SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549
_______________

FORM 10-Q

(MARK ONE)

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934.

For the quarterly period ended June 30, 1998.

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934.

For the transition period from __________ to __________.

Commission file number: 0-26966

ADVANCED ENERGY INDUSTRIES, INC.
_______________________________________________________________________________
(Exact name of registrant as specified in its charter)

DELAWARE 84-0846841
__________________________________ ___________________________________
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)

1625 SHARP POINT DRIVE, FORT COLLINS, CO 80525
____________________________________ ___________________________________
(Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code: (970) 221-4670

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No .
--- ---

As of July 31, 1998, there were 22,593,014 shares of the Registrant's Common
Stock, par value $0.001 per share, outstanding.

[GRAPHIC]

ADVANCED ENERGY INDUSTRIES, INC.
FORM 10-Q
INDEX

PART I FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

Consolidated Balance Sheets-
June 30, 1998 and December 31, 1997 3

Consolidated Statements of Operations-
Three months and six months ended June 30, 1998 and 1997 4

Consolidated Statements of Cash Flows-
Six months ended June 30, 1998 and 1997 5

Notes to consolidated financial statements 6

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 9

PART II OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS 18

ITEM 2. CHANGES IN SECURITIES 18

ITEM 3. DEFAULTS UPON SENIOR SECURITIES 18

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 18

ITEM 5. OTHER INFORMATION 19

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 19

PART I FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA

ADVANCED ENERGY INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)

JUNE 30, DECEMBER 31,
1998 1997
(UNAUDITED)
----------- ------------

ASSETS

CURRENT ASSETS:
Cash and cash equivalents . . . . . . . . . $11,293 $11,470
Marketable securities - trading . . . . . . 19,047 20,174
Accounts receivable, net. . . . . . . . . . 21,543 28,386
Inventories . . . . . . . . . . . . . . . . 20,556 26,243
Other current assets. . . . . . . . . . . . 1,497 2,472
Deferred income tax assets, net . . . . . . 2,957 2,836
------- --------
Total current assets. . . . . . . . . . . 76,893 91,581
------- --------

PROPERTY AND EQUIPMENT, net. . . . . . . . . 13,223 11,331

OTHER ASSETS:
Deposits and other. . . . . . . . . . . . . 1,264 500
Goodwill, net . . . . . . . . . . . . . . . 6,608 7,112
Demonstration and customer service equipment, net 1,689 1,719
------- --------
Total assets. . . . . . . . . . . . . . . $99,677 $112,243
------- --------
------- --------

LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES:
Accounts payable trade. . . . . . . . . . . $5,362 $12,045
Accrued payroll and employee benefits . . . 3,701 5,243
Other accrued expenses. . . . . . . . . . . 1,236 1,327
Customer deposits . . . . . . . . . . . . . 82 226
Accrued income taxes payable. . . . . . . . 0 2,734
Current portion of long-term debt . . . . . 2,262 3,298
------- --------
Total current liabilities . . . . . . . . 12,643 24,873
------- --------

LONG-TERM LIABILITIES:
Long-term debt. . . . . . . . . . . . . . . 0 22
------- --------
Total liabilities . . . . . . . . . . . . 0 24,895
------- --------

STOCKHOLDERS' EQUITY . . . . . . . . . . . . 87,034 87,348
------- --------
Total liabilities and stockholders' equity $99,677 $112,243
------- --------
------- --------

The accompanying notes to consolidated financial statements
are an integral part of these consolidated balance sheets.

ADVANCED ENERGY INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

THREE MONTHS ENDED JUNE 30,
---------------------------
1998 1997
(UNAUDITED) (UNAUDITED)
----------- -----------

SALES . . . . . . . . . . . . . . . . . . $26,158 $32,690
COST OF SALES. . . . . . . . . . . . . . . . 19,115 20,139
------ ------
Gross profit. . . . . . . . . . . . . . . . 7,043 12,551
------ ------
OPERATING EXPENSES:
Research and development. . . . . . . . . . 4,774 3,513
Sales and marketing . . . . . . . . . . . . 2,915 2,336
General and administrative. . . . . . . . . 1,914 1,702
----- -----
Total operating expenses. . . . . . . . . 9,603 7,551
----- -----
(LOSS) INCOME FROM OPERATIONS. . . . . . . . (2,560) 5,000
OTHER INCOME . . . . . . . . . . . . . . . . 198 286
----- -----
Net (loss) income before income taxes. . . . (2,362) 5,286
PROVISION FOR INCOME TAXES . . . . . . . . . (897) 1,996
------ -----
NET (LOSS) INCOME. . . . . . . . . . . . . . $(1,465) $3,290
-------- ------
-------- ------
BASIC (LOSS) EARNINGS PER SHARE. . . . . . . $(0.06) $0.15
-------- ------
-------- ------

DILUTED (LOSS) EARNINGS PER SHARE. . . . . . $(0.06) $0.15
-------- ------
-------- ------
BASIC WEIGHTED-AVERAGE COMMON SHARES
OUTSTANDING . . . . . . . . . . . . . . . 22,539 21,283
-------- ------
-------- ------
DILUTED WEIGHTED-AVERAGE COMMON SHARES
OUTSTANDING . . . . . . . . . . . . . . . 23,137 21,877
-------- ------
-------- ------

SIX MONTHS ENDED JUNE 30,
-------------------------
1998 1997
(UNAUDITED) (UNAUDITED)
----------- -----------

SALES . . . . . . . . . . . . . . . . . . $62,828 $53,358
COST OF SALES. . . . . . . . . . . . . . . . 44,658 33,298
------- -------
Gross profit. . . . . . . . . . . . . . . . 18,170 20,060
------- -------
OPERATING EXPENSES:
Research and development. . . . . . . . . . 9,416 6,334
Sales and marketing . . . . . . . . . . . . 5,911 4,135
General and administrative. . . . . . . . . 4,067 2,950
------- -------
Total operating expenses. . . . . . . . . 19,394 13,419
------- -------
(LOSS) INCOME FROM OPERATIONS. . . . . . . . (1,224) 6,641

OTHER INCOME (EXPENSE) . . . . . . . . . . . 347 (101)
------- --------
Net (loss) income before income taxes . . . (877) 6,540
PROVISION FOR INCOME TAXES . . . . . . . . . (333) 2,485
-------- --------
NET (LOSS) INCOME. . . . . . . . . . . . . . $(544) $4,055
-------- --------
-------- --------

BASIC (LOSS) EARNINGS PER SHARE. . . . . . . $(0.02) $0.19
-------- --------
-------- --------
DILUTED (LOSS) EARNINGS PER SHARE. . . . . . $(0.02) $0.19
-------- --------
-------- --------
BASIC WEIGHTED-AVERAGE COMMON SHARES
OUTSTANDING . . . . . . . . . . . . . . . 22,520 21,277
-------- --------
-------- --------
DILUTED WEIGHTED-AVERAGE COMMON SHARES
OUTSTANDING . . . . . . . . . . . . . . . 23,130 21,806
-------- --------
-------- --------

The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements.

ADVANCED ENERGY INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

SIX MONTHS ENDED JUNE 30,
--------------------------
1998 1997
(UNAUDITED) (UNAUDITED)
----------- -----------

CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income. . . . . . . . . . . . . . . . . . . . . $(544) $4,055
Adjustments to reconcile net income to net cash provided by
operating activities --
Depreciation and amortization . . . . . . . . . . . . . 2,652 1,673
Provision for deferred income taxes . . . . . . . . . . (121) --
Amortization of deferred compensation . . . . . . . . . 24 24
Loss on disposal of property and equipment. . . . . . . 12 --
Earnings from marketable securities, net. . . . . . . . (373) --
Changes in operating assets and liabilities --
Accounts receivable-trade, net. . . . . . . . . . . . 5,594 (8,854)
Related parties and other receivables . . . . . . . . 1,249 (1,184)
Inventories . . . . . . . . . . . . . . . . . . . . . 5,687 (2,193)
Other current assets. . . . . . . . . . . . . . . . . 975 376
Deposits and other. . . . . . . . . . . . . . . . . . (14) 634
Demonstration and customer service equipment. . . . . (476) 250
Accounts payable, trade . . . . . . . . . . . . . . . (6,683) 4,043
Accrued payroll and employee benefits . . . . . . . . (1,542) 1,291
Customer deposits and other accrued expenses. . . . . (235) 513
Income taxes payable. . . . . . . . . . . . . . . . . (2,734) 561
------- -----
Net cash provided by operating activities. . . . . 3,471 1,189
------- -----
CASH FLOWS FROM INVESTING ACTIVITIES:
Decrease of marketable securities. . . . . . . . . . . . . 1,500 --
Purchase of property and equipment, net. . . . . . . . . . (3,546) (770)
Purchase of preferred stock of Litmas. . . . . . . . . . . (750) --
------- ------
Net cash used in investing activities. . . . . . . (2,796) (770)
------- ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change from notes payable and capital lease obligations (1,058) (517)
Proceeds from sale of common stock . . . . . . . . . . . . 282 27
------- ------
Net cash used in financing activities. . . . . . . (776) (490)
------- ------
EFFECT OF CURRENCY TRANSLATION ON CASH FLOW. . . . . . . . . (76) 23
------- ------
DECREASE IN CASH AND CASH EQUIVALENTS. . . . . . . . . . . . (177) (48)
CASH AND CASH EQUIVALENTS, beginning of period . . . . . . . 11,470 11,231
------- -------
CASH AND CASH EQUIVALENTS, end of period . . . . . . . . . . $11,293 $11,183
------- -------
------- -------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest . . . . . . . . . . . . . . . . . . $9 $76
------- -------
------- -------
Cash paid for income taxes . . . . . . . . . . . . . . . . $2,255 $905
------- -------
------- -------

The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements.

ADVANCED ENERGY INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(1) BASIS OF PRESENTATION AND MANAGEMENT OPINION

In the opinion of management, the accompanying unaudited consolidated
balance sheets and statements of operations and cash flows contain all
adjustments, consisting only of normal recurring items, necessary to present
fairly the financial position of Advanced Energy Industries, Inc., a Delaware
corporation, and its wholly owned subsidiaries (the "Company") at June 30, 1998,
and the results of their operations and cash flows for the three- and six-month
periods ended June 30, 1998 and June 30, 1997.

The unaudited financial statements presented herein have been prepared in
accordance with the instructions to Form 10-Q and do not include all the
information and note disclosures required by generally accepted accounting
principles. The financial statements should be read in conjunction with the
audited financial statements and notes thereto contained in the Company's latest
Annual Report on Form 10-K for the year ended December 31, 1997.

(2) ACQUISITION

Effective August 15, 1997, the Company acquired all of the outstanding stock
of Tower Electronics, Inc., a Minnesota-based designer and manufacturer of
custom, high-performance switchmode power supplies used principally in the
telecommunications, medical and non-impact printing industries. The purchase
price consisted of $14.5 million in cash and a $1.5 million non-interest-bearing
promissory note to the seller (the "Note"), payable in August 1998. Total
consideration, including the effect of imputing interest on the Note, equaled
$15,889,000. The acquisition was accounted for using the purchase method of
accounting and resulted in a one-time charge of $3,080,000 for in-process
research and development acquired as a result of the transaction. Acquisition
costs totaled approximately $209,000.

The results of operations of Tower are included within the accompanying
consolidated financial statements for the three- and six-month periods ended
June 30, 1998.

(3) UNDERWRITTEN PUBLIC OFFERING

In October 1997, the Company closed on an underwritten offering of its common
stock. In connection with this offering, 1,000,000 shares of common stock were
sold at a price of $31 per share, providing gross proceeds of $31,000,000.
Offering costs and underwriters' commissions totaled $2,276,000.

(4) ACCOUNTS RECEIVABLE

Accounts receivable consisted of the following:

JUNE 30, DECEMBER 31,
1998 1997
(UNAUDITED)
----------- -----------
(IN THOUSANDS)

Domestic . . . . . . . . . . . . . . . . . . . . . $10,467 $16,724
Foreign. . . . . . . . . . . . . . . . . . . . . . 10,513 9,854
Allowance for doubtful accounts. . . . . . . . . . (424) (428)
-------- -------
Trade accounts receivable. . . . . . . . . . . . . $20,556 $26,150
Related parties. . . . . . . . . . . . . . . . . . 318 893
Other. . . . . . . . . . . . . . . . . . . . . . . 669 1,343
------- -------
Total accounts receivable. . . . . . . . . . . . . $21,543 $28,386
------- -------
------- -------

(5) INVENTORIES

Inventories consisted of the following:

JUNE 30, DECEMBER 31,
1998 1997
(UNAUDITED)
----------- -----------
(IN THOUSANDS)

Parts and raw materials. . . . . . . . . . . . . . $13,830 $18,549
Work in process. . . . . . . . . . . . . . . . . . 2,484 2,542
Finished goods . . . . . . . . . . . . . . . . . . 4,242 5,152
------- -------
Total inventories. . . . . . . . . . . . . . . . . $20,556 $26,243
------- -------
------- -------

(6) EARNINGS PER SHARE

In February 1997, the Financial Accounting Standards Board issued SFAS No.
128, "Earnings Per Share," which requires companies to present basic earnings
per share ("EPS") and diluted EPS, instead of the primary and fully-diluted
EPS that were previously required. The new standard is effective for the
Company in fiscal 1997 and all prior periods have been retroactively
adjusted. Basic EPS is computed by dividing income available to common
stockholders by the weighted-average number of common shares outstanding
during the period. The computation of diluted EPS is similar to the
computation of basic EPS except that the denominator is increased to include
the number of additional common shares that would have been outstanding if
dilutive potential common shares had been issued.

(7) STOCKHOLDERS' EQUITY

Stockholders' equity consisted of the following:

JUNE 30, DECEMBER 31,
1998 1997
(UNAUDITED)
----------- ----------
(IN THOUSANDS)

Common stock, $0.001 par value, 30,000
shares authorized; 22,576 and 22,493
shares issued and outstanding at June 30, 1998
and December 31, 1997, respectively . . . . . $23 $22
Additional paid-in capital . . . . . . . . . . . . 52,906 52,625
Retained earnings. . . . . . . . . . . . . . . . . 34,883 35,427
Deferred compensation. . . . . . . . . . . . . . . (10) (34)
Cumulative translation adjustment. . . . . . . . . (768) (692)
------ ------
Total stockholders' equity . . . . . . . . . . . . $87,034 $87,348
------ ------
------ ------

(8) ACCOUNTING STANDARDS

In June 1997, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards No. 130 ("SFAS 130"),
"Reporting Comprehensive Income," which is required to be adopted by the
Company in fiscal 1998. Reclassification of financial statements for earlier
periods provided for comparative purposes is required. SFAS 130 establishes
standards for the reporting and display of comprehensive income and its
components in a full set of general-purpose financial statements. The Company
adopted SFAS 130 in the first quarter of fiscal 1998.

SIX MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, 1998 JUNE 30, 1997
(UNAUDITED) (UNAUDITED)
------------- -------------
(IN THOUSANDS)

Net (loss) income, as reported . . . . . . . . . . $(544) $4,055
Adjustment to arrive at comprehensive net (loss) income:
Cumulative translation adjustment. . . . . . . . (76) 23
------ ------
Comprehensive net (loss) income. . . . . . . . . . $(620) $4,078
------ ------
------ ------

In June 1998, the FASB issued SFAS No. 133, ("SFAS 133"), "Accounting for
Derivative Instruments and Hedging Activities" which establishes accounting and
reporting standards for derivative instruments and for hedging activity. SFAS
133 is effective for all periods in fiscal years beginning after June 15, 1999.
SFAS 133 requires all derivatives to be recorded on the balance sheet as either
an asset or liability and measured at their fair value. Changes in the
derivative's fair value will be recognized currently in earnings unless
specific hedging accounting criteria are met. SFAS 133 also establishes uniform
hedge accounting criteria for all derivatives. The Company has not yet evaluated
the impact that the adoption of SFAS 133 will have on the financial statements.

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

The following discussion contains, in addition to historical information,
forward-looking statements, within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. Such forward-looking statements involve risks and uncertainties. As
a result, the Company's actual results may differ materially from the results
discussed in the forward-looking statements. Factors that could cause or
contribute to such differences include, but are not limited to, those discussed
below and in the Company's 1997 Annual Report on Form 10-K.

In particular, the Company believes that the factors described in the
Company's Annual Report on Form 10-K for the year ended December 31, 1997 Part I
"CAUTIONARY STATEMENTS - RISK FACTORS" could impact forward-looking statements
made herein or in future written or oral releases and by hindsight, prove such
statements to be overly optimistic and unachievable.

YEAR 2000 PROGRAM

The Year 2000 problem is the result of computer programs that rely on
two-digit date codes, instead of four-digit date codes, to indicate the year.
Such computer programs, which are unable to interpret the date code "00" as
the year 2000, may not be able to perform computations and decision-making
functions and could cause computer systems to malfunction. The Company has
developed a multi-phase program for Year 2000 information systems compliance
that consists of (i)assessment of the corporate systems and operations of the
Company that could be affected by the Year 2000 problem, (ii) remediation of
non-compliant systems and components, and (iii) testing of systems and
components following remediation. The Company has focused its Year 2000
review on three areas: (A) information technology (IT) system
applications, (B) non-IT systems, including engineering
and manufacturing applications, and (C) relationships with third parties.

The Company has conducted an initial assessment of the Year 2000 problem on
its IT systems. The Company believes that its enterprise-wide software system is
Year 2000 compliant. Such belief is based significantly on discussions with and
representations by the vendor of such software. The Company has been, and will
continue to be, in contact with such vendor in order to obtain any additional
revisions or upgrades issued by the vendor to ensure that such enterprise-wide
software remains Year 2000 compliant. The Company also is taking an independent
inventory of and assessing all informational systems that could be affected by
the Year 2000 problem. Remediation of non-compliant

systems is being conducted as the assessment phase nears completion. The
Company expects to complete these phases during the third quarter of 1998.

The Company also is in the process of conducting an initial assessment of the
Year 2000 problem on its non-IT systems, including engineering and manufacturing
applications. The Company expects to complete its initial assessment of such
areas during the third quarter of 1998. Following such initial assessment, the
Company will undertake Year 2000 remediation and testing of these applications.
The Company cannot determine, at this time, the number or type of non-IT systems
that will require remediation; however, the Company does not expect this area to
pose substantial Year 2000 problems.

Finally, the Company is examining its relationship with third parties whose
Year 2000 compliance could have material effect on the Company. The Company
considers third party suppliers and customers to pose the greatest Year 2000
risk to the Company, because the failure of such persons to become Year 2000
compliant in a timely manner, if at all, could result in the Company's inability
to obtain components in a timely manner, reductions in the quality of components
obtained, reductions, delays or cancellations of customer orders or delay in
payments by customers for products shipped. In addition, conversions by third
parties to become Year 2000 compliant might not be compatible with the Company's
systems. Any or all of these events could have a material adverse effect on the
Company's business, financial condition and results of operations.

The Company has circulated questionnaires to all of its significant vendors
and customers with respect to such persons' Year 2000 compliance programs and
status. The Company currently is in the process of analyzing the responses to
such questionnaires and expects to solicit more detailed and updated information
from its principal suppliers and customers over the next several months.

The Company has not yet developed a contingency plan to address the effects of
the failure of the Company or any of its principal suppliers or customers or
other third parties to become Year 2000 compliant in a timely manner, nor does
the Company have a timetable for preparing such a plan. In what the Company
believes to be the most likely worst case scenario, the Company would be unable
to obtain electronic components from its suppliers, because of such third
parties' failure to become Year 2000 compliant, and would be unable to
manufacture such components internally or to redesign its systems to accommodate
different components, because of the failure of the Company's engineering and
manufacturing systems to be Year 2000 compliant. See "Cautionary Statements-Risk
Factors--Supply Constraints and Dependence on Sole and Limited Source
Suppliers," and "--Significant Sales Are Concentrated Among a Few Customers"
discussed in the Company's 1997 Annual Report on Form 10-K.

Although the Company is continuing to assess Year 2000 costs, it does not
expect the costs associated with such projects to have a material effect on the
Company's financial results. The Company expects to spend less than five percent
of its total IT budget on Year 2000 costs. The Company has not identified any IT
projects that have been deferred

due to its Year 2000 efforts. The Company's current estimates of the impact of
the Year 2000 problem on its operations and financial results do not include
costs and time that may be incurred as a result of any vendors' or customers'
failures to become Year 2000 compliant on a timely basis.

The foregoing beliefs and expectations are forward-looking statements within
the meaning of Section 27A of the Securities Act and Section 21E of the
Exchange Act, and are based in large part on certain statements and
representations made by persons outside the Company, any of which statements
or representations ultimately could prove to be inaccurate.

RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 1998 AND 1997

SALES

Sales for the second quarter of 1998 were $26.2 million, a decrease of 20%
from second quarter of 1997 sales of $32.7 million. The decrease in sales
between such periods has resulted from decreased unit sales of the Company's
systems. Sales for the second quarter of 1998 also included sales by the
Company's wholly owned subsidiary Tower Electronics, Inc. ("Tower"), which was
acquired as of August 15, 1997. The decrease in sales was attributable mostly to
semiconductor capital equipment customers in the United States, particularly to
the Company's largest customer. The second quarter of 1998 reflected the impact
of the current downturn in the semiconductor capital equipment market and
continuation of the Asian financial crisis. Many of the customers to whom the
Company's OEM customers sell are located in Asia and Japan. In contrast, the
second quarter of 1997 was the first quarter of recovery from a previous
downturn in the semiconductor capital equipment industry that had begun during
the third quarter of 1996.

Sales by the Company to markets other than the semiconductor capital equipment
market remained relatively unchanged in total when the two periods are compared,
but changed significantly in mix. Sales to the data storage equipment market
decreased on a worldwide basis, though the decreases in sales to that industry
in the United States and Japan were partially offset by an increase in sales to
data storage equipment customers in Europe, particularly to the Company's
largest customer in that industry. Sales to the flat panel display industry in
Japan were one-third of the level of the comparable period last year. Sales to
industrial markets remained level not including Tower's sales. The Company sells
primarily to the semiconductor capital equipment, data storage and industrial
markets in the United States, to the flat panel display and data storage markets
in Japan, and to the data storage and industrial markets in Europe. Changes in
the economies of the countries in which the Company does business can impact the
geographic and industrial mixes of the sales by the Company.

Sales by industry segment for the three months ended June 30, 1998 were as
follows: semiconductor capital equipment, $13.9 million; data storage, $4.5
million; flat panel display, $1.0 million; industrial, $6.8 million. For the
comparable period in 1997, sales by industry were: semiconductor capital
equipment, $21.1 million; data storage, $5.9 million; flat panel display, $1.8
million; industrial, $3.9 million.

Sales by geographic region for the three months ended June 30, 1998 were:
United States, $18.6 million; Europe, $6.1 million; Japan, $1.0 million; Pacific
Rim and other, $0.5 million. For the comparable period in 1997, sales by
geographic region were: United States, $23.8 million; Europe, $5.0 million;
Japan, $3.1 million; Pacific Rim and other, $0.8 million.

Sales for the second quarter of 1998 were down 29% from first quarter 1998
sales of $36.7 million. This decrease was due to decreased demand from most
markets the Company serves. The downturn in the semiconductor capital equipment
market accounted for the greatest decrease while the data storage capital
equipment market experienced the smallest decrease.

GROSS MARGIN

The Company's gross margin for the second quarter of 1998 was 26.9%, down from
38.4% in the second quarter 1997 and down from 30.3% in the first quarter of
1998. The decrease in gross margin from the second quarter of 1997 to the second
quarter of 1998 was due primarily to unfavorable absorption of manufacturing
overhead and higher material costs attributable to the product mix.

During the fourth quarter of 1997,the Company expanded into a new
manufacturing facility in Fort Collins, Colorado. In the second quarter of 1998,
the Company relocated part of its previously existing Fort Collins manufacturing
operations to a new facility in Austin, Texas. The expansion to new locations
was to provide service to one of the Company's largest customers whose primary
manufacturing facilities are in Austin, and accommodate the anticipated growth
of the semiconductor industry. Starting late in the fourth quarter of 1997, the
semiconductor industry started a downturn, which has continued through the
second quarter of 1998 and appears to be getting worse. The downturn in this
industry has significantly impacted the Company's financial results. The
combination of the expansion and lower sales has resulted in an over-capacity
situation for the Company, leading to unfavorable absorption. In addition, the
decline in sales to the semiconductor industry has resulted in a change in
product mix of sales to that industry, with an increase in sales of products
with lower gross margins, and a decrease in sales of products with higher gross
margins.

The Company initiated cost reduction measures during the first quarter of
1998, including a 10% reduction in executive salaries and certain scheduled
mandatory time off for all personnel, except those in critical functions. These
cost reduction measures were continued into the second quarter of 1998 and will
be continued through at least the

fourth quarter of 1998. Other cost-reducing initiatives are being considered.
The Company expects that underutilization of manufacturing capacity will
continue to negatively impact gross margins until sales to the semiconductor
capital equipment market recover or until other markets the Company serves
experience significant growth.

The decrease in gross margin from the first quarter of 1998 to the second
quarter of 1998 was due primarily to unfavorable absorption of manufacturing
overhead resulting from the reduced sales volume and the change in product mix
that resulted in higher material costs.

RESEARCH AND DEVELOPMENT

The Company's research and development expenses are incurred researching new
technologies, developing new products and improving existing product designs.
Research and development expenses for the second quarter of 1998 were $4.8
million, an increase of 36% from $3.5 million in the comparable period in 1997.
The increase in expenses was attributable to increased spending for payroll and
materials and supplies for new product development, and to higher infrastructure
costs. As a percentage of sales, research and development expenses increased to
18.3% in the second quarter of 1998 from 10.8% in the second quarter of 1997,
reflecting the lower sales base in 1998.

Research and development expenses in the second quarter of 1998 were slightly
higher than first quarter of 1998 expenses of $4.6 million. The Company believes
continued research and development investment for development of new products is
critical to the Company's ability to serve new and existing markets. Since
inception, all research and development costs have been internally funded and
expensed.

SALES AND MARKETING

Sales and marketing expenses support domestic and international sales and
marketing activities that include personnel, trade shows, advertising, and other
marketing activities. Sales and marketing expenses for the second quarter of
1998 were $2.9 million, compared to $2.3 million in the second quarter of 1997,
representing an increase of 25%. The increase was attributable to higher payroll
costs incurred as the Company continues to strengthen its sales management and
product management teams. Additionally, the Company increased spending in 1998
to develop worldwide applications engineering capabilities, though sales and
marketing expenses for the second quarter of 1998 were slightly lower than first
quarter of 1998 expenses of $3.0 million. As a percentage of sales, sales and
marketing expenses increased to 11.1% in the second quarter of 1998 from 7.1% in
the second quarter of 1997, reflecting the lower sales base.

GENERAL AND ADMINISTRATIVE

General and administrative expenses support the worldwide financial,
administrative, information systems and human resources functions of the
Company. General and

administrative expenses for the second quarter of 1998 were $1.9 million,
compared to $1.7 million in the second quarter of 1997, and would have
remained at the same level except for $0.25 million in 1998 of amortization
of goodwill. General and administrative expenses for the second quarter of
1998 were 11% lower than in the first quarter of 1998. As a percentage of
sales, general and administrative expenses increased to 7.3% in the second
quarter of 1998 from 5.2% in the second quarter of 1997, reflecting the lower
sales base.

The Company continues to implement its management system software, including
the replacement of existing systems in its domestic and foreign locations. The
Company expects that charges related to training and implementation of the
software will continue through 1998.

OTHER INCOME (EXPENSE)

Other income (expense) consists primarily of foreign exchange gains and losses
and interest income and expense. Other income for the second quarter of 1998 was
$0.2 million, attributable to $0.3 million of interest income from marketable
securities. In the comparable period in 1997, other income was $0.3 million,
attributable to a foreign currency exchange gain.

The Company experienced fluctuations in foreign currency exchange rates
during 1997 and the first six months of 1998, particularly against the Japanese
yen. As a hedge against currency fluctuations in the yen, the Company entered
into various forward foreign exchange contracts during 1997 to mitigate the
effect of potential depreciation in that currency. The Company continues to
evaluate various policies to minimize the effects of currency fluctuations.

PROVISION FOR INCOME TAXES

The income tax benefit of $0.9 million for the second quarter of 1998
represented an estimated effective rate of 38.0%, compared to an effective
income tax rate for the year 1997 of 39.2%. The higher effective tax rate for
1997 was attributed to nondeductible charges resulting from the acquisition of
Tower. The Company adjusts its provision for income taxes periodically, based
upon the anticipated tax status of all of its foreign and domestic entities.

RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997

SALES

Sales for the first six months of 1998 were $62.8 million, an increase of 18%
from sales of $53.4 million in the comparable period in 1997. Sales to the
semiconductor capital equipment market, including the Company's largest
customer, remained at

essentially the same level. Sales to the data storage equipment market were
essentially unchanged as well, while sales to the flat panel display market
decreased moderately. Sales to industrial markets increased significantly,
due primarily to the inclusion of Tower in 1998. Sales to customers in the
United States and Europe were higher while sales to Japan and other
geographic regions were lower.

Sales by industry segment for the six months ended June 30, 1998 were as
follows: semiconductor capital equipment, $33.9 million; data storage, $9.5
million; flat panel display, $3.1 million; industrial, $16.3 million. For the
comparable period in 1997, sales by industry were: semiconductor capital
equipment, $34.2 million; data storage, $9.0 million; flat panel display, $3.6
million; industrial, $6.6 million.

Sales by geographic region for the six months ended June 30, 1998 were: United
States, $46.2 million; Europe, $11.8 million; Japan, $3.6 million; Pacific Rim
and other, $1.2 million. For the comparable period in 1997, sales by geographic
region were: United States, $38.9 million; Europe, $7.9 million; Japan, $5.2
million; Pacific Rim and other, $1.4 million.

GROSS MARGIN

The Company's gross margin for the first six months of 1998 was 28.9%, down
from 37.6% in the comparable period in 1997. The decrease in gross margin
between the periods presented was due primarily to unfavorable absorption of
manufacturing overhead and higher material costs. The unfavorable absorption
resulted from underutilized capacity resulting from two additional
manufacturing facilities the Company opened between the periods presented,
including one in Fort Collins, Colorado during the fourth quarter of 1997 and
one in Austin, Texas, during the second quarter of 1998. The higher material
costs are a result of a shift in the mix of the products the Company sells.

RESEARCH AND DEVELOPMENT

Research and development expenses for the first six months of 1998 were $9.4
million, up from $6.3 million in the comparable period in 1997. The increase was
attributable to higher spending for payroll and materials and supplies for new
product development. As a percentage of sales, research and development expenses
increased to 15.0% in the first six months of 1998 from 11.9% in the comparable
period in 1997.

SALES AND MARKETING

Sales and marketing expenses for the first six months of 1998 were $5.9
million, up from $4.1 million in the comparable period in 1997. The increase
was attributable to higher spending for payroll to strengthen the Company's
sales management and product management teams. As a percentage of sales, sales
and marketing expenses increased to 9.4% in the first six months of 1998 from
7.7% in the comparable period in 1997.

GENERAL AND ADMINISTRATIVE

General and administrative expenses for the first six months of 1998 were
$4.1 million, up from $3.0 million in the comparable period in 1997. The
increase was attributable to higher spending for payroll, purchased services and
amortization of goodwill. As a percentage of sales, general and administrative
expenses increased to 6.5% in the first six months of 1998 from 5.5% in the
comparable period in 1997. The percentage for the first six months of 1998
would have been 5.7% without the amortization.

OTHER INCOME (EXPENSE)

Other income for the first six months of 1998 was $0.3 million, attributable
to $0.5 million of interest income from marketable securities. In the
comparable period in 1997, other expense was $0.1 million.

PROVISION FOR INCOME TAXES

The income tax benefit of $0.3 million for the first six months of 1998
represented an estimated effective rate of 38.0% compared to an effective
income tax rate for the year 1997 of 39.2%.

LIQUIDITY AND CAPITAL RESOURCES

Since its inception, the Company has financed its operations, acquired
equipment and met its working capital requirements through cash flow from
operations, borrowings under its revolving line of credit, long-term loans
secured by property and equipment, and, since November 1995, proceeds from
underwritten public offerings.

Operations provided cash of $3.5 million in the first six months of 1998,
primarily as a result of depreciation, amortization, and decreases in accounts
receivable and inventories, partially offset by decreases in accounts payable
and accruals for payroll, employee benefits and income taxes. In the comparable
period in 1997, operations provided cash of $1.2 million, primarily as a result
of net income, depreciation and amortization and increases in accounts payable
and other accrued expenses, partially offset by increases in accounts
receivable and inventories.

Investing activities used cash of $2.8 million in the first six months of
1998, as a result of the purchase of property and equipment for $3.5 million
and investment in preferred stock of Litmas, Inc. ("Litmas") for $0.75 million,
partially offset by a decrease of marketable securities of $1.5 million. During
the second quarter of 1998, the Company opened a new manufacturing facility in
Austin, Texas, to accommodate the Company's largest customer in the
semiconductor capital equipment industry. In the comparable period in 1997,
investing activities used cash of $0.8 million due to the purchase of property
and equipment.

Financing activities used cash of $0.8 million in the first six months of
1998 and $0.5 million in the comparable period of 1997. In both periods
presented the cash used was due primarily to net changes of notes payable
and repayment of capital lease obligations.

The Company plans to spend approximately $1.0 million through the remainder
of 1998 for the acquisition of manufacturing and test equipment and furnishings.
The Company also plans to invest an additional $0.25 million in preferred stock
of Litmas in the third quarter of 1998.

As of June 30, 1998, the Company had working capital of $64.3 million. The
Company's principal sources of liquidity consisted of $11.3 million of cash and
cash equivalents, $19.0 million of marketable securities, and a credit facility
consisting of a $30.0 million revolving line of credit, with options to convert
up to $10.0 million to a three-year term loan. Advances under the revolving line
of credit bear interest at either the prime rate (8.5% at July 31, 1998) minus
1.25% or the LIBOR 360-day rate (5.82813% at July 31, 1998) plus 150 basis
points, at the Company's option. All advances under the revolving line of credit
will be due and payable in December 2000; however, there were no advances
outstanding as of June 30, 1998.

The Company believes that its cash and cash equivalents, marketable
securities, cash flow from operations and available borrowings, will be
sufficient to meet the Company's working capital needs through the end of 1998.
After that time, the Company may require additional equity or debt financing to
address its working capital, capital equipment, or expansion needs. In addition,
any significant acquisitions by the Company may require additional equity or
debt financings to fund the purchase price, if paid in cash. There can be no
assurance that additional funding will be available when required or that it
will be available on terms acceptable to the Company.

PART II OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

The Company is not aware of any material legal proceedings to which
it or any of its subsidiaries is a party.

ITEM 2. CHANGES IN SECURITIES

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

The Company held its 1998 Annual Meeting of Stockholders on Wednesday, May
6, 1998, to vote on three proposals. Proxy statements were sent to all
shareholders. The first proposal was for the election of directors, including
Douglas S. Schatz, G. Brent Backman, Richard P. Beck, Elwood Spedden, Hollis L.
Caswell, Ph.D. and Arthur A. Noeth. All six directors were elected with the
following votes tabulated:

TOTAL VOTE FOR TOTAL VOTE WITHHELD
NAME OF DIRECTOR EACH DIRECTOR FROM EACH DIRECTOR

Mr. Schatz 20,257,399 122,267

Mr. Backman 20,257,399 122,267

Mr. Beck 20,257,399 122,267

Mr. Spedden 20,257,099 122,567

Dr. Caswell 20,253,157 126,509

Mr. Noeth 20,257,099 122,567

The second proposal was for an amendment of the 1995 stock option plan to
increase the number of shares of common stock issuable thereunder from
3,500,000 to 4,625,000. The amendment was approved with the following votes
tabulated:

FOR AGAINST ABSTAIN

19,068,928 1,281,895 28,843

The third proposal was for the ratification of appointment of independent
auditors. The current auditors, Arthur Anderson, LLP, were retained, with the
following votes tabulated:

FOR AGAINST ABSTAIN

20,340,802 2,412 36,452

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits:

2.1 Agreement and Plan of Reorganization, dated as of June 1, 1998, by
and among the Company, Warpspeed, Inc., a wholly owned subsidiary
of the Company, and RF Power Products, Inc.

3.1 The Company's Restated Certificate of Incorporation(1)

3.2 The Company's Bylaws(1)

4.1 Form of Specimen Certificate for the Company's Common Stock(1)

4.2 The Company hereby agrees to furnish to the SEC, upon request, a
copy of the instruments which define the rights of holders of
long-term debt of the Company. None of such instruments not
included as exhibits herein represents long-term debt in excess of
10% of the consolidated total assets of the Company.

10.1 Comprehensive Supplier Agreement, dated May 18, 1998, between
Applied Materials Inc., and the Company+

10.2 Purchase Order and Sales Agreement, dated July 1, 1993, amended
September 16, 1995 between Lam Research Corporation and the
Company(1)+

10.3 Purchase Agreement, dated November 1, 1995, between Eaton
Corporation and the Company(2)+

10.4 Amended and Restated Loan and Security Agreement, dated as of
November 17, 1995, between Silicon Valley Bank and the Company(1)

10.5 Loan and Security Agreement, dated August 15, 1997, among Silicon
Valley Bank, Bank of Hawaii and the Company(3)

10.6 Loan Agreement dated December 8, 1997, by and among Silicon Valley
Bank, as Servicing Agent and a Bank, and Bank of Hawaii, as a
Bank, and the Company, as borrower(4)

10.7 Equipment Line of Credit, dated July 11, 1994, between Silicon
Valley Bank and the Company(1)

10.8 Master Lease Purchase Agreement, dated January 20, 1989, as
amended, between MetLife Capital Corporation and the Company(1)

10.9 Lease Purchase Agreement, dated June 11, 1992, between MetLife
Capital Corporation and the Company(1)

10.10 Master Equipment Lease, dated July 15, 1993, as amended, between
KeyCorp Leasing Ltd. and the Company(1)

10.11 Lease, dated June 12, 1984, amended June 11, 1992, between
Prospect Park East Partnership and the Company for property in
Fort Collins, Colorado(1)

10.12 Lease, dated March 14, 1994, as amended, between Sharp Point
Properties, L.L.C., and the Company for property in Fort Collins,
Colorado(1)

10.13 Lease, dated May 19, 1995, between Sharp Point Properties, L.L.C.
and the Company for a building in Fort Collins, Colorado(1)

10.14 Form of Indemnification Agreement(1)

10.15 1995 Stock Option Plan, as amended and restated(4)*

10.16 Employee Stock Purchase Plan(1)*

10.17 1995 Non-Employee Directors' Stock Option Plan(1)*

10.18 Lease, dated April 15, 1998, between Cross Park Investors, Ltd.,
and the Company for property in Austin, Texas

10.19 Lease, dated April 15, 1998, between Cameron Technology Investors,
Ltd., and the Company for property in Austin, Texas

21.1 Subsidiaries of the Company

27.1 Financial Data Schedule for the six-month period ended June 30,
1998.

27.2 Financial Data Schedule as restated for the year ended December 31,
1996; the three-month period ended March 31, 1997; the six-month
period ended June 30, 1997; and the nine-month period ended
September 30, 1997, respectively.

27.3 Financial Data Schedule as restated for the year ended December 31,
1995; the three-month period ended March 31, 1996; the six-month
period ended June 30, 1996; and the nine-month period ended
September 30, 1996, respectively.

(b) No reports on Form 8-K were filed or required to be filed by the Company
during the three-month period ended June 30, 1998.

_______________

(1) Incorporated by reference to the Company's Registration Statement
on Form S-1 (File No. 33-97188), filed September 20, 1995, as
amended.

(2) Incorporated by reference to the Company's Annual Report on Form
10-K for the year ended December 31, 1996 (File No. 0-26966), filed
March 21, 1997, as amended.

(3) Incorporated by reference to the Company's Registration Statement
on Form S-3 (File No. 333-34039), filed August 21, 1997, as
amended.

(4) Incorporated by reference to the Company's Annual Report on Form
10-K for the year ended December 31, 1997 (File No. 0-26966), filed
March 24, 1998.

* Compensation Plan

+ Confidential treatment has been requested for portions of this
agreement. Such portions have been omitted and filed separately
with the SEC.

++ Portions of these documents have been omitted in accordance with
an order by the SEC granting confidential treatment. Such omitted
material has been filed separately with the SEC.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.

ADVANCED ENERGY INDUSTRIES, INC.

/S/ RICHARD P. BECK

Senior Vice President, Chief Financial August 7, 1998
Officer, Assistant Secretary and
Director (Principal Financial Officer
and Principal Accounting Officer)

EXHIBIT INDEX

2.1 Agreement and Plan of Reorganization, dated as of June 1, 1998, by
and among the Company, Warpspeed, Inc., a wholly owned subsidiary
of the Company, and RF Power Products, Inc.

3.1 The Company's Restated Certificate of Incorporation(1)

3.2 The Company's Bylaws(1)

4.1 Form of Specimen Certificate for the Company's Common Stock(1)

10.1 Comprehensive Supplier Agreement, dated May 18, 1998, between
Applied Materials, Inc. and the Company+