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                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                            ------------------------

                                   FORM 10-K

                ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
                      THE SECURITIES EXCHANGE ACT OF 1934

                     FOR THE FISCAL YEAR ENDED MAY 31, 1999

                         COMMISSION FILE NUMBER 0-26784

                              SPEEDFAM-IPEC, INC.
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

<TABLE>
<S>                                              <C>
                    ILLINOIS                                        36-2421613
        (STATE OR OTHER JURISDICTION OF                          (I.R.S. EMPLOYER
         INCORPORATION OR ORGANIZATION)                        IDENTIFICATION NO.)

             305 NORTH 54TH STREET                                    85226
               CHANDLER, ARIZONA                                    (ZIP CODE)
    (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
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                 REGISTRANT'S TELEPHONE NUMBER:  (480) 705-2100

        SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE

          SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:

                           COMMON STOCK, NO PAR VALUE
                                (TITLE OF CLASS)

     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 [ ]

     Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.  [X]

     State the aggregate market value of the voting stock held by non-affiliates
of the registrant: $297,820,466 as of August 26, 1999.

     Indicate the number of shares outstanding of each of the issuer's classes
of common stock: 29,414,367 as of August 26, 1999.

                      DOCUMENTS INCORPORATED BY REFERENCE:

     Part III, Proxy Statement relating to 1999 Annual Meeting of Shareholders
(except for the report of the compensation committee of the board of directors
and the performance graph).

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                               TABLE OF CONTENTS

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ITEM NO.                             CAPTION                             PAGE
--------                             -------                             ----
<C>        <S>                                                           <C>
                                   PART I
   1.      Business....................................................    3
   2.      Properties..................................................   15
   3.      Legal Proceedings...........................................   15
   4.      Submission of Matters to a Vote of Security Holders.........   16

                                   PART II
   5.      Market for Common Equity and Related Shareholder Matters....   16
   6.      Selected Financial Data.....................................   18
   7.      Management's Discussion and Analysis of Financial Condition
           and Results of Operations...................................   19
  7A.      Quantitative and Qualitative Disclosures about Market
           Risk........................................................   28
   8.      Financial Statements and Supplementary Data.................   30
   9.      Changes in and Disagreements with Accountants on Accounting
           and Financial Disclosure....................................   76

                                  PART III
  10.      Directors and Executive Officers of the Company.............   76
  11.      Executive Compensation......................................   76
  12.      Security Ownership of Certain Beneficial Owners and
           Management..................................................   76
  13.      Certain Relationships and Related Transactions..............   76

                                   PART IV
  14.      Exhibits, Financial Statement Schedules, and Reports on Form
           8-K.........................................................   76
           Signatures..................................................   77
           List of Exhibits.........................................  EXHIBIT
                                                                        INDEX
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ITEM 1.  BUSINESS

     SpeedFam-IPEC, Inc. (the "Company") was incorporated in Illinois in 1959 as
SpeedLap Corporation. The Company is a holding company operating through three
wholly owned subsidiaries, and also owns interests in two joint ventures. The
Company operates through SpeedFam-IPEC Corporation in the U.S. ("SpeedFam-IPEC
U.S."), and SpeedFam-IPEC Limited ("SpeedFam-IPEC U.K.") and SpeedFam-IPEC GmbH
("SpeedFam-IPEC Germany") in Europe. The Company owns 50% of each of two joint
ventures, SpeedFam-IPEC Co., Ltd. (together with its subsidiaries and joint
ventures, the "Far East Joint Venture") and Fujimi Corporation (the "Fujimi
Joint Venture").

     The Company designs, develops, manufactures, markets and supports chemical
mechanical planarization, or "CMP," systems used in the fabrication of
semiconductor devices and other high-throughput precision surface processing
systems. The Company's flat surface processing systems are used in the thin film
memory disk media, silicon wafer and general industrial applications markets.
The Company also markets and distributes polishing liquids (slurries), parts and
consumables used in its customers' manufacturing processes. The Company's
processing systems include polishing, grinding, lapping, and pre-deposition
cleaning equipment.

     Effective April 6, 1999, Integrated Process Equipment Corp. ("IPEC"), a
supplier of CMP systems, merged into a wholly owned subsidiary of SpeedFam
International, Inc. Following the merger, SpeedFam International, Inc. changed
its name to SpeedFam-IPEC, Inc. The Company issued to holders of IPEC regular
and Class A common stock 0.71 of one share of the Company's common stock for
each share of IPEC common stock. The Company also issued to holders of IPEC
Series B-1, B-2, and B-3 preferred stock 8.90, 8.10, and 10.65 shares,
respectively, of the Company's common stock for each share of IPEC preferred
stock. The transaction was accounted for as a pooling of interests for financial
reporting purposes and was structured to qualify as a tax-free reorganization.

     Unless the context otherwise requires, the "Company" and "SpeedFam-IPEC"
refer only to SpeedFam-IPEC, Inc., an Illinois corporation, and its wholly owned
subsidiaries. The Company's principal executive offices are located at 305 North
54th Street, Chandler, Arizona 85226 and its telephone number is (480) 705-2100.

JOINT VENTURES

     Since 1971, the Company has owned a 50% interest in the Far East Joint
Venture. The remaining 50% is owned by Obara Corporation, a publicly-traded
Japanese company that supplies products to the automotive industry. The Far East
Joint Venture designs and manufactures most of the equipment sold by the Company
to the thin film memory disk media and silicon wafer markets in the U.S. and
Europe. It also distributes such products in the Far East and provides sales and
service channels in the Far East for products manufactured by the Company,
including distribution of the Company's CMP systems to manufacturers of
semiconductor devices. See "Joint Venture Arrangements -- Far East Joint
Venture." In 1984, the Company established the Fujimi Joint Venture with Fujimi
Incorporated, a publicly-traded Japanese manufacturer of slurries. The Fujimi
Joint Venture sells slurries manufactured by Fujimi Incorporated, primarily to
silicon wafer, thin film memory disk and general industrial manufacturers in
North and South America. See "-- Manufacturing" and "Joint Venture
Arrangements -- Fujimi Joint Venture."

PRODUCTS

     The Company's products include polishing, grinding and lapping equipment
and systems; cleaning systems; other high precision surface processing
equipment; and certain other products used in its customers' manufacturing
process, including slurries. The Company sells its products and services to
three segments: (1) semiconductor device manufacturers (CMP Group), (2) thin
film memory disk media and silicon wafer manufacturers (Surface Technology
Group), and (3) manufacturers of general industrial components (Industrial
Applications Group). During the last three fiscal years, the majority of the
Company's total revenue has been derived from the sale of products and services
into the CMP Group segment. In fiscal 1999, 1998 and 1997 sales to semiconductor
device manufacturers were 73.7%, 74.8% and 67.2% of total revenue,
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respectively. In fiscal 1999, 1998 and 1997 sales to thin film memory disk media
and silicon wafer manufacturers were 20.0%, 21.4% and 28.6% of total revenue,
respectively. In fiscal 1999, 1998 and 1997 sales to manufacturers of general
industrial components were 6.3%, 3.8% and 4.2% of total revenue, respectively.

     Applications.  Polishing is a process used to change the characteristics of
the surface of a semiconductor wafer or thin film memory disk. Polishing is a
complex science, often involving multiple steps, each at a specified set of
process parameters such as polishing speed, pressure, time, and temperature, as
well as slurry pH and particle size, hardness and shape. Polishing improves the
flatness (planarity), smoothness and optical properties of a surface. One
typical flat polishing system consists of a moving platen that is covered with a
polishing pad, in combination with a polishing liquid (or slurry) containing
abrasive particles that impinge on the surface, thereby creating the desired
surface qualities. This liquid slurry can be chemically active such that the
surface of the component being polished is chemically modified, thus
accelerating and improving the polishing process. The combination of chemical
action from the acidic or alkaline slurry and mechanical action from the
abrasive slurry is used to process silicon wafers, thin film memory disk media
and advanced semiconductor devices.

     Processes similar to polishing include lapping (a process where no
polishing pad is used and the workpiece is pressed into the slurry which is
applied to a cast-iron lapping wheel) and free abrasive machining ("FAM," a
process similar to lapping except that instead of a cast iron wheel, a high
alloy hardened steel wheel is used). Lapping and free abrasive machining result
in higher removal rates than polishing but produce rougher surface finishes.
Grinding is a conventional machining process in which abrasive particles are
contained within a fixed medium (grinding stone), rather than a liquid. Grinding
results in much higher removal rates than lapping but produces a coarser surface
finish. Dimensional tolerance, surface finish, quantity of material to be
removed along with production rates required and cost of operation are the
primary variables considered in the determination of the best process for a
specific application. Polishing and other surface treatment processes are
typically followed by a cleaning process. Semiconductor and thin film memory
disk cleaning systems offered by the Company incorporate ultrasonics, PVA
(polyvinyl alcohol) brush scrubbing, HF acid capability, rinsing and drying in a
Class 1 cleanroom-compatible system.

EQUIPMENT

     Semiconductor Chemical Mechanical Planarization (CMP).  The Company offers
the broadest range of CMP systems currently available to the semiconductor
industry. The Company's product lines include both rotary and orbital
technology.

     Semiconductor Rotational CMP Systems.  The Avanti 472, introduced in 1994,
is a fully automated, single wafer planarization system for polishing oxide or
metal layers on silicon wafers from four to eight inches in diameter. In
addition to the planarization of oxide layers, the system planarizes layers of
metal interconnects, including tungsten, aluminum and copper. The Avanti 472
offers higher throughput and improved ergonomics, as well as an improved pad
conditioner system, over the previous generation system.

     The Company's Auriga system is a five head, two polishing table CMP system
capable of processing 50-60 wafers per hour. The Auriga system, which began
shipping commercially in November 1996, is currently characterized and in
production for oxide and metal (tungsten) applications. The system incorporates
full cassette-to-cassette automation. Robotics remove the wafers from the
cassette and place them into the buffer tray. The wafers are then staged for
batch pickup by the polishing heads. Once secured by the polishing heads, the
wafers are moved onto the primary polishing pad and the process is initiated.
The polishing table, covered with a flat polishing pad, rotates at a variable
speed throughout the polishing cycle. Upon completion of the initial polish, the
wafers are transported either to a rinsing station or to a second polishing
table for an additional polishing or buffing step. The wafers are then rinsed
and placed into the output buffer tray, scrubbed on both sides with a wet PVA
brush and placed wet into the output cassettes. The system is self-enclosed, and
has its own air filtration and air flow management system. The Auriga offers
compatibility with all commonly used slurry chemistries.

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     In fiscal 1998 the Company introduced the Auriga-C, which integrates
cleaning and drying technology into the Company's CMP system thereby providing a
complete dry-in/dry-out system. The design of the Auriga-C is based upon the
replacement of the automation module on the Auriga with a new automation module
which incorporates the cleaning technology. The Auriga-C and the Auriga are
produced solely by the Company.

     The Auriga EC is the latest tool derived from the Auriga platform. The
Auriga EC provides complete dry-in/dry-out CMP processing with increased
chemical cleaning capability within the existing Auriga footprint. The Auriga EC
was designed to meet the pH levels required by current and anticipated future HF
and copper cleaning processes.

     Semiconductor Orbital CMP Systems.  The Company's orbital CMP systems
incorporate an advanced polishing technique developed in conjunction with a
major semiconductor manufacturer. Planarization in these systems is achieved by
the downward pressure from and rotational motion of the upper wafer carrier
against the orbital motion of the lower polishing platen, which has a polishing
pad attached to its surface. The use of orbital polishing technology in
conjunction with other enhancements offered on the Company's orbital platforms
provides customers with improved polish flexibility in a smaller footprint tool.
Moreover, the Company's orbital systems incorporate an innovative polish slurry
delivery method that delivers the slurry through the polishing pad directly to
the wafer surface. This slurry delivery method is designed to increase
throughput and improve process control and planarity, and therefore yield to the
device manufacturer, as well as reduce the consumption of slurry compared to
conventional methods, which deposit slurry on the pad surface.

     The AvantGaard 676 features four independent heads, allowing simultaneous
polishing of four wafers and offers one of the industry's smallest footprints.
This system is capable of polishing either oxide or metal layers and processing
40 or more wafers per hour. Prior to its introduction to the open market in
April 1996, the AvantGaard 676 was shipped only to the customer with which it
had been co-developed. The AvantGaard 676 was initially designed solely to
planarize metal layers and had been adopted for this purpose in volume
production by a majority of the customers that have purchased the system.

     First shipped in June 1997, the AvantGaard 776 is based on the same four
head orbital polishing technology as the AvantGaard 676 enabling throughput of
50 or more wafers per hour. The AvantGaard 776 integrates CMP, metrology and
wafer cleaning in a single unit that requires less clean room space than
separate CMP and post-CMP cleaning equipment. An oxide process for the
AvantGaard 676 and 776 was developed in 1997 and a number of customers have
adopted this process for volume production to date. The Company is currently
developing additional oxide processes for use by other customers and is also
developing a copper process.

     The AvantGaard 876 300mm is a fully integrated system which combines a
modular, multi-polish head, orbital technology with an advanced cleaning system
which can also support the integration of other industry standard cleaners. The
system has been designed to specifically address the upcoming 0.13m technology
at all levels; oxide, tungsten, STI, and the copper processing requirements
specific to this technology.

     Thin Film Memory Disk Media.  The Company sells polishing machines,
pre-deposition cleaning machines and grinding machines for producing aluminum,
nickel-plated and alternative substrates for the thin film memory disk media
market.

     The DSM line of manual and automated machines are used in the manufacture
of thin film memory disk media for grinding the aluminum substrate as well as
polishing after deposition of the nickel plating. The DSM line of machines
simultaneously processes both sides of a disk substrate and is available in
various sizes. The automated machines in the DSM line are currently manufactured
solely by the Far East Joint Venture.

     The MD and Neptune lines of cleaning systems are used to clean the
substrate at various stages of the manufacturing process, including the critical
cleaning immediately prior to the deposition of the magnetic layers. Disk
cleaning systems distributed by the Company are produced solely by the Far East
Joint Venture.

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     Semiconductor Wafers.  The Company supplies chemical mechanical polishing,
double-sided lapping and edge polishing systems to the semiconductor substrates
market.

     The Company's DSM line of double-sided lapping systems is available in
various sizes and is used to create the initial flatness and thickness of the
silicon wafer after it is sliced from an ingot. The lapping process removes saw
marks remaining after slicing and provides a surface finish suitable for
subsequent polishing processes. DSM double sided polishers for silicon wafer
polishing are also available.

     The SPAW line utilizes a chemical mechanical polishing process to remove
the shallow damage layer remaining from previous process steps and to attain the
specified flatness and surface finish. A 59-inch model suitable for automated
processing is manufactured by the Far East Joint Venture.

     The edge polishing technology was developed and introduced for the purpose
of making the wafer's edge easier to clean, thereby increasing semiconductor
device manufacturing yields. The Far East Joint Venture produces the EP line of
edge polishing systems that is marketed and distributed by the Company.

     General Industrial.  The Company offers a broad line of lapping, grinding
and polishing systems for the general industrial market. The line includes
approximately 35 models of single-side processing machines, double-side
processing machines and in-line grinding systems. The product offering is
available in a wide range of sizes from a 12 inch plate diameter up to a 150
inch plate diameter. Each system typically consists of a specialized machining
plate, a rotating spindle, a means to fix and apply pressure to the workpieces,
an abrasive distribution system and a control system.

PARTS AND CONSUMABLES

     The Company markets a broad line of parts and consumables. These products
include general spare parts, bearings, grinding stones, lapping plates,
workpiece carriers, seals, retaining rings, workholders and polishing pads.
These products are typically obtained from outside vendors and are generally
manufactured to the Company's specifications. The Company maintains spare parts
inventories at 14 U.S. locations, 9 European locations, and 4 locations in the
Far East. The Company believes that its ability to quickly supply parts and
consumables is an important factor in its ability to provide customers with a
total solution.

SLURRIES

     The Company offers a broad line of slurry and slurry components (including
vehicles and abrasives) used in surface treatment processes as part of a total
process solution. Polishing slurry consists of abrasive particles contained in a
liquid vehicle that may contain a suspension agent and may be chemically active.
The slurries marketed by the Company are used by manufacturers of thin film
memory disk media, semiconductor wafers and other products as part of their
polishing processes. Substantially all of the slurries sold by the Company are
manufactured by Fujimi Incorporated.

     The Company has entered into a joint venture (the "Fujimi Joint Venture")
with Fujimi Incorporated to sell certain products in North and South American
markets, including slurry and slurry components. The Company distributes thin
film memory disk polishing slurry and related products supplied by Fujimi
Incorporated, while the Fujimi Joint Venture distributes other products supplied
by Fujimi Incorporated. See "Joint Venture Arrangements -- Fujimi Joint
Venture."

     The slurry for thin film memory disk media polishing applications is
available in different varieties to address the varying needs of each specific
process. Some formulations allow higher stock removal rates and others emphasize
surface finish results. There are also a variety of slurry formulations
available for silicon wafer processing. Slurry is an essential process component
in chemical mechanical polishing. The chemical action of this process is
implemented by designing the slurry to be chemically active with the surface to
be polished, typically by adjusting the pH of the slurry vehicle. The mechanical
portion of the process is accomplished by abrasive particles in the slurry.

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CUSTOMERS

     The Company sells its products to leading manufacturers of semiconductor
devices, thin film memory disks, semiconductor wafers and for various general
industrial applications. Intel accounted for 10.5%, 19.4% and 23.2% of the
Company's total revenue in fiscal 1999, 1998 and 1997, respectively. Samsung
accounted for 11.4% of the Company's total revenue for fiscal 1999. The
Company's ten largest customers accounted for 60.8%, 53.4% and 59.5% of the
Company's total revenue in fiscal 1999, 1998 and 1997, respectively.

SALES AND MARKETING

     The Company markets and sells its products in North America through a
combination of direct sales personnel and distributors. The Company sells
directly to all the industries it serves and in addition uses a network of 10
regional distributors for its general industrial product lines. In its European
operations, the Company uses direct sales personnel and a small number of
distributors. The Company markets and sells its products in the Far East through
the sales and marketing arm of the Far East Joint Venture.

     The Company's sales strategy emphasizes direct interaction with customers,
particularly in the semiconductor device, silicon wafer and memory disk
industries, where ongoing customer support and service are critical. The
Company's direct sales force is divided into focused units for each of the
industries it serves.

     The Company's main sales offices are in Chandler, Arizona, Austin, Texas,
Portland, Oregon and Des Plaines, Illinois. To enhance its sales capabilities,
the Company maintains process development and demonstration laboratories in the
U.S. and Europe. Sales and marketing activities in the Far East are conducted
primarily by the Far East Joint Venture. See "Joint Venture Arrangements -- Far
East Joint Venture." The Company also has direct sales personnel in the
SpeedFam-IPEC U.K. and SpeedFam-IPEC Germany offices.

     The Company's marketing strategy includes involvement with SEMATECH, Inc.,
a consortium of major semiconductor manufacturers and equipment suppliers,
attendance at Semicon, Diskcon, IMTS and other trade shows worldwide and
participation in technical conferences, which include the presentation of
technical papers written by customers, university scientists and the Company's
own senior technologists. The Company believes these initiatives serve to
promote acceptance of the Company's products and process technologies in the
semiconductor, thin film memory disk and other industries.

SERVICE AND SUPPORT

     The Company believes that providing highly responsive service is an
essential factor in providing a total solution to its customers. In order to
provide customers with experienced service and support personnel, the Company
has structured its service operations into distinct service units responsible
for each of the semiconductor device, thin film memory disk media, semiconductor
wafer and general industrial products industries. Elements of the Company's
service and support program include system installation and process
certification, process support, machine repair, providing spare parts
inventories, internal training programs, external customer training,
documentation and formation of customer user groups. For large users of the
Company's systems, the Company often creates a customized service arrangement
designed to meet the specific requirements of the customer.

     The Company generally provides a one-year warranty on all equipment it
sells and in certain instances the Company has provided a warranty period in
excess of one year. Field and technical service personnel provide warranty
service, post-warranty service, and equipment installations. Field and technical
service engineers are located in various locations throughout the world,
including dedicated site-specific engineers in place at certain customer
locations pursuant to contractual arrangements. The Company also provides
service and maintenance training as well as process application training for its
customers' personnel. The Company maintains an extensive inventory of spare
parts at its primary locations and at its satellite service sites. This provides
the Company the ability to provide same day or overnight delivery for many
parts.

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BACKLOG

     Backlog of orders for capital equipment, parts, consumables and slurries
was approximately $45.4 million at July 31, 1999, compared to $65.4 million at
July 31, 1998. The Company's backlog does not include orders for capital
equipment or other products manufactured by the Far East Joint Venture and
distributed by the Company in the U.S. and Europe for which the Company receives
commissions. The time between the placing of orders and shipment of parts,
consumables and slurries is significantly less than for capital equipment and as
a result, the Company's backlog consists mostly of orders for capital equipment.
The Company includes in its backlog only those customer orders for which it has
accepted signed purchase orders with assigned delivery dates within 12 months.
Orders generally carry a stipulation that customers may incur a penalty in the
event of cancellation. However, there can be no assurance that orders will not
be canceled by customers or that the Company will obtain a meaningful penalty
payment. As a result of systems and equipment ordered and shipped in the same
quarter, possible changes in delivery schedules, occasional cancellation of
orders and delays in product shipments, the Company's backlog at any particular
date may not be indicative of actual sales for any succeeding period.

RESEARCH AND DEVELOPMENT

     The capital equipment market, and in particular the semiconductor capital
equipment market in which the Company competes, is characterized by rapid
technological development and product innovation. The Company's research and
development efforts are currently focused on enhanced performance for finer
geometries in oxide and tungsten applications while developing new process
capabilities for emerging STI, copper, and 300mm applications. The Company's
research and development expenditures during fiscal 1999, 1998 and 1997 were
approximately $70.2 million, $67.2 million and $43.7 million respectively.

     Because of the complex and highly specialized design, testing, and
manufacturing requirements of the Company, research and development employees
must be experienced in a wide range of engineering disciplines. These primary
disciplines include process development, mechanical engineering, software
engineering, electrical engineering, and test engineering. Development programs
are organized around cross-functional project teams including leaders for
engineering, manufacturing, marketing and customer support. Teams are lead by
program managers responsible for concurrent activity across all functional
areas. The Company believes that this approach provides flexibility and allows
the Company to shorten time to market for new products and processes.

     In order to respond to developing technologies in the semiconductor
industry, the company augments its internal development capabilities by seeking
cooperative research and product development relationships with industry
participants. Three such relationships are currently active: alliances with
other capital equipment suppliers; joint development projects with customers,
and; sponsorship of university research.

     During fiscal 1999, the Company developed numerous enhancements to the high
throughput Auriga-C system and the highly flexible 776 orbital system. As a
result, the Company believes that the large installed base of customers will
achieve higher productivity from their systems and build confidence in the
production capability of the Company's products and processes.

     Future investments will create an integrated system architecture that
enables the Company to offer a range of tool configurations that fully support
the polishing requirements for oxide, tungsten, copper, STI, Low K dielectrics,
and 300mm applications. The Company has also recently announced a cooperative
agreement with Rodel Inc. for the development of a tool that uses fixed abrasive
pad technology in a web format. The new web format will utilize fixed abrasive
pads for slurry-free or slurry reduced CMP processes.

MANUFACTURING

     The Company generally assembles its equipment and systems from components
and fabricated parts manufactured and supplied by others, including stainless
steel plates and gears, frames and weldments, power supplies, process
controllers, robots and polishing heads. Certain of the items manufactured by
others are made to the Company's specifications. All final assembly and system
tests are performed within the

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Company's manufacturing/assembly facilities. Quality control is maintained
through incoming inspection of components, in-process inspection during
equipment assembly and final inspection and operation of all manufactured
equipment prior to shipment. Substantially all of the Company's products sold to
manufacturers of general industrial components are manufactured in its Illinois
facility. Most of the equipment sold to the thin film memory disk media and
silicon wafer markets is manufactured by the Far East Joint Venture. The
Company's CMP system development and manufacturing are located at the Company's
headquarters in Chandler, Arizona.

COMPETITION

     The Company competes in several distinct markets. These markets include the
semiconductor device equipment market (specifically for CMP), the thin film
memory disk media equipment market, the semiconductor wafer equipment market,
the general industrial applications market, and the related parts and
expendables market. In all markets, the Company competes on the basis of
technology, overall cost of ownership, product quality, price, availability,
size of installed base, breadth of product line and customer service and
support.

     The Company faces substantial competition from both established competitors
and from potential new entrants, some of which have substantially greater
financial, engineering, manufacturing and marketing resources than the Company.
The Company expects its competitors to improve the design and performance of
their products. There can be no assurance that the Company's competitors will
not develop enhancements or acquire new technologies through business
acquisitions that will offer price or performance features superior to those
offered by the Company. In the semiconductor device equipment market, the
Company faces significant competition from current competitors including Applied
Materials, Inc. and Ebara Corporation, and any others that may enter this market
in the future. In addition, certain of the Company's competitors have longer-
standing relationships than the Company with particular customers, including
device manufacturers. These longer-standing relationships may make it more
difficult for the Company to sell its CMP system to such semiconductor device
manufacturers. Consolidation among CMP equipment suppliers or the acquisition of
CMP equipment suppliers by large, established suppliers of non-CMP capital
equipment to semiconductor device manufacturers or others could materially
adversely affect the Company's ability to compete and would have a material
adverse effect on the Company's results of operations. In the thin film memory
disk and semiconductor wafer equipment markets, the Company competes with
relatively few but significant competitors.

     Competition in the general industrial products markets is fragmented; no
one competitor currently holds a dominant position. The Company faces
significant competitive pressure in the sale of slurries, particularly with
regard to pricing, resulting in decreased margins for certain products of the
Company in recent periods. In the thin film memory disk slurry market, the
Company competes primarily with Praxair, a large chemical company that
manufactures and sells its own products.

EMPLOYEES

     At May 31, 1999, the Company had approximately 1,100 full time employees in
the U.S. and Europe. From time to time the Company will use temporary employees
to respond more rapidly to fluctuations in assembly and product demand and to
better control the labor component of its manufacturing costs. None of the
Company's employees is represented by a labor union and the Company has never
experienced a work stoppage or strike. The Company considers its employee
relations to be good.

INTELLECTUAL PROPERTY

     The Company currently holds 101 United States patents and 90 foreign
patents in Japan and several Asian and European countries and as of August 6,
1999, has 296 United States patent applications and foreign patent applications
pending. In addition, the Company believes that such factors as continued
innovation, technical expertise and know-how of its personnel and other factors
are also important. The Company owns 10 U.S. trademark registrations. The
Company also owns numerous foreign trademarks.

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     The Company licenses the right to manufacture CMP machines employing an
orbital motion in its AvantGaard 676, 776, and 876 from a semiconductor
manufacturer.

     There can be no assurance that the Company's pending patent applications
will be allowed or that the issued or pending patents will not be challenged or
circumvented by competitors. There can be no assurance that any of these rights
held by the Company will not be challenged, invalidated or circumvented, or that
such rights will provide competitive advantages to the Company.

     There are no pending lawsuits against the Company regarding infringement of
any existing patents or other intellectual property rights or any unresolved
claims by third parties that the Company is infringing intellectual property
rights of such third parties. There can be no assurance that infringement claims
will not be asserted by third parties in the future. There also can be no
assurance in the event of such claims of infringement that the Company will be
able to obtain licenses on reasonable terms, if at all. The Company's
involvement in any patent dispute or other intellectual property dispute or
action could have a material adverse effect on the Company's business. Adverse
determinations in any litigation relating to intellectual property could
possibly subject the Company to significant liabilities to third parties,
require the Company to seek licenses from third parties and prevent the Company
from manufacturing and selling one or more of its products. Any of these events
could have a material adverse effect on the Company.

EXECUTIVE OFFICERS OF THE COMPANY

<TABLE>
<CAPTION>
                                              HELD PRESENT              OTHER POSITIONS HELD
          NAME AND POSITION            AGE    OFFICE SINCE             DURING PAST FIVE YEARS
-------------------------------------  ---    ------------    -----------------------------------------
<S>                                    <C>    <C>             <C>
Makoto Kouzuma.......................  59         1999        President and Chief Executive Officer,
  Vice Chairman of the Board                                  Chief Operating Officer, Executive Vice
                                                              President
Richard J. Faubert...................  51         1999        Vice President of the T.V. and
  President and Chief Executive                               Telecommunications Test Business Unit of
  Officer                                                     Tektronix, Inc.
J. Michael Dodson*...................  38         1999        Vice President, Corporate Controller and
  Chief Financial Officer and                                 Chief Accounting Officer of Novellus
  Treasurer                                                   Systems, Inc.
Roger K. Marach**....................  54         1988
  Chief Financial Officer and
  Treasurer
Ralph Hartung........................  56         1999        Chief Operating Officer of IPEC
  President of the CMP Group and                              Vice President -- Europe of MEMC
  Chief Operating Officer                                     Electronic Materials, Inc.
Robert R. Smith......................  56         1974
  Managing Director of SpeedFam-IPEC,
  Limited
</TABLE>

---------------
 * Mr. Dodson started employment with the Company on August 9, 1999.

** Mr. Marach resigned from the Company effective July 30, 1999.

                                       10
<PAGE>   11

                           JOINT VENTURE ARRANGEMENTS

FAR EAST JOINT VENTURE

     SpeedFam-IPEC Co., Ltd. (together with its subsidiaries and joint ventures,
the "Far East Joint Venture") is headquartered in Kanagawa Prefecture, Japan.
The Far East Joint Venture designs and manufacturers most of the equipment sold
by the Company to the thin film memory disk media and silicon wafer markets in
the U.S. and Europe. It also distributes such products in the Far East and
provides sales and service channels in the Far East for products manufactured by
the Company, including distribution of the Company's CMP systems to
manufacturers of semiconductor devices. The Far East Joint Venture conducts
operations primarily in Japan but has subsidiaries and branches located in
China, Hong Kong, India, Korea, Singapore, and Taiwan and owns a majority
interest in a Japanese subcontract manufacturing organization, Saku Seiki Co.,
Ltd. The Far East Joint Venture operations in China, Hong Kong, Singapore, and
Korea are primarily marketing, sales and service functions. The subsidiaries in
Taiwan and India also include manufacturing facilities where certain of the
equipment sold by the subsidiaries is produced.

     Background.  In 1970 the Company entered into a joint venture with a
Japanese company, Obara Corporation ("Obara"), pursuant to which the Far East
Joint Venture was formed. The Company and Obara each own a 50% interest in the
Far East Joint Venture. Obara, a publicly-traded company, principally supplies
welding guns and tips and related products to the automotive industry; its
business is unrelated to that of the Company and the Far East Joint Venture.

     Terms of the Joint Venture Agreement.  Pursuant to the terms of an
agreement between the Company and Obara dated November 14, 1970 (the "Joint
Venture Agreement"), the Far East Joint Venture will continue as long as
SpeedFam-IPEC Co., Ltd. is in corporate existence and both the Company and Obara
are shareholders. Both parties to the Joint Venture Agreement have agreed to
refrain from competing with the joint venture in Japan. The agreement may be
terminated upon 90-days notification by either party in the event of a
substantial breach by the other party if such breach is not cured within the
90-day period. In the event that either the Company or Obara desires to sell its
interest in the Far East Joint Venture, it must first offer its interest to the
other party, which then has 60 days to purchase the interest at a price to be
mutually agreed upon. If the interest is not purchased within the 60-day period,
the party desiring to sell its interest may sell it to a third party free of the
right of first offer provisions, provided that the price is not less than the
price initially offered by the other party.

     Pursuant to the terms of a License and Technical Assistance Agreement
between the Company and SpeedFam-IPEC Co., Ltd. dated November 14, 1970 (the
"Technology Agreement"), the Company licensed to the Far East Joint Venture
certain trademarks and technology, and granted to the Far East Joint Venture the
exclusive right to manufacture and sell in Japan, Korea, Taiwan, Hong Kong,
China, India, the Philippines, Thailand, Vietnam, Malaysia, Singapore and
Indonesia, and such other countries as the parties may agree to from time to
time, products similar to those manufactured and distributed by the Company. In
exchange for such rights, the Far East Joint Venture agreed to pay to the
Company a royalty of 4% of the total net sales of products sold by the Far East
Joint Venture that incorporate the technology. The Company also agreed to
provide technical assistance and to communicate to the Far East Joint Venture
all developments and improvements related to the technology. In addition, the
Far East Joint Venture agreed to communicate to the Company all developments and
improvements known to the Far East Joint Venture relating to the technology, and
the Company agreed to pay to the Far East Joint Venture a 2% royalty fee on
machines sold by the Company that utilize certain of that technology. The
Technology Agreement continued for an initial term of ten years and was
renewable for subsequent ten year periods. By oral agreement in 1980, the
Technology Agreement was extended and amended to reduce the percentage of
royalties to be paid by the Far East Joint Venture. Notwithstanding the
requirements of the Technology Agreement, although the Far East Joint Venture
had transferred technology to the Company, the Company and the Far East Joint
Venture agreed that no royalties would be paid by the Company. By oral agreement
in 1990, the Technology Agreement was extended for a new ten-year period. By
oral agreement in 1991, the Technology Agreement was amended to eliminate the
payment of royalties by either party. On July 24, 1995, the foregoing oral
agreements were confirmed in writing. Unless extended, the Technology Agreement
will expire in November 2000.
                                       11
<PAGE>   12

     Since the inception of the Far East Joint Venture, the Company and the Far
East Joint Venture have cooperated on various research and development projects
and each entity has communicated significant technology to the other. It is not
anticipated that either the Company or the Far East Joint Venture will pay
royalties to the other in connection with the transfer of technology in the
foreseeable future, including with respect to the Company's CMP technology.

     Management.  SpeedFam-IPEC Co., Ltd. currently has seven directors serving
on its Board of Directors, including Messrs. Farley and Kouzuma, the Co-Chairman
and Vice Chairman of the Company, respectively, as well as Hiroshi Obara,
Suminori Suzuki, Ryosuke Tojo, Hatsuyuki Arai, and Akitoshi Yoshida. Mr. Kouzuma
is the Executive Vice President and General Manager of SpeedFam-IPEC Co., Ltd.
and is responsible for day to day operations and acts as the primary liaison
between the Company and Obara. Mr. Obara is the President of the Far East Joint
Venture. Mr. Suzuki, Senior Managing Director of Obara, is the senior finance
officer of the Far East Joint Venture. Mr. Tojo is Senior Managing Director of
the Far East Joint Venture and assists in the overall management of operations.
Mr. Arai is the Director of Intellectual Property and reports to Mr. Kouzuma.
Mr. Yoshida is Office Manager of the Makuhari Techno Garden Laboratory and
reports to Mr. Kouzuma.

     The Joint Venture Agreement provides limited direction with respect to the
relationship between the joint venture partners and the operation and management
of the Far East Joint Venture. To date, decisions with respect to the strategic
direction of the Far East Joint Venture have been made by the Company and Obara
from time to time on the basis of informal discussions and the relationships
forged over time by the individuals. Business transactions between the Company
and the Far East Joint Venture, including those relating to the absence of
payment of royalties on transfers of certain technology, may not be consistent
with business decisions and results that would exist between two independent
entities dealing at arms-length.

     Financial Information.  During the Company's 1999, 1998 and 1997 fiscal
years, the Company's share of the net earnings of the Far East Joint Venture was
$77,000, $2.8 million and $5.5 million, respectively. In fiscal 1999, the Far
East Joint Venture paid $521,000 in dividends to the Company. Historically, the
Far East Joint Venture has not paid significant dividends. The Far East Joint
Venture is expected to retain substantially all of its earnings, if any, in the
foreseeable future to support the growth of its business. As a result, the
Company's share of the net earnings of the Far East Joint Venture has not in the
past resulted and is not expected in the future to result in a like effect on
the cash flows of the Company. In fiscal 1999, the equity in net earnings of
affiliates decreased from the prior year primarily as a result of a decrease in
net earnings of the Far East Joint Venture. Revenue of the Far East Joint
Venture declined in fiscal 1999 from the same period a year ago. Investments by
manufacturers of both silicon wafers and thin film memory disks were reduced
significantly in fiscal 1999 compared to fiscal 1998. This reduced manufacturing
volume also resulted in lower sales of consumable goods. The Company believes
that earnings of the Far East Joint Venture will be adversely affected in the
next fiscal year by both a slowdown in demand for equipment sold into the thin
film memory disk and silicon wafer markets, as well as the current financial
difficulties facing several Asian economies. During fiscal 1999, 1998 and 1997,
1.0%, 2.4% and 3.9% respectively, of the Company's total revenue was
attributable to commissions earned on products produced by the Far East Joint
Venture and which were sold by the Company. At May 31, 1999, the Company's
equity interest in the Far East Joint Venture was $21.8 million, representing
4.9% of the Company's total assets and 8.8% of stockholders' equity. Set forth
below is certain selected financial information with respect to the Far East
Joint Venture which has been derived from consolidated financial statements
which have been audited by KPMG LLP. Such information should be read in
conjunction with the consolidated financial statements and notes thereto of the
Far East Joint Venture appearing elsewhere herein.

                                       12
<PAGE>   13

<TABLE>
<CAPTION>
                                                                   YEAR ENDED APRIL 30,
                                                             --------------------------------
                                                               1999        1998        1997
                                                             --------    --------    --------
                                                                      (IN THOUSANDS)
<S>                                                          <C>         <C>         <C>
Consolidated Statements of Earnings Data:
  Net sales................................................  $136,232    $221,738    $220,281
  Gross profit.............................................    36,956      56,586      66,773
  Operating profit.........................................     2,330      10,964      20,958
  Net earnings(1)..........................................       206       5,863      11,013
Consolidated Balance Sheet Data (at period end):
  Working capital..........................................  $ 23,971    $ 21,614    $ 19,637
  Total assets.............................................   128,522     173,282     153,700
  Long-term debt, less current portion.....................    20,430      18,945      10,786
  Stockholders' equity.....................................    43,527      41,086      40,726
</TABLE>

---------------
(1) Approximately one-half of such amount is recognized by the Company on the
    equity method as "equity in net earnings of affiliates."

     Products and Customers.  The Far East Joint Venture designs and
manufactures most of the equipment sold by the Company to the thin film memory
disk media and silicon wafer markets in the U.S. and Europe. It also distributes
such products in the Far East and provides sales and service channels in the Far
East for products manufactured by the Company, including distribution of the
Company's CMP systems to manufacturers of semiconductor devices. The Far East
Joint Venture designs, produces and markets edge and flat polishing machines for
the semiconductor wafer market and pre-deposition cleaning machines for the thin
film memory disk market and the flat panel display market. The Company
distributes certain of these machines in the U.S. and Europe. The Far East Joint
Venture also markets parts, consumables and slurries (primarily to thin film
memory disk and silicon wafer manufacturers). The Company's CMP products are
marketed and sold through the Far East Joint Venture. The Far East Joint Venture
receives a commission from the Company for such sales in the Far East.

     The Far East Joint Venture's products are sold to semiconductor wafer
(primarily silicon), thin film memory disk and general industrial (primarily
quartz, ceramic and LCD glass) manufacturers. Major end user customers of the
Far East Joint Venture have included: MA Disk (thin film memory manufacturer),
ALTECNO (thin film memory manufacturer), Nippon Light Metal Co., Ltd. (thin film
memory disk manufacturer), Phoenix Silicon International (silicon wafer
manufacturer in Taiwan), Hitachi Ltd. (CMP user), Mitsubishi Material Silicon
(silicon wafer manufacturer), Toyo Kohan Co., Ltd. (thin film memory disk
manufacturer), and Wacker Siltronic Corp. (silicon wafer manufacturer). During
the Far East Joint Venture's fiscal years 1999, 1998 and 1997, sales to certain
customers through Fujimi Incorporated, acting as a distributor accounted for
approximately 9%, 20% and 13% of net sales respectively.

     Competition.  The Far East Joint Venture competes in several distinct
markets including the semiconductor substrate equipment market, the thin film
memory disk equipment market, the general industrial equipment applications
market (primarily quartz, ceramic and LCD glass) and the slurries market. The
Far East Joint Venture competes on the basis of technology, overall cost of
ownership, product quality, price, availability, size of installed base, breadth
of product line and customer service and support. The Far East Joint Venture
faces intense competition from established competitors, some of which have
substantially greater financial, engineering, manufacturing and marketing
resources. In the equipment markets served, the Far East Joint Venture generally
competes with a relatively small number of competitors which, together with the
Far East Joint Venture, provide a substantial majority of the products sold into
those markets. In the slurries market, Fujimi Incorporated is the provider of
substantially all of the slurries sold by the Far East Joint Venture. Fujimi
Incorporated also sells directly to end users and is a dominant supplier and
distributor of slurries in the Far East region.

     Sales, Marketing and Service.  The Far East Joint Venture markets and sells
its products through a combination of Japanese trading companies and direct
sales personnel. As is customary in Japan, the Far East

                                       13
<PAGE>   14

Joint Venture sells a substantial portion of the products sold in Japan through
trading companies, although the Far East Joint Venture sales personnel have
primary responsibility for most aspects of the sale. The Far East Joint Venture
maintains a field service organization based in the major locations where the
Far East Joint Venture maintains a presence, such as Japan, India, Korea,
Singapore, and Taiwan.

     Research, Development and Manufacturing.  Research and development efforts
of the Far East Joint Venture are focused on enhancing existing products as well
as developing new products and generally cover a broader range of products and
technologies than the Company's research and development efforts. The Company
and the Far East Joint Venture have in the past collaborated on various projects
and are expected to do so in the future.

     The Far East Joint Venture or manufacturing subcontractors of the Far East
Joint Venture typically manufacture equipment and systems from components and
fabricated parts manufactured and supplied by others. Certain of the items
manufactured by others are made to the Company's specifications. A portion of
the products sold by the Far East Joint Venture are manufactured by the Far East
Joint Venture's majority owned subsidiary, Saku Seiki Co., Ltd., and a
substantial portion are manufactured by unaffiliated third party subcontractors
for the Far East Joint Venture.

     Employees.  At April 30, 1999, the Far East Joint Venture had approximately
460 full-time employees.

     Certain Relationships.  The Company acts as distributor in North America
and Europe of certain machines produced by the Far East Joint Venture. During
fiscal 1999, 1998 and 1997, commissions paid to the Company relating to such
distribution amounted to approximately $2.2 million, $9.0 million and $12.4
million, respectively. Further, the Company purchases certain components used in
its machines from the Far East Joint Venture. During fiscal 1999, 1998 and 1997,
purchases of components from the Far East Joint Venture totaled approximately
$3.0 million, $6.3 million and $6.1 million, respectively.

     Pursuant to an agreement with the Far East Joint Venture, effective as June
1, 1998, the Company is solely responsible for compensating Mr. Kouzuma. In lieu
of director's fees, salary and bonus paid directly to Mr. Kouzuma for services
rendered with respect to the Far East Joint Venture, the Far East Joint Venture
pays an annual amount directly to the Company for the use of Mr. Kouzuma's
services. In addition, both Messrs. Farley and Kouzuma receive dividends on
their individual holdings of stock in certain of SpeedFam-IPEC Co., Ltd.'s
subsidiaries. Both Messrs. Farley and Kouzuma serve as directors of
SpeedFam-IPEC Co., Ltd. In addition, both serve as directors of SpeedFam-IPEC
Clean Systems Co., Ltd., a majority owned subsidiary of SpeedFam-IPEC Co., Ltd.
Mr. Kouzuma also serves as President of SpeedFam-IPEC Clean Systems Co., Ltd. In
addition, each of Messrs. Farley and Kouzuma own 5% of the outstanding capital
stock of SpeedFam-IPEC Clean Systems Co., Ltd. Mr. Kouzuma owns 10.62% of the
outstanding capital stock of Saku Seiki Co., Ltd., a majority owned subsidiary
of SpeedFam-IPEC Co., Ltd., and serves as a director of Saku Seiki Co., Ltd.
Messrs. Farley and Kouzuma also serve as directors of several wholly owned
subsidiaries of SpeedFam-IPEC Co., Ltd., namely SpeedFam-IPEC Korea Ltd.,
SpeedFam-IPEC Incorporated in Taiwan, SpeedFam-IPEC India (Pvt.) Ltd. and
SpeedFam-IPEC (S.E.A.) Pte. Ltd. in Singapore.

FUJIMI JOINT VENTURE

     Pursuant to a joint venture agreement dated September 7, 1984, the Company
and Fujimi Incorporated formed Fujimi Corporation (the "Fujimi Joint Venture"),
an Illinois corporation. Each of Fujimi Incorporated and the Company owns 50% of
the Fujimi Joint Venture's common stock. Fujimi Incorporated, a publicly traded
company in Japan, is a manufacturer of slurry, abrasives and compounds in Japan.
The initial term of the joint venture agreement was for a period of five years,
but the agreement continues in effect until such time as either party terminates
upon written notice delivered to the other party upon one-year notice. The
agreement may also be terminated upon 60-days notification by either party in
the event of a breach by the other party if such breach is not cured within 60
days.

     The Fujimi Joint Venture was organized to sell Fujimi Incorporated products
in North and South America. The Fujimi Joint Venture distributes abrasives,
polishing pads, diamond wheels, diamond slurries and other products to the
semiconductor wafer, thin film memory disk and general industrial markets.

                                       14
<PAGE>   15

Notwithstanding the written terms of the joint venture agreement, the Company,
through SpeedFam-IPEC U.S., has distributed a variety of products, primarily
slurry, to manufacturers of thin film memory disks. The Company has the
exclusive right to distribute Fujimi Incorporated memory disk polishing slurry
in North America until October 1, 1999. Revenue from sales of products by the
Fujimi Joint Venture were $22.7 million in fiscal 1999, $36.8 million in fiscal
1998 and $36.6 million in fiscal 1997. For a description of other business
relationships between the Company and Fujimi Incorporated, see
"Business -- Manufacturing and Suppliers." The Fujimi Joint Venture imports a
portion of the products it sells and purchases such products in non-U.S. dollar
denominated transactions. This business is subject to foreign exchange rate
fluctuations which can significantly impact operating profit margins.

     The Fujimi Joint Venture currently has five directors serving on its Board
of Directors, including Mr. Farley, Co-Chairman of the Company and Mr. Kouzuma,
Vice Chairman of the Company. The other three directors, Messrs. Isamu
Koshiyama, Tadashi Nagotoshi and Stuart Sawai, are representatives of Fujimi
Incorporated. Day to day management of the Fujimi Joint Venture is under the
control of its president, Mr. Donald R. Hixson. The Fujimi Joint Venture employs
5 full-time sales personnel.

ITEM 2.  PROPERTIES.

     The Company's operations are conducted primarily in three buildings in
Chandler, Arizona and one building in Des Plaines, Illinois. Two of the Chandler
buildings are owned and consist of approximately 245,000 square feet. The other
building is leased and is approximately 26,000 square feet. These buildings
house the main manufacturing operation, research and development, various
administrative and customer support offices, a customer demonstration lab,
corporate headquarters and a new state-of-the-art applications and customer
demonstration lab. The Des Plaines, Illinois building is owned and consists of
approximately 42,000 square feet. It houses the Industrial Applications Group.

     The Company leases 22,000 square feet in Portland, Oregon, which is used
for research and development and also houses the northwest field service
operation. The central region field service operation is housed in a 20,000
square foot leased facility in Austin, Texas.

     SpeedFam-IPEC UK is located in Hinckley, England and owns a 9,000 square
foot facility used for demonstration, customer service, sales and administration
purposes. SpeedFam-IPEC GmbH leases 2,000 square feet of office space in
Ingelfingen, Germany.

     The Company also leases various smaller facilities worldwide, which are
used as sales and customer service centers.

     The Company is currently seeking sub-lessees for or has subleased certain
of the properties occupied by the former IPEC operations, which have been
relocated to the facilities in Chandler, Arizona. This includes a 150,000 square
foot facility in Phoenix, Arizona, which was the primary manufacturing, research
and administration facility for the IPEC operations.

     The Company owns approximately 30 acres of vacant land in Chandler, Arizona
close to the current facilities, which is being held for future expansion needs.

     The Company believes that its current properties will be sufficient to meet
the Company's requirements for the foreseeable future.

ITEM 3.  LEGAL PROCEEDINGS.

     The Company is not presently involved in any material legal proceedings.

                                       15
<PAGE>   16

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

     On April 6, 1999, a special meeting of the shareholders was held. At that
meeting the Company's shareholders approved the following three proposals:

     1. Proposal to issue shares of common stock to stockholders of Integrated
        Process Equipment Corp. in accordance with a merger agreement by and
        among the Company, IPEC and a wholly-owned subsidiary of the Company.

<TABLE>
<S>                                                        <C>
FOR                                                        11,715,255
ABSTAIN                                                        24,554
AGAINST                                                        90,240
</TABLE>

     2. Proposal to amend the Company's articles of incorporation to change its
        name to SpeedFam-IPEC, Inc.

<TABLE>
<S>                                                        <C>
FOR                                                        11,737,333
ABSTAIN                                                       104,126
AGAINST                                                        91,530
</TABLE>

     3. Proposal to amend the Company's 1995 Stock Plan to increase the maximum
        aggregate number of shares of the Company's common stock reserved for
        issuance from 1,800,000 to 3,300,000 shares.

<TABLE>
<S>                                                         <C>
FOR                                                         8,205,664
ABSTAIN                                                        27,217
AGAINST                                                     3,597,173
</TABLE>

                                    PART II

ITEM 5.  MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

<TABLE>
<CAPTION>
                                                    NUMBER OF
                                                 STOCKHOLDERS OF
                                                  RECORD AS OF
TITLE OF CLASS                                    MAY 31, 1999
--------------                                   ---------------
<S>                                              <C>
Common Stock, no par value.....................        183
</TABLE>

     The Company's Common Stock is traded on the Nasdaq National Market under
the symbol "SFAM." Public trading of the Common Stock commenced on October 10,
1995. Prior to that time, there was no public market for the Company's Common
Stock. The following table sets forth the high and low closing sale prices for
the Common Stock as reported by Nasdaq for the periods indicated:

<TABLE>
<CAPTION>
                                                              HIGH    LOW
                                                              ----    ---
<S>                                                           <C>     <C>
Fiscal 1998
  First Quarter.............................................  $54 7/8 $31 1/2
  Second Quarter............................................   60 3/8  25 5/8
  Third Quarter.............................................   30 1/2  19 7/8
  Fourth Quarter............................................   30 7/8  19 1/2
Fiscal 1999
  First Quarter.............................................  $20 3/4 $12 3/8
  Second Quarter............................................   18 5/16   9 1/4
  Third Quarter.............................................   21 5/16  14
  Fourth Quarter............................................   16 11/16  10 1/16
Fiscal 2000
  First Quarter (through August 20, 1999)...................  $17 3/4 $ 8 13/16
</TABLE>

                                       16
<PAGE>   17

     The Company has never declared or paid cash dividends on its Common Stock.
The Company currently intends to retain any future earnings to finance the
growth and development of its business and does not intend to pay any cash
dividends on its Common Stock in the foreseeable future. Payment of dividends in
the future, if any, will be made at the discretion of the Board of Directors of
the Company. Such decisions will depend on a number of factors, including the
future earnings, capital requirements, financial condition and future prospects
of the Company and such other factors as the Board of Directors may deem
relevant.

                                       17
<PAGE>   18

ITEM 6.  SELECTED FINANCIAL DATA.

                      SELECTED CONSOLIDATED FINANCIAL DATA

     The consolidated statement of operations data for the years ended May 31,
1999, 1998 and 1997 and the consolidated balance sheet data as of May 31, 1999
and 1998 are derived from the Company's consolidated financial statements and
notes thereto which have been audited by KPMG LLP, independent public
accountants and are included elsewhere herein. The consolidated statement of
operations data for the years ended May 31, 1996 and 1995 and the consolidated
balance sheet data as of May 31, 1997, 1996 and 1995 are derived from the
Company's consolidated financial statements but are not included herein. The
selected consolidated financial data presented below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and with the Company's consolidated financial
statements, appearing elsewhere herein.

<TABLE>
<CAPTION>
                                                                        YEAR ENDED MAY 31,
                                                       -----------------------------------------------------
                                                         1999        1998       1997       1996       1995
                                                       ---------   --------   --------   --------   --------
                                                               (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                                    <C>         <C>        <C>        <C>        <C>
REVENUE:
Net sales............................................  $ 210,108   $365,259   $305,682   $262,570   $132,241
Commissions from affiliates..........................      2,217      9,009     12,430      6,290      2,757
                                                       ---------   --------   --------   --------   --------
Total revenue........................................    212,325    374,268    318,112    268,860    134,998
Cost of sales........................................    182,463    231,332    186,343    163,722     87,093
                                                       ---------   --------   --------   --------   --------
Gross margin.........................................     29,862    142,936    131,769    105,138     47,905
Operating expenses:
Research, development and engineering................     70,243     67,182     43,717     27,373      8,147
Purchased research and development...................         --         --         --     36,961         --
Selling, general and administrative..................     68,237     72,916     56,234     45,575     27,009
Merger, integration and restructuring................     40,300         --     17,601         --         --
                                                       ---------   --------   --------   --------   --------
Operating profit (loss)..............................   (148,918)     2,838     14,217     (4,771)    12,749
Other income (expense)...............................      4,296      3,510     (1,162)      (108)    (1,436)
                                                       ---------   --------   --------   --------   --------
Earnings (loss) from consolidated companies before
  income taxes.......................................   (144,622)     6,348     13,055     (4,879)    11,313
Income tax expense (benefit).........................     (3,931)    29,584      5,086     (2,133)       900
                                                       ---------   --------   --------   --------   --------
Earnings (loss) from consolidated companies..........   (140,691)   (23,236)     7,969     (2,746)    10,413
Equity in net earnings of affiliates(1)..............        916      4,418      7,068      5,204      1,187
                                                       ---------   --------   --------   --------   --------
Net earnings (loss) from continuing operations.......   (139,775)   (18,818)    15,037      2,458     11,600
Loss from discontinued operations....................         --    (10,578)   (28,564)    (1,294)    (9,357)
                                                       ---------   --------   --------   --------   --------
Net earnings (loss)..................................   (139,775)   (29,396)   (13,527)     1,164      2,243
Cumulative dividend on preferred stock...............       (174)      (244)      (284)      (579)      (377)
                                                       ---------   --------   --------   --------   --------
Net earnings (loss) attributable to common
  stockholders.......................................  $(139,949)  $(29,640)  $(13,811)  $    585   $  1,866
                                                       =========   ========   ========   ========   ========
Net earnings (loss) per common share:
Basic:
From continuing operations...........................  $   (4.84)  $  (0.69)  $   0.67   $   0.13   $   0.90
                                                       =========   ========   ========   ========   ========
From discontinued operations.........................              $  (0.39)  $  (1.27)  $  (0.07)  $  (0.73)
                                                                   ========   ========   ========   ========
Net earnings (loss) attributable to common
  stockholders.......................................  $   (4.84)  $  (1.08)  $  (0.62)  $   0.03   $   0.15
                                                       =========   ========   ========   ========   ========
Diluted:
From continuing operations...........................  $   (4.84)  $  (0.69)  $   0.62   $   0.11   $   0.80
                                                       =========   ========   ========   ========   ========
From discontinued operations.........................              $  (0.39)  $  (1.19)  $  (0.06)  $  (0.65)
                                                                   ========   ========   ========   ========
Net earnings (loss) attributable to common
  stockholders.......................................  $   (4.84)  $  (1.08)  $  (0.57)  $   0.03   $   0.13
                                                       =========   ========   ========   ========   ========
Weighted average shares used in per share
  calculations:
Basic................................................     28,890     27,469     22,441     19,592     12,828
                                                       =========   ========   ========   ========   ========
Diluted..............................................     28,890     27,469     24,088     21,953     14,493
                                                       =========   ========   ========   ========   ========
CONSOLIDATED BALANCE SHEET DATA:
Working capital......................................  $ 243,735   $374,426   $205,918   $ 84,893   $109,627
Total assets.........................................    443,778    575,653    404,565    292,685    210,653
Long-term obligations, less current maturities.......    116,129    117,078     19,818     25,346     11,647
Stockholders' equity.................................    246,750    384,136    288,317    188,376    153,157
</TABLE>

---------------
(1) Includes $76, $2,776, $5,513, $4,759, and $1,100 for the 1999 through 1995
    fiscal years, respectively, attributable to the Company's share of net
    earnings from the Far East Joint Venture, accounted for on the equity
    method. See "Business -- Joint Venture Arrangements," and the consolidated
    financial statements of the Far East Joint Venture included elsewhere
    herein. The remainder represents the Company's share of net earnings from
    the Fujimi Joint Venture.

                                       18
<PAGE>   19

ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.

OVERVIEW

     On April 6, 1999, shareholders of the Company and stockholders of IPEC
voted to approve the merger agreement between the companies and the merger was
consummated. The Articles of Incorporation of the Company were amended to change
the name of the Company to SpeedFam-IPEC, Inc. The merger was accounted for as a
pooling of interests. Accordingly, the financial statements of the separate
entities were combined and the discussion herein reflects such combination.

     The Company designs, develops, manufactures, markets and supports chemical
mechanical planarization, or "CMP," systems used in the fabrication of
semiconductor devices and other high-throughput precision surface processing
systems. The Company's flat surface processing systems are used in the thin film
memory disk media, silicon wafer and general industrial components markets. In
addition, the Company markets and distributes parts, consumables and slurries.
The Company's total revenue consists of net sales of the products described
above and service revenues, as well as commissions from affiliate
("commissions") which consist primarily of revenue derived from the distribution
by the Company in the U.S. and Europe of products manufactured by SpeedFam-IPEC,
Co. Ltd. -- the "Far East Joint Venture". Certain capital equipment marketed and
distributed by the Company is produced solely by the Far East Joint Venture. The
Company distributes such products throughout the U.S. and Europe acting as sales
agent and receives commissions thereon. Such amount reflects the difference
between the imported equipment's cost to the Company and sales price to the
customer. Commissions are subject to foreign exchange rate fluctuations, which
can significantly impact operating profit margins.

     The Company sells its products and services to three market segments: (1)
semiconductor device manufacturers (CMP Group), (2) thin film memory disk media
and silicon wafer manufacturers (Surface Technology Group), and (3)
manufacturers of general industrial components (Industrial Applications Group).
Over the last three years, the majority of the Company's total revenue has been
derived from the sales of products and services by the CMP Group. In fiscal
1999, 1998 and 1997, sales to semiconductor device manufacturers were 73.7%,
74.8% and 67.2% of total revenue respectively.

     In fiscal 1999, 1998, and 1997, 38.1%, 34.3% and 26.5%, respectively, of
the Company's total revenue was attributable to sales outside of the United
States. In particular, in fiscal 1999, 12.6% of the Company's total revenue was
attributable to sales made to European markets and 23.4% was attributable to
sales to markets in the Far East.

     In the fourth quarter of fiscal year 1999, the Company recorded merger,
integration and restructuring costs of $53.9 million. These charges were
incurred primarily to close duplicate facilities, record transaction costs,
account for certain employee termination benefits and write down inventory and
equipment resulting from strategic decisions to discontinue certain product
lines as a merged company.

     The Company generally enters into foreign exchange contracts to hedge
certain firm commitments denominated in foreign currencies, principally in
Japanese yen. The terms of the contracts are rarely more than one year. Currency
exchange rate variations have had an immaterial effect on the Company's results
of operations for the periods presented. The results of operations of the
Company's subsidiaries and its equity in the net earnings of the Far East Joint
Venture are translated for financial statement purposes based upon average
exchange rates during the period covered. As a result, fluctuations in exchange
rates may have an adverse effect on the Company's results of operations. Net
assets of the Company's foreign subsidiaries and 50% of the net assets of the
Far East Joint Venture were approximately $28.6 million at April 30, 1999 (the
end of fiscal 1999 of such entities).

     The Company owns a 50% interest in both the Far East Joint Venture and the
Fujimi Joint Venture. The Company's equity interest in each joint venture is
accounted for on the equity method. As a result, the Company's share of the net
earnings of the Far East Joint Venture and the Fujimi Joint Venture appear in
the "Equity in net earnings of affiliates" caption on the Company's consolidated
statements of operations. The Far East Joint Venture and the Fujimi Joint
Venture have paid dividends in the past and may continue to do so in the
foreseeable future, but are expected to reinvest substantially all their
earnings back into their respective

                                       19
<PAGE>   20

businesses. The Company's share of the net earnings of the Far East Joint
Venture has not in the past resulted and is not expected in the future to result
in a like effect on the cash flows of the Company. At May 31, 1999, the
Company's equity interest in the Far East Joint Venture was $21.8 million,
representing 4.9% of the Company's total assets and 8.8% of shareholders'
equity. The net earnings (loss) of the Company in the past have been
substantially influenced by the results of operations of the Far East Joint
Venture and may be so influenced in the future. See "Business -- Joint Venture
Arrangements" and the consolidated financial statements of SpeedFam-IPEC Co.,
Ltd. included elsewhere herein.

RESULTS OF OPERATIONS

     The following table sets forth certain consolidated statements of
operations data for the periods indicated as a percentage of total revenue:

<TABLE>
<CAPTION>
                                                        YEARS ENDED MAY 31,
                                                      -----------------------
                                                      1999     1998     1997
                                                      -----    -----    -----
<S>                                                   <C>      <C>      <C>
REVENUE:
Net sales.........................................     99.0%    97.6%    96.1%
Commissions from affiliate........................      1.0      2.4      3.9
                                                      -----    -----    -----
Total revenue.....................................    100.0    100.0    100.0
Cost of sales.....................................     85.9     61.8     58.6
                                                      -----    -----    -----
Gross margin......................................     14.1     38.2     41.4
OPERATING EXPENSES:
Research, development and engineering.............     33.1     18.0     13.7
Selling, general and administrative...............     32.1     19.4     17.7
Merger, integration and restructuring.............     19.0       --      5.5
                                                      -----    -----    -----
Operating profit (loss)...........................    (70.1)     0.8      4.5
Other income (expense)............................      2.0      0.9     (0.4)
                                                      -----    -----    -----
Earnings (loss) from consolidated companies before
  income taxes....................................    (68.1)     1.7      4.1
Income tax expense (benefit)......................     (1.8)     7.9      1.6
                                                      -----    -----    -----
Earnings (loss) from consolidated companies.......    (66.3)    (6.2)     2.5
Equity in net earnings of affiliates..............      0.5      1.2      2.2
                                                      -----    -----    -----
Net earnings (loss) from continuing operations....    (65.8)%   (5.0)%    4.7%
                                                      =====    =====    =====
</TABLE>

  Fiscal 1999 Compared with Fiscal 1998

     Net Sales.  Net sales for fiscal 1999 were $210.1 million, down 42.5% from
net sales of $365.3 million in fiscal 1998. Sales of CMP systems totaled $156.4
million, or 74.5% of net sales, down 44.1% from the $280.1 million of CMP system
sales in fiscal 1998. Sales of CMP systems declined significantly in fiscal 1999
from the prior year due to a worldwide slowdown in overall demand for
semiconductor manufacturing equipment, which was caused by an over-capacity
situation in the semiconductor device market worldwide. In addition, the Company
has seen erosion in its market share of new sales due to increased competition
in the sales of CMP systems to semiconductor manufacturers.

     Sales of the Surface Technology Group in fiscal 1999 accounted for $40.4
million, or 19.2% of net sales, as compared to $71.9 million, or 19.7% of net
sales in fiscal 1998. During fiscal 1999, thin film memory disk manufacturers
continued to experience manufacturing over-capacity which in turn reduced
capital spending. The thin film memory disk industry continues to feel "price
per unit" pressures which in turn has forced a reduction in capital spending for
equipment the Company supplies from its U.S. operations. The decline in sales
from the Surface Technology Group was also due to continued slowdown in the
silicon wafer market. This slowdown was due to the ongoing manufacturing
over-capacity caused by various factors including die

                                       20
<PAGE>   21

shrink, increased production efficiencies and Asian economic conditions. The
Company expects the slowdown in these markets to continue for at least the next
12 months. Sales of the Industrial Applications Group were $13.3 million, or
6.3% of net sales in fiscal year 1999, unchanged from the $13.3 million, or 3.6%
of net sales in fiscal year 1998.

     Commissions from Affiliate.  Commissions from affiliate decreased to $2.2
million in fiscal 1999, compared to $9.0 million in fiscal 1998. The decrease in
fiscal 1999, as compared to fiscal 1998, was due to the continued slowdown in
the thin film memory disk market, and silicon wafer markets. The Company
believes that capital equipment spending will continue to be weak in the thin
film memory and silicon wafer industries through the next 12 months in turn
lowering commissions from affiliate compared to prior year periods.

     Gross Margin.  In fiscal 1999, gross margin was $29.9 million, or 14.1% of
total revenue, compared to $142.9 million, or 38.2% of total revenue, in fiscal
1998. Gross margin, both in dollars and as a percentage of total revenue, was
down year over year primarily due to higher material costs for some of the
Company's mainline tools, higher overhead costs due to excess production
capacity spread over a smaller revenue base, lower commission revenue, pricing
pressure in all markets and shifts in the product mix. In addition, in the
fourth quarter of fiscal 1999 the Company wrote down inventory in the amount of
$13.6 million in connection with the merged company's new strategic plan to
discontinue certain product lines. In the fourth quarter of fiscal year 1999,
the Company also increased its reserves for excess inventory and obsolescence.
In fiscal 1999, the Company faced significantly increased competition in the
sale of its products to equipment manufacturers, in addition to increased
customer demands to meet changing process requirements and develop new
technologies. As these factors grew in significance in fiscal year 1999, the
Company determined that additional excess and obsolescence reserves were
necessary considering the weakness in order activity and lower demand for the
Company's products that became apparent in the fourth quarter of fiscal 1999.

     Research, Development and Engineering.  In fiscal 1999, research,
development and engineering expense increased to $70.3 million, or 33.1% of
total revenue, compared to $67.2 million, or 18.0% of total revenue, in fiscal
1998. During fiscal 1999, the Company delivered numerous enhancements to the
Auriga-C system and 776 orbital system. In addition, in fiscal 1999, the Company
continued to focus on enhanced performance for finer geometries in oxide and
tungsten applications while developing new process capabilities for emerging
STI, copper and 300mm applications. Research, development and engineering
expense increased as a percentage of total revenue due to the decrease in the
revenue base from fiscal 1998 to fiscal 1999.

     Selling, General and Administrative.  In fiscal 1999, selling, general and
administrative expense decreased to $68.2 million from $72.9 million in fiscal
1998. In fiscal 1999, selling, general and administrative expense increased as a
percent of total revenue to 32.1% from 19.4% in fiscal 1998. The dollar amount
decrease in selling, general and administrative expense resulted primarily from
management's efforts to control expenses, including reductions in the Company's
global workforce. Selling, general and administrative expense increased as a
percentage of total revenue due to the decrease in the revenue base from fiscal
1998 to fiscal 1999.

     Merger, Integration and Restructuring.  In fiscal 1999, merger, integration
and restructuring expenses included in operating expenses were $40.3 million, or
19.0% of total revenue. These charges were incurred in the fourth quarter of
fiscal 1999 primarily to close duplicate facilities, record transaction costs,
account for certain employee termination benefits and record adjustments and
reserves resulting from strategic decisions to discontinue certain product lines
and sales and marketing activities as a merged company.

     Other Income (Expense).  Other income (expense) increased to $4.3 million
in fiscal 1999 from $3.5 million in fiscal 1998. This increase was due primarily
to a gain arising from the collection of insurance proceeds for a CMP tool,
which was destroyed in transit. Other income also increased in fiscal 1999 due
to the Company's decision in the first quarter of fiscal 1999 to transfer a
significant portion of the Company's short-term investments to higher yielding
taxable securities.

     Provision for Income Taxes.  Income tax benefit was $3.9 million for fiscal
1999 compared to an income tax expense of $29.6 million in fiscal 1998. The
effective tax expense (benefit) rates for fiscal 1999 and 1998 were
approximately (2.7)% and 466%, respectively. Tax expense in 1998 resulted
primarily from a $25.9

                                       21
<PAGE>   22

million net charge, which increased the Company's deferred tax valuation
allowance. In fiscal 1999, the expected tax benefit computed by applying the
statutory rate to the current year loss was offset by a $51.5 million increase
to the Company's deferred tax valuation allowance. This increase in the deferred
tax valuation allowance fully offsets the Company's net deferred tax assets at
May 31, 1999.

     Equity in Net Earnings of Affiliates.  For fiscal 1999, equity in net
earnings of affiliates decreased to $916,000 compared to $4.4 million in fiscal
1998. Equity in the net earnings of affiliates were down from the prior year
primarily due to significantly decreased sales revenue of the Far East Joint
Venture. Investments by manufacturers of both silicon wafer and thin film memory
disks were reduced significantly in fiscal 1999 compared to fiscal 1998. This
reduced manufacturing volume also resulted in lower sales of consumable goods.
The Company believes that the results of the Far East Joint Venture will be
adversely affected in the next fiscal year by both a slowdown in demand for
equipment sold into the thin film memory disk and silicon wafer markets, as well
as the current financial difficulties facing several Asian economies.

  Fiscal 1998 Compared with Fiscal 1997

     Net Sales.  Net sales for fiscal 1998 were $365.3 million, up 19.5% over
net sales of $305.7 million in fiscal 1997. The dollar increase was attributable
to higher sales of the Company's CMP planarization systems to the semiconductor
industry. Sales of CMP systems totaled $280.1 million, or 76.7% of net sales, up
30.9% over the $213.9 million or 70.0% of net sales in fiscal 1997.

     Sales of the Surface Technology Group in fiscal 1998 accounted for $71.9
million, or 19.7% of net sales, as compared to $78.9 million, or 25.8% of net
sales in fiscal 1997. This decrease was primarily due to a decline in sales of
equipment to the thin film memory disk market from the prior year. The
technology for the production of thin film memory disks had shifted to the use
of alternative substrates; a majority of those substrates being produced by Far
East manufacturers. Consequently, thin film memory disk manufacturers
headquartered in the United States experienced manufacturing over-capacity which
in turn reduced capital spending for equipment the Company supplies from its
U.S. operations. The decrease in fiscal 1998, as compared to fiscal 1997, was
due not only to the continued slowdown in the thin film memory disk market, but
also to a global decrease in orders of capital equipment from the silicon wafer
market related to manufacturing over-capacity due to slowing demand for silicon
wafers produced by that industry. Sales of the Industrial Applications Group
were $13.3 million, or 3.6% of net sales in fiscal 1998, compared to $12.9
million, or 4.2% of net sales in fiscal year 1997.

     Commissions from Affiliate.  Commissions from affiliate decreased to $9.0
million in fiscal 1998, compared to $12.4 million in fiscal 1997. The decrease
in fiscal 1998, as compared to fiscal 1997, was due to the continued slowdown in
the thin film memory disk and silicon wafer markets as described above.

     Gross Margin.  In fiscal 1998, gross margin was $142.9 million, or 38.2% of
total revenue, compared to $131.8 million, or 41.4% of total revenue, in fiscal
1997. Gross margin increased primarily due to increased sales of CMP systems in
fiscal 1998. However, gross margin as a percentage of total revenue decreased
due to a $7.8 million charge in fiscal 1998 for inventory adjustments and
additional retrofit costs for newly available performance enhancing
modifications to installed CMP tools. Gross margin was also impacted by an
additional $1.5 million in warranty expense accrued in the fourth quarter of
fiscal 1998. Due to the increasing complexity of the Company's CMP products, and
the importance of maintaining customer good will in the competitive environment,
management made the decision in the fourth quarter of fiscal 1998 to accrue for
additional equipment warranty to cover the anticipated customer service costs
related to CMP products. Gross margin as a percentage of total revenue also
decreased due to declining gross margins in sales to the thin film memory disk
industry, declining slurry margins and lower commission revenue compared to
fiscal 1997.

     Research, Development and Engineering.  In fiscal 1998, research,
development and engineering expense increased to $67.2 million, or 18.0% of
total revenue, compared to $43.7 million, or 13.7% of total revenue, in fiscal
1997. The increase in both the dollar amount and the percent of total revenue is
a result of the Company's significant investment in dry-in/dry-out, end-point
detection and 300mm planarization capabilities for its CMP systems; improvements
in CMP systems' reliability and productivity; and various

                                       22
<PAGE>   23

process technologies for the semiconductor device, thin film memory disk and
silicon wafer markets. In addition, the Company committed significant technical
support resources to meet the needs of its customers.

     Selling, General and Administrative.  In fiscal 1998, selling, general and
administrative expense increased to $72.9 million from $56.2 million in fiscal
1997. In fiscal 1998, selling, general and administrative expense increased as a
percent of total revenue to 19.4% from 17.7% in fiscal 1997. This increase in
selling, general and administrative expense reflects a higher level of sales
activity, continued investments in the sales and administrative infrastructure,
as well as an increased international presence, including commissions paid to
the Far East Joint Venture as a result of increased sales of CMP systems
produced by the Company in the U.S. and exported to Pacific Rim customers
through the Far East Joint Venture. In the fourth quarter of fiscal 1998,
selling, general and administrative expense also included an increase in the
allowance for doubtful accounts receivable due to possible exposures in the Far
East as well as severance compensation related to reductions in the Company's
workforce which were made during the quarter.

     Merger, Integration and Restructuring.  In fiscal 1997, the Company
demonstrated that the AvantGaard 676 tool could be used for oxide planarization
as well as metal planarization. As a result of this improvement and prior to
manufacturing any Avanti 672 systems, the Company decided to discontinue
production plans for the Avanti 672, an integrated 300mm high-throughput oxide
CMP tool, and recorded a $17.6 million program discontinuance charge. The
Company incurred a write-down of $9.0 million to adjust specific Avanti 672
parts and components to salvage value, since parts and components for this tool
were unlike parts and components for the Company's other products. A liability
amounting to $4.5 million for noncancelable purchase orders was also incurred as
a result of properly reflecting inventory on order at salvage value. A $4.1
million charge was also incurred to adjust Avanti 672 development and prototype
tools to salvage value.

     Other Income (Expense).  Other income increased to $3.5 million in fiscal
1998 from $1.2 million of other expense in fiscal 1997. Interest income
increased substantially in fiscal 1998 as a result of the cash infusions from
the Company's two equity offerings in February and October of calendar year
1997. Increased interest income in fiscal 1998 as well as interest expense
amounts also resulted from invested proceeds related to an aggregate of $115.0
million in 6.25% convertible notes issued in September 1997.

     Provision for Income Taxes.  Income tax expense was $29.6 million for
fiscal 1998 compared to $5.1 million in fiscal 1997. The effective tax rates for
fiscal 1998 and 1997 were approximately 466% and 39%, respectively. The increase
in tax expense results primarily from a $25.9 million net charge, which
increased the Company's deferred tax valuation allowance.

     Equity in Net Earnings of Affiliates.  For fiscal 1998, equity in net
earnings of affiliates decreased to $4.4 million compared to $7.1 million in
fiscal 1997. Revenue of the Far East Joint Venture grew in fiscal 1998 as
compared to fiscal 1997. However, net earnings of the Far East Joint Venture
were down from the prior year due to competitive pricing pressures for the
automated disk polishing systems, which negatively impacted gross margins,
combined with higher costs of producing and servicing these systems.
Restructuring costs of approximately $742,000 were incurred by the Far East
Joint Venture during fiscal 1998 in connection with the reorganization of its
Asian operations, which included the closing of the Malaysia and Thailand
subsidiaries in July of 1998.

     Net loss from discontinued operations.  In fiscal 1997, the Company decided
to discontinue the operations of IPEC Clean. The operating results of IPEC Clean
were segregated from the continuing operations of the Company and reported
separately as discontinued operations. The loss recorded in fiscal 1997 was due
to a $3.6 million operating loss, net taxes, and a $25.0 million charge, net of
taxes, for the estimated loss on disposal of IPEC Clean. The Company recorded an
additional write-down of the net assets of IPEC Clean of $10.6 million in fiscal
1998.

LIQUIDITY AND CAPITAL RESOURCES

     As of May 31, 1999, the Company had $147.0 million in cash, cash
equivalents and short-term investments, compared to $225.3 million at May 31,
1998. The Company used $51.6 million of cash in operating activities during
fiscal 1999. Net loss of $139.8 million adjusted for non-cash items, primarily
representing $20.4 million of

                                       23
<PAGE>   24

depreciation and amortization expense and $49.8 million of merger, integration
and restructuring costs was $68.5 million. In addition, cash was provided by
decreases in trade accounts receivable and inventories partially offset by a
decrease in trade accounts payable. During fiscal 1999, accounts receivable
decreased from the prior year due to lower sales activity in fiscal 1999
compared to fiscal 1998, as well as increased collection efforts. Inventory
decreased in fiscal 1999 primarily due to write-downs to reflect strategic
decisions to discontinue certain product lines as a merged company and an
increase in excess and obsolescence reserves. In addition, inventories decreased
due to decreased production in fiscal 1999. Accounts payable decreased due to
efforts to control inventory purchasing due to decreased production in fiscal
1999.

     The Company made capital expenditures of $31.4 million in fiscal 1999. The
majority of the cash was used to fund the construction of a new 109,000 square
foot Technology Center next to the corporate headquarters in Chandler, Arizona.
The remaining capital expenditures were primarily related to the purchase of
equipment and software.

     Financing activities provided $1.6 million primarily from $3.4 million in
proceeds on the sale of stock to employees and the exercise of stock options.
Principal payments on long-term debt amounted to $1.1 million. Total long-term
debt decreased to $117.4 million at May 31, 1999, compared to $118.9 million at
May 31, 1998. Total long-term debt as a percentage of stockholder's equity
increased to 47.6% as of May 31, 1999 from 30.9% as of May 31, 1998.

     The Company believes that its current cash, cash equivalents and short-term
investments will be sufficient to meet the Company's cash needs during the next
12 months.

     SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities" is effective for financial years beginning after June 15, 2000. SFAS
No. 133 establishes accounting and reporting standards for derivative
instruments and hedging activities. The Company is evaluating the new
Statement's provisions and has not yet determined its impact. The Company will
adopt SFAS No. 133 effective June 1, 2001.

YEAR 2000

     The Company is addressing the issues associated with the programming code
in existing computer systems as the millennium (Year 2000) approaches. The Year
2000 problem is pervasive and complex as virtually every computer operation will
be affected in some way. The Company is aware of and is addressing the potential
computing difficulties that may be triggered by the Year 2000.

     The Company has commenced a Year 2000 date review and conversion project to
address all the necessary changes, testing and implementation issues. The
project encompasses three major areas of review: internal systems (hardware and
software), supplier compliance and Company products. The Company has identified
the changes required to its computer programs and hardware. The necessary
modifications to the Company's centralized financial, manufacturing and
operational information systems have been completed. To date, the Company's
suppliers have been sent letters requesting information regarding their own Year
2000 plan, as well as requesting confirmation that the components supplied by
these vendors are Year 2000 compliant. The Company has evaluated the vendor
responses which have been received and concluded that the vendors which have
responded either are Year 2000 compliant or are proceeding with their own Year
2000 compliance programs. The Company will continue to follow-up with vendors
with which the Company has a material relationship and who have not responded to
obtain assurances that they expect to be Year 2000 compliant in time. Equipment
and systems manufactured and supplied by the Company have been evaluated and
determined to be free of any material problems that could be caused by the Year
2000 issue. To date, the Company believes that Year 2000 problems related to its
own internal systems and equipment and systems it sells will not have a material
effect on the Company's business, financial condition and results of operations.
However, there can be no assurance that the systems of other companies upon
which the Company's systems and business rely will be timely converted or that
any such failure to convert by another company would not have a material adverse
effect on the Company's business, financial conditions or results of operations.

                                       24
<PAGE>   25

                                  RISK FACTORS

     The Company's business is subject to numerous risks, including those
discussed below. If any of the events described in these risks occurs, the
Company's business, financial condition and results of operations could be
seriously harmed.

     The Company's growth depends on continued and increased acceptance of CMP
among semiconductor manufacturers.  While CMP is used by a number of advanced
logic semiconductor manufacturers, CMP has been used to manufacture advanced
memory devices only in the past 2 years. Continued and increased acceptance of
CMP systems depends on many factors considered by potential customers, including
the CMP product's

     - cost of ownership

     - throughput

     - process flexibility

     - performance, including reliability

     - customer support

Failure to adequately meet potential customers' needs with respect to one or
more of these factors will result in decreased acceptance of CMP and, therefore,
the Company's CMP systems, which will in turn negatively impact the Company's
profitability.

     The Company's Business is Highly Cyclical.  The Company's business depends
substantially on the capital expenditures of semiconductor manufacturers and, to
a lesser extent, thin film memory disk and silicon wafer manufacturers. These
industries are highly cyclical and have historically experienced periodic
downturns, which often have a material adverse effect on the acquisition of
capital equipment and other products used in the manufacturing process,
including products offered by the Company. These downturns have in the past and
are expected in the future to materially adversely affect the business and
operating results of the Company. The semiconductor device industry has recently
experienced a slowdown and the memory disk and silicon wafer industries are
currently experiencing a slowdown. These events have negatively impacted the
Company's results of operations.

     If the Company does not continue to integrate SpeedFam's and IPEC's
technology and operations quickly and effectively, its operations may be
adversely affected.  The merger of SpeedFam and IPEC was consummated April 6,
1999. The company must continue to integrate all components of IPEC's former
operations, including the following:

     - Sales and marketing operations, including international distribution
       channels. Combining international sales channels could result in
       significant expense or customer confusion.

     - Product offerings, including marketing of products to the other's
       customers.

     - Research and development programs.

     - Manufacturing operations and philosophies.

     - Field service support for CMP equipment.

     - Management information and reporting systems. Since SpeedFam and IPEC
       used different management information systems, the Company may face
       difficulties obtaining timely and accurate information, data and reports
       to operate the company effectively until integration is completed.

The Company cannot be certain that it can achieve integration of these
components without adversely impacting operations. To the extent management
focuses on integration, it may not be able to develop the business.

     The merger has resulted and may continue to result in a loss of key
employees due to downsizing and competition.  The Company's success depends on
retaining and integrating both former SpeedFam and former IPEC personnel. The
Company has signed agreements with a few key former IPEC employees to retain
their services. However, employees have, and may continue to, leave for many
reasons. Competition for qualified personnel in the industry served by the
Company, particularly in the Phoenix metropolitan area, is

                                       25
<PAGE>   26

intense. SpeedFam and IPEC had in the past experienced difficulty in attracting
qualified personnel. Also, other employers may offer lucrative compensation and
benefit programs, including those with respect to stock options The Company
presently experiences the same difficulty and may continue to in the future.

     The Company, and its predecessors, have had losses recently and the Company
expects losses in the near future.  In fiscal 1999, the Company had a net loss
of $139.9 million. This loss included $53.9 million of various merger,
integration and restructuring costs. Direct merger costs primarily consist of
professional fees, such as investment banking, legal and accounting for services
rendered through the date of the merger. The Company recorded integration and
restructuring costs for lease terminations, the write-off of duplicative
equipment previously used for demonstration purposes, the writedown of inventory
and equipment related to products lines that will no longer be supported, and
severance costs resulting from workforce reductions. The Company attributes the
additional loss to the slowdown in the industry combined with increasing
investment in research and development.

IPEC had net losses of $42.3 million in fiscal 1998, $33.7 million in fiscal
1997 and $10.7 million in fiscal 1996. In fiscal 1998, IPEC incurred net charges
of $25.9 million to increase the valuation allowance for its deferred tax assets
and $10.6 million for an additional writedown of assets in connection with the
closure of IPEC Clean, a subsidiary of IPEC.

     These losses are attributed mainly to the slowdown in the industry combined
with increasing investment in research and development.

     The Company faces intense competition, including from companies with
greater resources.  Several companies currently market CMP systems that directly
compete with the Company's products, including Applied Materials, Inc. and Ebara
Corporation. For several reasons, the Company may not compete effectively with
competitors. These reasons include:

     - Some competitors may have greater financial resources than the Company.
       They also may have more extensive engineering, manufacturing, marketing
       and customer service and support capabilities.

     - Some competitors may supply a broader range of semiconductor capital
       equipment than the Company. As a result, these competitors may have
       better relationships with semiconductor manufacturers, including current
       and potential customers of the Company.

     - The Company expects competitors to continue to improve their existing
       technology and introduce new products. This could cause a decline in the
       Company's sales or lead to intensified pricebased competition.

     - Other capital equipment manufacturers not currently involved in the
       development of CMP systems may enter the market or develop technology
       that reduces the need for the Company's products.

     The Company may not develop products in time to meet changing
technologies.  Semiconductor manufacturing equipment and processes are subject
to rapid technological changes and product obsolescence. Developing new products
in the rapidly evolving industry in which the company operates involves a number
of risks:

     - products may be introduced behind schedule or after customers have made
       buying decisions

     - products may not be accepted in the marketplace

Competitive pressures require the Company to continue to enhance performance for
finer geometrics in oxide and tungsten applications, while developing new
process capabilities for emerging STI, copper and 300mm applications. The
Company will also continue to develop with the Far East Joint Venture products
and processes for thin film memory disk manufacturers and to enhance the plasma
assisted chemical etch processes.

                                       26
<PAGE>   27

     Product or process development problems could harm the Company's results of
operations.  The Company's products are complex, and from time to time have
defects or bugs that are difficult and costly to fix. This can harm results of
operations for the Company, in two ways:

          (1) The Company incurs substantial costs to ensure the functionality
     and reliability of products earlier in their life cycle. This can reduce
     orders, increase manufacturing costs, adversely impact working capital and
     increase service and warranty expenses.

          (2) The Company requires significant lead-times between product
     introduction and commercial shipment. As a result, the Company may have to
     write off inventory and other assets related to products and could lose
     customers and revenue. For example, in the second quarter of fiscal 1997,
     the Company incurred a $17.6 million pretax asset write-off for
     discontinuance of the Avanti 672 product development program.

     The Company's quarterly operating results will fluctuate for reasons not in
its control.  The Company's quarterly operating results will fluctuate due to a
variety of factors, including:

     - Industry demand for capital equipment, which depends on economic
       conditions in the semiconductor, memory disk and silicon wafer markets.

     - Timing, cancellation or delay of customer orders and shipments. The
       Company continues to derive a significant portion of revenue from the
       sale of a relatively small number of machines during a given quarter.
       Order and delivery delays and cancellations, even of one or two systems,
       may cause the company to miss quarterly revenue and profit expectations.

     - Unexpected costs associated with sales and service of the CMP tools and
       processes.

     - The quarterly operating results of the company's joint ventures, which
       are accounted for on the equity method.

     - Foreign currency exchange rates.

Results of operations in any period are not an indication of future results.
Fluctuations in the Company's operating results may also result in fluctuations
in the Company's common stock price. Operating results may not meet the
expectations of public market analysts or investors and the trading price of the
common stock could decline.

     Orders in backlog may not result in future revenue if customers cancel or
reschedule orders.  The Company includes in backlog only those customer orders
for which it has accepted purchase orders. Expected revenue may be lower if
customers cancel or reschedule orders, which they can generally do without
penalty. For example, the Company removed from its backlog orders of
approximately $5.3 million in the fourth quarter of fiscal 1999, primarily due
to reduced capacity requirements and increased funding constraints of certain
customers.

     The Company depends on a small number of major customers.  Currently, and
for the foreseeable future, the Company expects that it will sell machines to a
limited number of major customers. To date, the CMP process has been used
primarily to fabricate advanced semiconductors, which accounts for only a
portion of the overall semiconductor market. In fiscal 1999, Samsung and Intel
accounted for 11.4% and 10.5%, respectively, of its total revenue. In fiscal
1998, Intel accounted for 19.4% of total revenue.

     The Company's success depends on international sales, particularly in Asia
and Europe.  International sales accounted for 38.1% of SpeedFam-IPEC's total
revenue for fiscal 1999, 34.3% for fiscal year 1998 and 26.5% for fiscal year
1997. The Company expects that international sales will continue to account for
a significant portion of total revenue in future periods. International sales
are subject to risks, including:

     - foreign exchange issues

     - political, economic and regulatory environment of the countries where
       customers are located

     - collectibility of accounts receivable

                                       27
<PAGE>   28

     - inadequate intellectual property protection

Foreign exchange issues also affect the value of the Company's foreign
subsidiaries and equity interest in its Far East joint venture. The Company does
not manage this balance sheet risk through currency transactions known as
hedging, which are designed to minimize this risk. The Company does try to
manage near term currency risks through hedging. However, efforts may not be
enough to decrease the risks involved.

     If the Company is unable to protect its intellectual property, its business
could suffer.  The company's intellectual property portfolio is very important
to its success. However, the Company may not be able to protect its technology
because:

     - pending and new patent applications may not be approved in a timely
       manner or approved at all

     - third parties may try to challenge or invalidate existing patents and new
       patents

     - policing unauthorized use of intellectual property is difficult and
       expensive

     - the laws of some foreign countries do not protect intellectual property
       rights as much as U.S. laws

     - competitors may independently develop similar technology or design around
       intellectual property owned by the company

Third parties may prevent the Company from selling products that allegedly
infringe on those third parties' intellectual property rights. The Company
cannot be certain that third parties will not in the future claim that its
products infringe their intellectual property rights. Third parties may

     - bring claims of patent, copyright or trademark infringement

     - obtain patents or other intellectual property rights that limit the
       Company's ability to do business or require the Company to license or
       cross-license technology

     - Bring costly, time consuming lawsuits

Third parties hold many patents relating to CMP machines and processes. The
Company licenses the right to manufacture CMP machines employing an orbital
motion in its Avant Gaard 676, 776 and 876 from a semiconductor manufacturer.

     The Company may experience Year 2000 computer problems that harm its
business.  Certain computer systems may not correctly recognize dates when the
year changes from 1999 to 2000. This could cause computers to either shut down
or lead to incorrect calculations. The Company has reviewed their exposure to
this problem, and does not believe it will incur significant expenses either to
remedy the problem or as a result of the effect of the problem on business
operations. However, Year 2000 issues may cause disruptions in the Company's
business for the following reasons:

     - The Company cannot be certain that the measures taken are enough. Despite
       completed efforts, the company may incur significant expenses to remedy
       unforeseen problems or may suffer disruptions in its business.

     - Third parties with whom the Company has relationships may not
       successfully complete their Year 2000 remediation efforts. This could
       also result in disruptions in the company's business, which would harm
       its financial condition, results of operations and business prospects.

For additional information regarding the status of Year 2000 issues, refer to
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Year 2000"

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

     Interest Rate Risk.  The Company's exposure to market risk for changes in
interest rates relates primarily to the Company's investment portfolio and
long-term debt obligations. The Company does not use derivative financial
instruments in its investment portfolio. The Company places its investments with
high credit quality issuers and, by policy, limits the amount of credit exposure
to any one issuer.

                                       28
<PAGE>   29

     The Company mitigates default risk by investing in only the safest and
highest credit quality securities and by monitoring the credit rating of
investment issuers. The portfolio includes only marketable securities with
active secondary or resale markets to ensure portfolio liquidity.

     The Company has no cash flow exposure due to rate changes for cash
equivalents and short-term investments, as all of these investments are at fixed
interest rates. Long-term debt is at a fixed interest rate. The long-term debt
was primarily incurred in connection with the Company's issuance of convertible
debenture bonds.

     The table below presents principal amounts and related weighted average
interest rates by year of maturity for the Company's investment portfolio and
debt obligations.

<TABLE>
<CAPTION>
                                                                                            FAIR VALUE
IN THOUSANDS               2000     2001   2002   2003    2004     THEREAFTER    TOTAL     MAY 31, 1999
------------             --------   ----   ----   ----   -------   ----------   --------   ------------
<S>                      <C>        <C>    <C>    <C>    <C>       <C>          <C>        <C>
Assets
Cash equivalents.......  $ 97,003     --     --     --        --      --        $ 97,003   $     97,003
  Average interest
     rate..............      4.73%    --     --     --        --      --            4.73%
Short-term
  investments..........  $ 50,272     --     --     --        --      --        $ 50,272   $     50,020
  Average interest
     rate..............      5.30%    --     --     --        --      --            5.30%
Total investment
  securities...........  $147,275     --     --     --        --      --        $147,275   $    147,023
  Average interest
     rate..............      4.93%    --     --     --        --      --            4.93%
Long term debt.........  $  1,275    970    146     13   115,000      --        $117,404   $    117,404
  Fixed rate...........      9.25   9.00   9.88%  8.70%     6.25%     --            6.30%
Total debt.............  $  1,275    970    146     13   115,000      --        $117,404   $    117,404
  Average interest
     rate..............      9.25%  9.00%  9.88%  8.70%     6.25%     --            6.30%
</TABLE>

     Foreign Currency Risk.  The Company transacts business in various foreign
countries. Its primary foreign currency cash flows are in countries in Asia and
Europe. During 1999 and 1998, the Company employed a foreign currency hedging
program utilizing foreign currency forward exchange contracts. Under this
program, increases or decreases in currency commitments, as translated into U.S.
dollars, are primarily offset by realized gains and losses on the hedging
instruments. The goal of the hedging program is to economically guarantee or
lock in exchange rates on the Company's foreign currency cash outflows and to
minimize the impact to the Company of foreign currency fluctuations. The Company
does not use foreign currency forward exchange contracts for speculative or
trading purposes.

     The following table provides information as of May 31, 1999 about the
Company's derivative financial instruments, which are comprised of foreign
currency forward exchange contracts. The information is provided in U.S. dollar
equivalent amounts, as presented in the Company's financial statements. The
table presents the notional amounts (at the contract exchange rates), the
weighted average contractual foreign currency exchange rates, and the estimated
fair value of those contracts.

<TABLE>
<CAPTION>
MAY 31, 1999                                                  NOTIONAL      AVERAGE      ESTIMATED
IN THOUSANDS, EXCEPT FOR AVERAGE CONTRACT RATE                 AMOUNT    CONTRACT RATE   FAIR VALUE
----------------------------------------------                --------   -------------   ----------
<S>                                                           <C>        <C>             <C>
Foreign currency forward exchange contracts:
  Japanese yen..............................................   $1,793       119.67         $1,534
  British pound.............................................   $  735         1.63         $  726
</TABLE>

                                       29
<PAGE>   30

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                                                              PAGE
                                                              ----
<S>                                                           <C>
SPEEDFAM-IPEC, INC. AND CONSOLIDATED SUBSIDIARIES
Independent Auditors' Report................................   31
Consolidated Balance Sheets -- at the end of fiscal years
  1999 and 1998.............................................   32
Consolidated Statements of Earnings -- for the fiscal years
  1999, 1998 and 1997.......................................   33
Consolidated Statements of Stockholders' Equity -- for the
  fiscal years 1999, 1998 and 1997..........................   34
Consolidated Statements of Cash Flows -- for the fiscal
  years 1999, 1998 and 1997.................................   35
Notes to Consolidated Financial Statements..................   36
SPEEDFAM-IPEC CO., LTD. AND CONSOLIDATED SUBSIDIARIES
Independent Auditors' Report................................   59
Consolidated Balance Sheets -- at the end of fiscal years
  1999 and 1998.............................................   60
Consolidated Statements of Earnings -- for the fiscal years
  1999, 1998 and 1997.......................................   61
Consolidated Statements of Stockholders' Equity -- for the
  fiscal years 1999, 1998 and 1997..........................   62
Consolidated Statements of Cash Flows -- for the fiscal
  years 1999, 1998 and 1997.................................   63
Notes to Consolidated Financial Statements..................   64
</TABLE>

The above consolidated financial statements of SpeedFam-IPEC Co., Ltd. and
consolidated subsidiaries are included herein pursuant to Rule 3-09 of
Regulation S-X.

                                       30
<PAGE>   31

                          INDEPENDENT AUDITORS' REPORT

Board of Directors
SpeedFam-IPEC, Inc.:

     We have audited the accompanying consolidated balance sheets of
SpeedFam-IPEC, Inc. and consolidated subsidiaries as of May 31, 1999 and 1998,
and the related consolidated statements of operations, stockholders' equity and
comprehensive income, and cash flows for each of the years in the three-year
period ended May 31, 1999. These consolidated financial statements are the
responsibility of the management of SpeedFam-IPEC, Inc. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.

     We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

     In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
SpeedFam-IPEC, Inc. and consolidated subsidiaries as of May 31, 1999 and 1998,
and the results of their operations and their cash flows for each of the years
in the three-year period ended May 31, 1999 in conformity with generally
accepted accounting principles.

KPMG LLP

July 7, 1999

                                       31
<PAGE>   32

                              SPEEDFAM-IPEC, INC.

                          CONSOLIDATED BALANCE SHEETS
                             MAY 31, 1999 AND 1998
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                1999        1998
                                                              ---------    -------
<S>                                                           <C>          <C>
                                      ASSETS
Current assets:
  Cash and cash equivalents.................................  $  97,003    104,482
  Short-term investments....................................     50,020    120,867
  Trade accounts receivable, less allowance for doubtful
    accounts of $5,600 in 1999 and $4,487 in 1998...........     76,808     89,034
  Inventories...............................................     80,744    122,581
  Deferred income taxes.....................................         --      3,339
  Prepaid expenses and other current assets.................      9,790      7,542
                                                              ---------    -------
    Total current assets....................................    314,365    447,845
Investments in affiliates...................................     25,360     24,299
Property, plant, and equipment, net.........................     88,997     87,136
Other assets................................................     15,056     16,373
                                                              ---------    -------
    Total assets............................................  $ 443,778    575,653
                                                              =========    =======
                       LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Current portion of long-term debt.........................  $   1,275      1,803
  Accounts payable..........................................     20,296     30,708
  Customer deposits.........................................      1,490      2,866
  Due to affiliates.........................................      4,805      3,636
  Accrued expenses..........................................     42,764     34,406
                                                              ---------    -------
    Total current liabilities...............................     70,630     73,419
                                                              ---------    -------
Long-term liabilities:
  Long-term debt............................................    116,129    117,078
  Other liabilities.........................................     10,258         --
  Deferred income taxes.....................................         11      1,020
                                                              ---------    -------
    Total long-term liabilities.............................    126,398    118,098
                                                              ---------    -------
Stockholders' equity:
  Preferred stock, $.01 par value per share. Nonvoting
    authorized, 2,000 shares. Exchanged for common stock at
    the merger date
    Series B-1 cumulative preferred stock. Authorized 21
     shares, no issued and outstanding shares at May 31,
     1999 and 14 shares at June 30, 1998....................         --         --
    Series B-2 cumulative preferred stock. Authorized 21
     shares, no issued and outstanding shares at May 31,
     1999 and 20 shares at June 30, 1998....................         --         --
    Series B-3 cumulative preferred stock. Authorized 21
     shares, no issued and outstanding shares at May 31,
     1999 and 10 shares at June 30, 1998....................         --         --
    Series D preferred stock, $.01 par value per share.
     Authorized 50 shares, 1,000 votes per share; no shares
     issued and outstanding.................................         --         --
  Common stock, no par value, 96,000 shares authorized,
    29,392 and 28,409 shares issued and outstanding at May
    31, 1999 and 1998, respectively.........................          1          1
  Class A common stock, $.01 par value per share. Four votes
    per share Authorized 2,485 shares, no issued and
    outstanding shares at May 31, 1999 and 159 shares at
    June 30, 1998. Exchanged for common stock at the merger
    date....................................................         --          2
  Additional paid-in capital................................    427,290    423,146
  Retained earnings.........................................   (180,311)   (38,026)
  Accumulated comprehensive income..........................       (230)      (987)
                                                              ---------    -------
    Total stockholders' equity..............................    246,750    384,136
                                                              ---------    -------
    Total liabilities and stockholders' equity..............  $ 443,778    575,653
                                                              =========    =======
</TABLE>

          See accompanying notes to consolidated financial statements.
                                       32
<PAGE>   33

                              SPEEDFAM-IPEC, INC.

                     CONSOLIDATED STATEMENTS OF OPERATIONS
                    YEARS ENDED MAY 31, 1999, 1998, AND 1997
                     (IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
                                                                1999        1998       1997
                                                              ---------    -------    -------
<S>                                                           <C>          <C>        <C>
Revenue:
  Net sales.................................................  $ 210,108    365,259    305,682
  Commissions from affiliate................................      2,217      9,009     12,430
                                                              ---------    -------    -------
     Total revenue..........................................    212,325    374,268    318,112
Cost of sales...............................................    182,463    231,332    186,343
                                                              ---------    -------    -------
     Gross margin...........................................     29,862    142,936    131,769
                                                              ---------    -------    -------
Operating expenses:
  Research, development, and engineering....................     70,243     67,182     43,717
  Selling, general, and administrative......................     68,237     72,916     56,234
  Merger, integration, and restructuring....................     40,300         --     17,601
                                                              ---------    -------    -------
     Total operating expenses...............................    178,780    140,098    117,552
                                                              ---------    -------    -------
     Operating profit (loss)................................   (148,918)     2,838     14,217
     Other income (expense).................................      4,296      3,510     (1,162)
                                                              ---------    -------    -------
     Earnings (loss) from consolidated companies before
       income taxes.........................................   (144,622)     6,348     13,055
Income tax expense (benefit)................................     (3,931)    29,584      5,086
                                                              ---------    -------    -------
     Earnings (loss) from consolidated companies............   (140,691)   (23,236)     7,969
Equity in net earnings of affiliates........................        916      4,418      7,068
                                                              ---------    -------    -------
     Net earnings (loss) from continuing operations.........   (139,775)   (18,818)    15,037
Discontinued operations:
  Loss from operations of IPEC Clean, net of taxes..........         --         --      3,614
  Loss on disposal of IPEC Clean, net of taxes..............         --     10,578     24,950
                                                              ---------    -------    -------
     Loss from discontinued operations......................         --     10,578     28,564
                                                              ---------    -------    -------
     Net loss...............................................   (139,775)   (29,396)   (13,527)
Cumulative dividend on preferred stock......................        174        244        284
                                                              ---------    -------    -------
     Net loss attributable to common stockholders...........  $(139,949)   (29,640)   (13,811)
                                                              =========    =======    =======
Net earnings (loss) per common share:
  Basic:
     From continuing operations.............................  $   (4.84)     (0.69)      0.67
     From discontinued operations, including loss on
       disposal.............................................         --      (0.39)     (1.27)
     Net loss attributable to common stockholders...........      (4.84)     (1.08)     (0.61)
                                                              =========    =======    =======
  Diluted:
     From continuing operations.............................  $   (4.84)     (0.69)      0.62
     From discontinued operations, including loss on
       disposal.............................................         --      (0.39)     (1.19)
     Net loss attributable to common stockholders...........      (4.84)     (1.08)     (0.57)
                                                              =========    =======    =======
Weighted average shares used in per share calculation:
  Basic.....................................................     28,890     27,469     22,441
  Diluted...................................................     28,890     27,469     24,088
                                                              =========    =======    =======
</TABLE>

          See accompanying notes to consolidated financial statements.
                                       33
<PAGE>   34

                              SPEEDFAM-IPEC, INC.

                           CONSOLIDATED STATEMENTS OF
                 STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME
                    YEARS ENDED MAY 31, 1999, 1998, AND 1997
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                                        ACCUMULATED
                                                    CLASS A   ADDITIONAL   RETAINED        OTHER
                                           COMMON   COMMON     PAID-IN     EARNINGS    COMPREHENSIVE
                                           STOCK     STOCK     CAPITAL     (DEFICIT)    INCOME/LOSS     TOTAL
                                           ------   -------   ----------   ---------   -------------   --------
<S>                                        <C>      <C>       <C>          <C>         <C>             <C>
Balance at May 31, 1996..................   $  1       5       178,046        5,701        4,623        188,376
                                                                                                       --------
Comprehensive income (loss):
  Net earnings (loss)....................     --      --            --      (13,527)          --        (13,527)
  Foreign currency translation
     adjustments.........................     --      --            --           --       (3,041)        (3,041)
                                                                                                       --------
Total comprehensive income (loss)........                                                               (16,568)
Issuance of common stock.................     --      --        77,673           --           --         77,673
Retirement of Series B-1 preferred
  stock..................................     --      --          (500)          --           --           (500)
Issuance of Series C preferred stock
  (less offering costs of $1,600) and
  conversion of Series C preferred stock
  to common stock........................     --      --        23,400           --           --         23,400
Issuance of warrants.....................     --      --         1,059           --           --          1,059
Exercise of warrants.....................     --      --           347           --           --            347
Preferred stock dividends paid...........     --      --            --         (558)          --           (558)
Exercise of stock options, tax benefits,
  and employee stock plan purchases......     --      --        15,088           --           --         15,088
                                            ----      --       -------     --------       ------       --------
Balance at May 31, 1997..................      1       5       295,113       (8,384)       1,582        288,317
                                                                                                       --------
Comprehensive income (loss):
  Net earnings (loss)....................     --      --            --      (29,396)          --        (29,396)
  Foreign currency translation
     adjustments.........................     --      --            --           --       (2,569)        (2,569)
                                                                                                       --------
Total comprehensive income (loss)........                                                               (31,965)
Issuance of common stock.................     --      --       116,704           --           --        116,704
Conversion of Class A common stock to
  common stock...........................     --      (3)            3           --           --             --
Preferred stock dividends paid...........     --      --            --         (246)          --           (246)
Unearned compensation, net...............     --      --          (896)          --           --           (896)
Exercise of stock options, tax benefits,
  and employee stock plan purchases......     --      --        12,222           --           --         12,222
                                            ----      --       -------     --------       ------       --------
Balance at May 31, 1998..................      1       2       423,146      (38,026)        (987)       384,136
                                                                                                       --------
Comprehensive income (loss):
  Net earnings (loss)....................     --      --            --     (139,775)          --       (139,775)
  Foreign currency translation
     adjustments.........................     --      --            --           --        1,009          1,009
  Net unrealized change in investment
     securities..........................     --      --            --           --         (252)          (252)
                                                                                                       --------
Total comprehensive income (loss)........                                                              (139,018)
Conversion of Class A common stock to
  common stock...........................     --      (2)            2           --           --             --
June 1998 IPEC net income................     --      --            --       (2,232)          --         (2,232)
Employee stock purchases.................     --      --         2,677           --           --          2,677
Preferred stock dividends paid...........     --      --            --         (278)          --           (278)
Unearned compensation, net...............     --      --           742           --           --            742
Exercise of stock options................     --      --           723           --           --            723
                                            ----      --       -------     --------       ------       --------
Balance at May 31, 1999..................   $  1      --       427,290     (180,311)        (230)       246,750
                                            ====      ==       =======     ========       ======       ========
</TABLE>

          See accompanying notes to consolidated financial statements.

                                       34
<PAGE>   35

                              SPEEDFAM-IPEC, INC.

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                    YEARS ENDED MAY 31, 1999, 1998, AND 1997
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                1999         1998       1997
                                                              ---------    --------    -------
<S>                                                           <C>          <C>         <C>
Cash flows from operating activities:
  Net loss..................................................  $(139,775)    (29,396)   (13,527)
  Adjustments to reconcile net loss to net cash provided by
    (used in) operating activities:
    June 1998 IPEC net income...............................     (2,232)         --         --
    Equity in net earnings of affiliates....................       (916)     (4,418)    (7,068)
    Depreciation and amortization...........................     20,421      15,546     12,342
    Loss on disposal of IPEC Clean, net of taxes............         --      10,578     24,950
    Merger, integration, and restructuring costs............     49,800          --     17,601
    Provision for losses on accounts receivable.............      3,598       3,402      2,905
    Deferred income tax expense (benefit)...................     (4,663)     29,584    (11,987)
    Costs of warrants issued................................         --          --      1,059
    (Gain) loss on sales of assets..........................      5,419         (42)       (32)
    Increase in cash surrender value of life insurance......       (150)       (150)      (144)
    (Increase) decrease in assets:
      Trade accounts receivable.............................      8,628      (7,847)   (17,722)
      Inventories...........................................     20,459     (42,088)   (38,191)
      Prepaid expenses and other current assets.............      4,495      (3,602)      (889)
    Increase (decrease) in liabilities:
      Accounts payable and due to affiliates................    (14,554)     (9,016)     4,775
      Accrued expenses and customer deposits................     (2,137)     (8,179)     7,807
      Income taxes payable..................................         --      (6,677)      (942)
      Net assets of discontinued operations.................         --        (802)     2,306
                                                              ---------    --------    -------
         Net cash used in operating activities..............    (51,607)    (53,107)   (16,757)
                                                              ---------    --------    -------
Cash flows from investing activities:
  Purchases of short-term investments.......................    (55,616)   (609,172)   (20,219)
  Maturities of short-term investments......................     90,369     508,521         --
  Sales of short-term investments...........................     35,871          --         --
  Capital expenditures......................................    (31,361)    (49,065)   (21,134)
  Proceeds from sales of assets.............................        613          61     20,492
  Dividends from affiliates.................................      1,521       2,325        554
  Other investing activities................................        106        (801)      (553)
                                                              ---------    --------    -------
         Net cash provided by (used in) investing
           activities.......................................     41,503    (148,131)   (20,860)
                                                              ---------    --------    -------
Cash flows from financing activities:
  Repayment of notes payable................................       (395)       (124)    (1,356)
  Net proceeds from issuance of common stock and warrants...         --     122,111     89,374
  Proceeds from exercise of stock options and employee stock
    purchases...............................................      3,400       3,723      1,481
  Payment of preferred stock dividend.......................       (278)       (246)      (558)
  Proceeds from long-term debt..............................         --     111,181     15,628
  Net proceeds from issuance of Series C preferred stock....         --          --     23,400
  Principal payments on long-term debt......................     (1,082)    (27,559)   (15,267)
                                                              ---------    --------    -------
         Net cash provided by financing activities..........      1,645     209,086    112,702
                                                              ---------    --------    -------
Effect of foreign currency rate changes on cash.............        980        (701)        51
                                                              ---------    --------    -------
         Net increase (decrease) in cash and cash
           equivalents......................................     (7,479)      7,147     75,136
Cash and cash equivalents at beginning of year..............    104,482      97,335     22,196
                                                              ---------    --------    -------
Cash and cash equivalents at end of year....................  $  97,003     104,482     97,332
                                                              =========    ========    =======
Supplemental cash flow information
  Cash paid during the year for:
    Interest................................................  $   7,463       4,771      2,142
    Income taxes............................................        845       7,261     10,973
  Non-cash financing activities -- book value of common
    stock issued in a merger................................  $ 126,992          --         --
</TABLE>

          See accompanying notes to consolidated financial statements.
                                       35
<PAGE>   36

                              SPEEDFAM-IPEC, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             MAY 31, 1999 AND 1998
                     (IN THOUSANDS, EXCEPT PER SHARE DATA)

(1) MERGER

     In April 1999, SpeedFam International, Inc. (SpeedFam) issued 13,048 shares
of its common stock in exchange for all outstanding common and preferred stock
of Integrated Process Equipment Corp. (IPEC). In conjunction with this merger,
SpeedFam amended its articles of incorporation to change the corporate name of
SpeedFam to SpeedFam-IPEC, Inc. (SpeedFam-IPEC or the Company).

     Effective upon the consummation of the merger, each share of the
outstanding common stock of IPEC was converted into .71 shares of common stock
of the Company. Outstanding IPEC employee stock options, warrants and
convertible notes were similarly converted into options, warrants and
convertible notes to purchase Company stock. In addition, each share of the
Series B-1 preferred stock, Series B-2 preferred stock, and Series B-3 preferred
stock of IPEC has been converted into 8.90, 8.10, and 10.65 shares of common
stock of the Company, respectively.

     The merger constituted a tax-free reorganization and has been treated as a
pooling-of-interests. Accordingly, the assets and liabilities of IPEC were
carried forward to the Company at historical values and the consolidated
financial statements for the periods prior to the combination have been restated
to include the accounts and results of operations of IPEC.

     The results of operations previously reported by the separate enterprises
and the combined amounts presented in the accompanying consolidated financial
statements are summarized below:

<TABLE>
<CAPTION>
                                                                        YEARS ENDED
                                            TEN MONTHS ENDED    ----------------------------
                                             MARCH 31, 1999     MAY 31, 1998    MAY 31, 1997
                                            ----------------    ------------    ------------
<S>                                         <C>                 <C>             <C>
Revenue:
  SpeedFam................................      $ 97,270          185,256         173,424
  IPEC....................................        79,933          189,012         144,688
                                                --------          -------         -------
     Combined.............................      $177,203          374,268         318,112
                                                ========          =======         =======
Net earnings (loss):
  SpeedFam................................      $ (8,525)          12,863          20,219
  IPEC....................................       (38,105)         (42,503)        (34,030)
                                                --------          -------         -------
     Combined.............................      $(46,630)         (29,640)        (13,811)
                                                ========          =======         =======
</TABLE>

     Prior to the combination, IPEC's fiscal year ended June 30. In recording
the pooling-of-interests combination, IPEC's financial statements for the twelve
months ended May 31, 1999 were combined with SpeedFam's financial statements for
the same period and IPEC's financial statements for the years ended June 30,
1998 and 1997 were combined with SpeedFam's financial statements for the years
ended May 31, 1998 and 1997, respectively. IPEC's unaudited results of
operations for the one month ended June 30, 1998 included revenue of $19,727 and
net income of $2,232. An adjustment has been made to stockholders' equity as of
May 31, 1999 to eliminate the effect of including IPEC's results of operations
for the one month ended June 30, 1998 in the results of operations of the
combined enterprise for both of the years ended May 31, 1999 and 1998. There
were no significant transactions between SpeedFam and IPEC prior to the
combination or significant differences in accounting policies that required
elimination or adjustment in the combined financial statements.

                                       36
<PAGE>   37
                              SPEEDFAM-IPEC, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     SpeedFam-IPEC, Inc., an Illinois corporation, designs, develops,
manufactures, markets, and supports chemical mechanical planarization (CMP)
systems used in the fabrication of semiconductor devices and other
high-throughput, precision surface processing systems. SpeedFam-IPEC's flat
surface processing systems are used in the thin film memory disk media, silicon
wafer, and general industrial applications markets.

     The Company also markets and distributes polishing liquids (slurries),
parts, and consumables used in its customers' manufacturing processes.
SpeedFam-IPEC, Inc. owns a 50 percent interest in each of two joint ventures,
SpeedFam-IPEC Co., Ltd. (the Far East Joint Venture) and Fujimi Corporation.

  (a) Principles of Consolidation

     The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries after elimination of all
significant intercompany accounts and transactions.

     The Company's investments in the common stock of affiliates SpeedFam-IPEC
Co., Ltd. (a Japanese corporation, 50% owned) and Fujimi Corporation (an
Illinois corporation, 50% owned) are accounted for by the equity method using
fiscal years that end April 30 and May 31, respectively.

  (b) Cash and Cash Equivalents and Short-term Investments

     Cash and cash equivalents include deposits in banks and highly liquid
investments with original maturities of three months or less at the date of
purchase.

     The Company's short-term investments consist of government and corporate
debt securities. All of the Company's short-term investments are classified as
available-for-sale. Available-for-sale securities are recorded at fair value.
Unrealized holding gains and losses, net of related tax effect, on
available-for-sale securities are excluded from earnings and are reported as a
separate component of other comprehensive income until realized. Realized gains
and losses from the sale of available-for-sale securities are determined on a
specific identification basis.

     A decline in market value of any available-for-sale security below cost
that is deemed to be other than temporary is considered an impairment of fair
value. The impairment is charged to earnings and a new cost basis for the
security is established. Premiums and discounts are amortized or accreted over
the life of the related available-for-sale security as an adjustment to yield
using the effective interest method. Dividend and interest income are recognized
when earned.

  (c) Inventories

     Inventories are stated at the lower of cost (first-in, first-out method) or
market.

  (d) Property, Plant, and Equipment

     Property, plant, and equipment are stated at cost. Depreciation is provided
on the straight-line method over the estimated useful lives of the assets.
Depreciation expense was $19,102, $12,436, and $8,952 in fiscal years 1999,
1998, and 1997, respectively. The estimated useful lives of the assets are as
follows:

<TABLE>
<S>                                                      <C>
Buildings and improvements.............................  7 to 40 years
Machinery and equipment................................   3 to 5 years
Furniture and fixtures.................................   3 to 5 years
Leasehold improvements.................................  2 to 10 years
</TABLE>

                                       37
<PAGE>   38
                              SPEEDFAM-IPEC, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     Equipment recorded under capital leases is stated at the lower of fair
market value or the present value of minimum lease payments at the inception of
the lease. Equipment recorded under capital leases and leasehold improvements
are amortized using the straight-line method over the shorter of the lease term
or the estimated useful lives of the related assets.

  (e) Income Taxes

     Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.

  (f) Revenue Recognition

     Sales of the Company's products are recorded upon customer acceptance, or
shipment if no customer acceptance is required, at which time title passes to
the customer. Customer acceptance refers to the sign off by the customer that
the equipment is complete and has passed all tests satisfactory to the customer.
Installation of the equipment is generally completed within 30 to 60 days of
acceptance. Service revenue is recognized upon completion of the service.

  (g) Installation and Warranty Costs

     Costs to be incurred by the Company related to product installation and
warranty fulfillment are accrued at the date of customer acceptance, or shipment
if no customer acceptance is required, and are estimated by the Company based on
past experience.

  (h) Foreign Currency Translation

     The local currency is the functional currency for all foreign operations.
Accordingly, translation gains or losses related to the foreign subsidiaries
financial statements are included as a component of stockholders' equity.

  (i) Earnings (Loss) Per Share

     Basic earnings (loss) per common share is based upon the weighted average
number of common shares outstanding. Diluted earnings (loss) per common share
assumes the exercise of all options which are dilutive, whether exercisable or
not. The dilutive effect of stock options is measured under the treasury stock
method.

     The weighted average shares used to calculate basic and diluted earnings
per common share for the years ended May 31, 1999, 1998, and 1997 are as
follows:

<TABLE>
<CAPTION>
                                                            1999      1998      1997
                                                           ------    ------    ------
<S>                                                        <C>       <C>       <C>
Weighted average shares outstanding for basic earnings
  per common share.......................................  28,890    27,469    22,441
Effect of dilutive securities............................      --        --     1,647
                                                           ------    ------    ------
  Weighted average shares outstanding for diluted
     earnings per common share...........................  28,890    27,469    24,088
                                                           ======    ======    ======
</TABLE>

                                       38
<PAGE>   39
                              SPEEDFAM-IPEC, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     In calculating net loss per common share for 1999 and 1998, 375,000 and
1,600 potentially dilutive common shares consisting of stock options, warrants,
convertible notes and convertible preferred stock have been excluded because
their inclusion would have been anti-dilutive.

  (j) Significant Customers and Concentration of Credit Risk

     Presented below is a summary of net sales to and commissions earned from
significant customers as a percentage of total revenue. Net sales to and
commissions earned from these customers are from all of the Company's segments.

<TABLE>
<CAPTION>
CUSTOMER                                                 1999    1998
--------                                                 ----    ----
<S>                                                      <C>     <C>
  A....................................................   11%     19%
  B....................................................   11       *
  C....................................................    *       *
  D....................................................    *       *
                                                          ==      ==
</TABLE>

---------------
* Less than 10%.

     The Company sells products and services primarily to semiconductor
manufacturers, and extends credit based on an evaluation of the customer's
financial condition, generally without requiring collateral. As a result of the
economic difficulties within certain Asian countries, the Company has increased
sales subject to extended payment terms within this region. Exposure to losses
on receivables is principally dependent on each customer's financial condition.
The Company monitors its exposure for credit losses and maintains allowances for
anticipated losses.

     Presented below is a summary of customers with significant account
receivable balances as a percentage of total accounts receivable.

<TABLE>
<CAPTION>
CUSTOMER                                                 1999    1998
--------                                                 ----    ----
<S>                                                      <C>     <C>
  A....................................................    *       *
  B....................................................   22%      *
  C....................................................   11       *
  D....................................................   13       *
                                                          ==      ==
</TABLE>

---------------
* Less than 10%.

  (k) Patents, Trademarks, and Goodwill

     Patents and trademarks included in other assets, in the net amount of
$6,336 and $6,452 at the end of fiscal years 1999 and 1998, respectively, are
amortized on a straight-line basis over 5 to 17 years for patents and five years
for trademarks.

     Intangible assets have been allocated among various categories based on
their estimated fair value upon acquisition as determined by management or by
independent appraisal.

     Goodwill included in other assets, in the net amount of $3,274 and $3,981
at the end of fiscal years 1999 and 1998, respectively, represents the excess
cost over the fair value of tangible and intangible assets acquired and is
amortized over 10 years using the straight-line method.

                                       39
<PAGE>   40
                              SPEEDFAM-IPEC, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

  (l) Research, Development, and Engineering

     Expenditures for research, development, and engineering of products and
processes are expensed as incurred.

  (m) Use of Estimates

     The preparation of financial statements in conformity with generally
accepted accounting principles requires the Company's management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.

  (n) Employee Stock Plans

     Effective June 1, 1996, the Company adopted Statement of Financing
Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation."
In accordance with the provisions of SFAS No. 123, the Company applies
Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued
to Employees," and related interpretations in accounting for its employee stock
option and stock purchase plans and, accordingly, does not recognize
compensation cost. As prescribed by SFAS No. 123, note 17 contains a summary of
the pro forma effects on reported net income and earnings per share for 1999,
1998, and 1997 as if the Company had elected to recognize compensation cost
based on the fair value of the options granted at the grant date.

  (o) Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of

     The Company continually evaluates whether events and circumstances have
occurred that indicate the estimated useful life of long-lived assets or
intangible assets may warrant revision or that the remaining balance may not be
recoverable. When factors indicate that the asset should be evaluated for
possible impairment, the Company uses an estimate of the related undiscounted
net cash flows generated by the asset over the remaining estimated life of the
asset in measuring whether the asset is recoverable. Material factors which may
alter the useful life of the asset or lead to a determination that the balance
may not be recoverable include effects of new technologies, obsolescence,
demand, competition, and other economic factors. If such assets are considered
to be impaired, the impairment to be recognized is measured as the amount by
which the carrying amount of the assets exceed the fair value of the assets.

     Assets to be disposed of are reported at the lower of the carrying amount
or fair value less costs to sell.

  (p) Derivative Financial Instruments

     The Company uses derivative financial instruments to reduce exposure to
market risks arising from changes in foreign exchange rates. Derivative
financial instruments currently utilized by the Company primarily include
foreign currency forward contracts. The Company evaluates and monitors
consolidated net exposures by currency and maturity, and external derivative
financial instruments correlate with the net exposures in all material respects.
Gains and losses on hedges of existing assets and liabilities are included in
the carrying amounts of those assets or liabilities and are ultimately
recognized in income when the related assets and liabilities are sold or
liquidated. Gains or losses related to hedges of firm commitments are deferred
and included in the bases of the transactions when they are completed. Gains or
losses on unhedged foreign currency transactions, if any, are included in income
as part of cost of sales. Gains and losses on derivative financial instruments
which protect the Company from exposure in a particular currency, but do not
currently have a designated underlying transaction, are also included in income
as part of cost of sales. If a hedged item matures, or is sold, extinguished,
terminated, or is related to an anticipated transaction that is no longer likely

                                       40
<PAGE>   41
                              SPEEDFAM-IPEC, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

to take place, the derivative financial instrument is closed and the related
gain or loss is included in income as part of cost of sales.

  (q) Comprehensive Income

     Effective June 1, 1998, the Company adopted Statement of Financial
Accounting Standard No. 130, "Reporting Comprehensive Income," which established
standards to report and display comprehensive income and its components in a
full set of general purpose financial statements.

  (r)  Reclassifications

     Certain reclassifications have been made in the fiscal 1998 and fiscal 1997
financial statements to conform to the fiscal 1999 presentation.

(3) MERGER, INTEGRATION, AND RESTRUCTURING COSTS

     In connection with the merger, the Company recorded various merger,
integration and restructuring costs. Direct merger costs primarily consist of
professional fees, such as investment banking, legal and accounting for services
rendered through the date of the merger. The Company recorded integration and
restructuring costs for lease terminations, the write-off of duplicative
equipment previously used for demonstration purposes, the writedown of inventory
and equipment related to product lines that will no longer be supported, and
severence costs resulting from workforce reductions.

     The merger of the two companies resulted in the closing of several
facilities, the most significant being the former IPEC corporate office and two
manufacturing facilities. The IPEC corporate office and one of the manufacturing
facilities were vacated as of May 31, 1999. The other manufacturing facility
will be vacated in fiscal year 2000. As a result, the Company has accrued lease
termination costs for the estimated payments required to be made subsequent to
vacating the facilities and has written off leasehold improvements made at these
facilities.

     As part of the business strategy developed by the combined entity, certain
product lines will no longer be supported. These product lines relate to wafer
shaping and measuring applications, and the 372 CMP product line formerly
produced by IPEC. Certain equipment and inventory associated with these product
lines have been written down to estimated market value. Market value has been
determined based on estimated liquidation value. The disposals are expected to
occur in fiscal year 2000.

     The severance and other related employee costs provide for the reduction of
approximately 90 employment positions resulting from facility closures, and the
elimination of duplicate positions or positions no longer necessary due to the
streamlining of operations. Notification of the planned severance and the amount
of the related benefits was made to employees prior to May 31, 1999.

     The following table summarizes the components of the merger, integration,
and restructuring costs.

<TABLE>
<CAPTION>
                                                              FISCAL 1999 ACTIVITY
                                                TOTAL      ---------------------------      ACCRUED
                                              ESTIMATED        CASH           ASSET            AT
                                                COSTS      EXPENDITURES    WRITE-DOWNS    MAY 31, 1999
                                              ---------    ------------    -----------    ------------
<S>                                           <C>          <C>             <C>            <C>
Direct merger costs.........................   $ 6,900        3,300              --           3,600
Lease termination costs.....................    16,900           --           2,300          14,600
Demonstration equipment.....................     4,200           --           4,200              --
Discontinued product lines..................    19,400           --          19,300             100
Severance costs.............................     4,700          500              --           4,200
Other costs.................................     1,800          300           1,000             500
                                               -------        -----          ------          ------
                                               $53,900        4,100          26,800          23,000
                                               =======        =====          ======          ======
</TABLE>

                                       41
<PAGE>   42
                              SPEEDFAM-IPEC, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     These costs are classified in the statement of operations for the year
ended May 31, 1999 in cost of sales and in selling, general and administrative
expenses. The following table summarizes the classification of the merger and
integration charges:

<TABLE>
<S>                                                          <C>
Cost of sales............................................    $13,600
Merger, integration and restructuring costs..............     40,300
                                                             -------
                                                             $53,900
                                                             =======
</TABLE>

     In the second quarter of fiscal 1997, the Company recorded a pretax
nonrecurring charge of $17,601, related to write-downs of inventory of $9,001;
write-downs of property, plant, and equipment of $4,100; and the accrual of
related noncancelable purchase orders of $4,500 related to the discontinuance of
the Avanti 672 program.

     Cash payments related to the merger, integration and restructuring charges
are expected to be $12,800 for fiscal year 2000.

(4) SHORT-TERM INVESTMENTS

     In August, 1998 the Company recorded a realized gain of $46 from the sale
of tax exempt short-term investments, classified as held-to-maturity securities,
with a carrying value of $35,803. The proceeds of $35,849 were re-invested. The
Company sold investments originally intended to be held-to-maturity to take
advantage of more favorable rates of return available on taxable securities. All
of the Company's short-term investments were reclassified as available-for-sale
subsequent to the date of sale and are recorded at fair value.

     The amortized cost, gross unrealized gains, gross unrealized losses, and
approximate fair value of short-term investments classified as
available-for-sale are summarized as follows at May 31, 1999:

<TABLE>
<CAPTION>
                                                                         1999
                                                  --------------------------------------------------
                                                               GROSS         GROSS       APPROXIMATE
                                                             UNREALIZED    UNREALIZED       FAIR
                                                   COST        GAINS         LOSSES         VALUE
                                                  -------    ----------    ----------    -----------
<S>                                               <C>        <C>           <C>           <C>
Municipal and state governments.................  $26,439        1            (152)        26,288
Corporate debt securities and other.............   23,833       --            (101)        23,732
                                                  -------        --           ----         ------
                                                  $50,272        1            (253)        50,020
                                                  =======        ==           ====         ======
</TABLE>

     The amortized cost, gross unrealized gains, gross unrealized losses, and
approximate fair value of short-term investments classified as held-to-maturity
are summarized as follows at May 31, 1998:

<TABLE>
<CAPTION>
                                                                        1998
                                                 ---------------------------------------------------
                                                               GROSS         GROSS       APPROXIMATE
                                                             UNREALIZED    UNREALIZED       FAIR
                                                   COST        GAINS         LOSSES         VALUE
                                                 --------    ----------    ----------    -----------
<S>                                              <C>         <C>           <C>           <C>
Municipal and state governments................  $ 49,342        46           (13)          49,375
Corporate debt securities and other............    71,525       492           (12)          72,005
                                                 --------       ---           ---          -------
                                                 $120,867       538           (25)         121,380
                                                 ========       ===           ===          =======
</TABLE>

                                       42
<PAGE>   43
                              SPEEDFAM-IPEC, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(5) INVENTORIES

     Inventories at the end of fiscal years 1999 and 1998 are summarized as
follows:

<TABLE>
<CAPTION>
                                                            1999       1998
                                                           -------    -------
<S>                                                        <C>        <C>
Raw materials............................................  $48,082     68,846
Work-in-process..........................................   23,428     30,491
Finished goods...........................................    9,234     23,244
                                                           -------    -------
          Total inventories..............................  $80,744    122,581
                                                           =======    =======
</TABLE>

(6) PROPERTY, PLANT, AND EQUIPMENT

     Property, plant, and equipment at the end of fiscal years 1999 and 1998 are
summarized as follows:

<TABLE>
<CAPTION>
                                                            1999       1998
                                                          --------    -------
<S>                                                       <C>         <C>
Land....................................................  $  8,547      8,507
Buildings...............................................    40,911     19,248
Machinery and equipment.................................    69,066     73,487
Furniture and fixtures..................................     3,529      4,717
Leasehold improvements..................................     1,607      4,606
Construction in progress................................     2,906      6,167
                                                          --------    -------
                                                           126,566    116,732
Less accumulated depreciation...........................   (37,569)   (29,596)
                                                          --------    -------
  Net property, plant, and equipment....................  $ 88,997     87,136
                                                          ========    =======
</TABLE>

(7) ACCRUED LIABILITIES

     Accrued liabilities at the end of fiscal years 1999 and 1998 are summarized
as follows:

<TABLE>
<CAPTION>
                                                               1999      1998
                                                              -------   ------
<S>                                                           <C>       <C>
Accrued warranties..........................................  $13,245   12,226
Accrued payroll and benefits................................    6,217    7,070
Accrued merger, integration, and restructuring costs........    9,429       --
Other accrued liabilities...................................   13,873   15,110
                                                              -------   ------
          Total accrued liabilities.........................  $42,764   34,406
                                                              =======   ======
</TABLE>

                                       43
<PAGE>   44
                              SPEEDFAM-IPEC, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(8) INVESTMENTS IN AFFILIATES

     The Company owns a 50% interest in SpeedFam-IPEC Co., Ltd. The Company's
equity investment in SpeedFam-IPEC Co., Ltd. was $21,764 and $20,543 in 1999 and
1998, respectively. SpeedFam-IPEC Co., Ltd.'s consolidated financial statements
include the accounts of the following subsidiaries:

<TABLE>
<CAPTION>
COMPANY                                                   LOCATION
-------                                                  -----------
<S>                                                      <C>
SpeedFam Clean Systems Co., Ltd........................     Japan
Saku Seiki Co., Ltd....................................     Japan
SpeedFam-IPEC Taiwan Ltd...............................    Taiwan
SpeedFam-IPEC Korea Ltd................................  South Korea
SpeedFam-IPEC India (Pvt.) Ltd.........................     India
SpeedFam-IPEC (S.E.A.) Pte. Ltd........................   Singapore
SpeedFam-IPEC (Malaysia) SDN BHD.......................   Malaysia
</TABLE>

     Significant intercompany balances and transactions have been eliminated.
SpeedFam-IPEC Co., Ltd.'s investments in four affiliated Japanese companies,
Met-Coil Ltd.; GRT Co., Ltd.; Clean Technology Co., Ltd.; and Xevios Corporation
are accounted for by the equity method.

     Condensed consolidated financial statements of SpeedFam-IPEC Co., Ltd. are
as follows:

BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                   APRIL 30,
                                                              -------------------
                                                                1999       1998
                                                              --------    -------
<S>                                                           <C>         <C>
                                ASSETS
Current assets:
  Cash and short-term investments...........................  $  8,963     13,612
  Trade accounts receivable, net and due from affiliates....    55,670     89,359
  Inventories...............................................    13,445     20,723
  Prepaid expenses and other current assets.................     3,682      4,685
                                                              --------    -------
          Total current assets..............................    81,760    128,379
Property, plant, and equipment, net.........................    36,003     35,763
Other assets................................................    10,759      9,140
                                                              --------    -------
          Total assets......................................  $128,522    173,282
                                                              ========    =======
</TABLE>

                                       44
<PAGE>   45
                              SPEEDFAM-IPEC, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

<TABLE>
<CAPTION>
                                                                   APRIL 30,
                                                              -------------------
                                                                1999       1998
                                                              --------    -------
<S>                                                           <C>         <C>
                 LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Short-term borrowings and current portion of long-term
     debt...................................................  $ 26,381     37,779
  Accounts payable..........................................    25,546     58,440
  Accrued expenses..........................................     5,862      6,656
  Income taxes payable......................................        --      3,890
                                                              --------    -------
          Total current liabilities.........................    57,789    106,765
                                                              --------    -------
Long-term debt..............................................    19,607     18,945
Other long-term liabilities.................................     7,599      6,486
                                                              --------    -------
          Total long-term liabilities.......................    27,206     25,431
                                                              --------    -------
Stockholders' equity........................................    43,527     41,086
                                                              --------    -------
          Total liabilities and stockholders' equity........  $128,522    173,282
                                                              ========    =======
</TABLE>

STATEMENTS OF EARNINGS AND RETAINED EARNINGS

<TABLE>
<CAPTION>
                                                          YEARS ENDED APRIL 30,
                                                    ---------------------------------
                                                      1999         1998        1997
                                                    ---------    --------    --------
<S>                                                 <C>          <C>         <C>
Net sales.........................................  $ 136,232     221,738     220,281
Costs and operating expenses......................   (135,378)   (210,900)   (198,449)
                                                    ---------    --------    --------
  Earnings before income taxes....................        854      10,838      21,832
Income taxes......................................     (1,332)     (5,041)    (10,250)
                                                    ---------    --------    --------
  Net earnings (loss) before minority interest....       (478)      5,797      11,582
Minority interest.................................        684          66        (569)
                                                    ---------    --------    --------
  Net earnings....................................        206       5,863      11,013
Retained earnings at beginning of year............     41,162      37,049      26,943
Dividends.........................................     (1,042)     (1,750)       (907)
                                                    ---------    --------    --------
  Retained earnings at end of year................  $  40,326      41,162      37,049
                                                    =========    ========    ========
</TABLE>

     The following is a summary of SpeedFam-IPEC, Inc. and consolidated
subsidiaries' transactions with SpeedFam-IPEC Co., Ltd. and its subsidiaries.

<TABLE>
<CAPTION>
                                                             1999     1998      1997
                                                            ------    -----    ------
<S>                                                         <C>       <C>      <C>
Sales to SpeedFam-IPEC Co., Ltd...........................  $  659      924     1,520
                                                            ======    =====    ======
Purchases from SpeedFam-IPEC Co., Ltd.....................  $3,030    6,344     6,146
                                                            ======    =====    ======
Commissions revenue.......................................  $2,217    9,009    12,430
                                                            ======    =====    ======
Commission expense........................................  $4,727    4,433     2,707
                                                            ======    =====    ======
</TABLE>

     Net amounts due to SpeedFam-IPEC Co., Ltd. included in the consolidated
balance sheets at the end of fiscal years 1999 and 1998 are $4,799 and $3,437,
respectively.

                                       45
<PAGE>   46
                              SPEEDFAM-IPEC, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     The Company owns a 50% interest in Fujimi Corporation. The Company's equity
investment in Fujimi Corporation was $3,596 and $3,757 in 1999 and 1998,
respectively. Summary financial information relating to Fujimi Corporation is as
follows:

BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                 MAY 31,
                                                            -----------------
                                                             1999       1998
                                                            -------    ------
<S>                                                         <C>        <C>
                          ASSETS
Current assets............................................  $11,300    11,063
Other assets..............................................       20        30
                                                            -------    ------
          Total assets....................................  $11,320    11,093
                                                            =======    ======
           LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities...............................................  $ 4,127     3,579
Stockholders' equity......................................    7,193     7,514
                                                            -------    ------
          Total liabilities and stockholders' equity......  $11,320    11,093
                                                            =======    ======
</TABLE>

STATEMENTS OF EARNINGS

<TABLE>
<CAPTION>
                                                            YEARS ENDED MAY 31,
                                                       ------------------------------
                                                         1999       1998       1997
                                                       --------    -------    -------
<S>                                                    <C>         <C>        <C>
Net sales............................................  $ 22,746     36,767     36,556
Costs and operating expenses.........................   (20,028)   (31,332)   (30,775)
                                                       --------    -------    -------
  Earnings before income taxes.......................     2,718      5,435      5,781
Income taxes.........................................    (1,039)    (2,207)    (2,205)
                                                       --------    -------    -------
  Net earnings.......................................  $  1,679      3,228      3,576
                                                       ========    =======    =======
</TABLE>

     The Company received dividends from Fujimi Corporation of $1,000, $1,450,
and $100 in fiscal years 1999, 1998, and 1997, respectively. Purchases from
Fujimi Corporation approximated $1,790, $2,271, and $1,725 in fiscal years 1999,
1998, and 1997, respectively. Amounts due to Fujimi Corporation included in the
consolidated balance sheets at the end of fiscal years 1999 and 1998 are $6 and
$199, respectively.

(9) INCOME TAXES

     The Company files consolidated U.S. Federal income tax returns with its
domestic subsidiaries. Operations in the United Kingdom and Germany file local
income tax returns. Earnings (losses) from consolidated companies before income
taxes are as follows:

<TABLE>
<CAPTION>
                                                           1999       1998      1997
                                                         ---------    -----    ------
<S>                                                      <C>          <C>      <C>
U.S. ..................................................  $(146,438)   3,942    10,475
Non-U.S. ..............................................      1,816    2,406     2,580
                                                         ---------    -----    ------
          Total........................................  $(144,622)   6,348    13,055
                                                         =========    =====    ======
</TABLE>

                                       46
<PAGE>   47
                              SPEEDFAM-IPEC, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     Income tax expense (benefit) is included in the statements of operations as
follows:

<TABLE>
<CAPTION>
                                                           1999       1998      1997
                                                          -------    ------    ------
<S>                                                       <C>        <C>       <C>
Continuing operations...................................  $(3,931)   29,584     5,086
Discontinued operations.................................       --        --    (7,076)
                                                          -------    ------    ------
          Total.........................................  $(3,931)   29,584    (1,990)
                                                          =======    ======    ======
</TABLE>

     Income tax expense (benefit) related to continuing operations is as
follows:

<TABLE>
<CAPTION>
                                                           1999       1998      1997
                                                          -------    ------    ------
<S>                                                       <C>        <C>       <C>
Current:
  U.S. Federal..........................................  $    --     2,348     6,673
  State.................................................       22     1,080     2,300
  Non-U.S. .............................................      710       640     1,025
                                                          -------    ------    ------
                                                              732     4,068     9,498
                                                          -------    ------    ------
Deferred:
  U.S. Federal and state................................   (4,622)   25,366    (4,165)
  Non-U.S. .............................................      (41)      150      (747)
                                                          -------    ------    ------
                                                           (4,663)   25,516    (4,912)
                                                          -------    ------    ------
          Income tax expense............................  $(3,931)   29,584     5,086
                                                          =======    ======    ======
</TABLE>

     The tax effects of temporary differences that give rise to the deferred tax
assets (liabilities) at the end of fiscal years 1999 and 1998 are attributable
to:

<TABLE>
<CAPTION>
                                                            1999       1998
                                                          --------    -------
<S>                                                       <C>         <C>
Deferred tax assets:
  Financial valuation accounts..........................  $ 18,655      8,133
  Expenses not currently deductible.....................     2,017        404
  Merger, integration, and restructuring................    21,421      5,065
  Net operating loss carryforwards and tax credits......    55,096     32,554
  Other.................................................       906      1,938
                                                          --------    -------
                                                            98,095     48,094
  Valuation allowance...................................   (91,564)   (40,019)
                                                          --------    -------
                                                             6,531      8,075
Deferred tax liabilities:
  Depreciation and amortization differences.............    (6,542)    (5,756)
                                                          --------    -------
     Net deferred tax asset (liability).................  $    (11)     2,319
                                                          ========    =======
</TABLE>

     The net deferred tax asset (liability) has been recorded on the balance
sheet as follows:

<TABLE>
<CAPTION>
                                                              1999     1998
                                                              ----    ------
<S>                                                           <C>     <C>
Current deferred tax asset..................................  $ --     3,339
Long-term deferred tax liability............................   (11)   (1,020)
                                                              ----    ------
                                                              $(11)    2,319
                                                              ====    ======
</TABLE>

                                       47
<PAGE>   48
                              SPEEDFAM-IPEC, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     The Company has in excess of $100,000 of Federal net operating loss
carryforwards at May 31, 1999 which expire between 2000 and 2019. The Company
also has $5,000 of Federal research and development tax credit carryforwards
available. These carryforwards begin to expire in 2011.

     The valuation allowance for deferred taxes was increased by $51,500 and
$32,200 during the years ended May 31, 1999 and 1998, respectively. A valuation
allowance is required to be recorded against deferred tax assets that are not
likely to be realized. This determination is dependent on many factors,
including the Company's ability to generate taxable income within the net
operating loss carryforward period. Significant negative results of the fourth
quarter of fiscal year 1999, including a decline in sales and backlog, were due
to the downturn in the semiconductor industry, Asian economic situation, and
market share erosion due to increased competition in the sales of CMP systems to
semi-conductor manufacturers. The industry instability changed the assumptions
used to predict future projected results of the Company. These circumstances
combined with two consecutive years of operating losses as of May 31, 1999
caused a change in judgment about the realization of the deferred tax assets. As
a result, the Company is unable to predict the level of future sales and ability
to generate income under these circumstances. The Company has established a full
valuation allowance against all of its deferred tax assets. The Company will
recognize future benefits only as reassessment demonstrates that the deferred
tax assets are realizable. While the need for this valuation allowance is
subject to periodic review, if the allowance is reduced, the tax benefits
attributable to the deferred tax assets will be recorded in the future as a
reduction of the Company's income tax expense.

     A reconciliation between the Company's effective tax rate and the expected
tax rate on earnings before income taxes is as follows:

<TABLE>
<CAPTION>
                                                              1999    1998    1997
                                                              ----    ----    ----
<S>                                                           <C>     <C>     <C>
Expected income tax rate....................................  (34)%    34%     35%
Dividend income from affiliates.............................   --       2       2
State taxes, net of U.S. Federal tax benefit................   (6)     12      12
Foreign sales corporation...................................   --     (19)     (2)
Research and development tax credit.........................   (2)     --     (10)
Tax exempt investment securities............................   --     (17)     (3)
Meals and entertainment.....................................   --       4      --
Non-deductible expenses, including purchased research and
  development and amortization of goodwill..................    1      38       5
Change in allowance.........................................   36     391      --
Stock option compensation...................................   --      21      --
Other.......................................................    2      --      --
                                                              ---     ---     ---
  Effective income tax rate.................................   (3)%   466%     39%
                                                              ===     ===     ===
</TABLE>

     No provision is made for income taxes on undistributed earnings of wholly
owned non-U.S. subsidiaries and SpeedFam-IPEC Co., Ltd., because it is the
Company's present intention to reinvest substantially all the earnings of these
operations. At the end of fiscal year 1999, there was approximately $27,102 of
accumulated undistributed earnings of those operations. It is not practical for
the Company to compute the amount of unrecognized deferred tax liability on the
undistributed earnings.

(10) DISCONTINUED OPERATIONS

     In the second quarter of fiscal 1997, the Company announced its decision to
focus its resources on manufacturing CMP and CMP related equipment. As a result
of this decision, the Company adopted a plan for the disposition by sale or
closure of IPEC Clean in calendar 1997.

                                       48
<PAGE>   49
                              SPEEDFAM-IPEC, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     IPEC Clean has been accounted for as a discontinued operation and,
accordingly, its results of operations and financial position are segregated for
all periods presented in the accompanying consolidated financial statements.
Revenue, related losses, and income taxes associated with the discontinued
operations are as follows:

<TABLE>
<CAPTION>
                                                              FISCAL
                                                               1997
                                                             --------
<S>                                                          <C>
Revenue....................................................  $ 4,609
                                                             -------
Loss from discontinued operations before taxes.............   (5,495)
Income tax benefit.........................................   (1,881)
                                                             -------
  Loss from discontinued operations, net of taxes..........  $(3,614)
                                                             =======
</TABLE>

     The effective income tax benefit for discontinued operations differs from
the Company's effective tax rate primarily as a result of nondeductible
amortization of intangible assets.

     The Company recorded a pretax charge of $27,200 to write down intangible
assets, accounts receivable, inventory, equipment, and other assets to estimated
net realizable value and to record additional liabilities in the second quarter
of fiscal 1997. A charge of $2,945 was also recorded to reflect the estimated
phase out costs and losses from operations associated with IPEC Clean until
disposition. The tax benefit associated with these charges was $5,195.

     Following the decision to dispose of IPEC Clean in calendar 1997, the
Company entered into negotiations to sell its remaining assets. The
deteriorating business climate in the Pacific Rim resulted in customers delaying
expected purchases from IPEC Clean and the Company was unable to consummate a
sale. The Company closed IPEC Clean in the third quarter of fiscal 1998. A
charge of $10,578 to write down accounts receivable, inventory, equipment, and
other assets to liquidation value and to record additional liabilities was
recorded in fiscal 1998.

(11) REVOLVING CREDIT FACILITY

     On October 31, 1996, SpeedFam-IPEC Limited in the United Kingdom, a wholly
owned subsidiary of the Company., entered into a L950 ($1,587) multi-currency
revolving line of credit with the London branch of a U.S. bank. The revolving
line of credit is secured by property and equipment of the subsidiary and is
payable on demand. If the line of credit is utilized, interest will accrue on
the outstanding balance at 2.0% above the bank's base rate (7.25% at April 30,
1999 and 1998). As of April 30, 1999 and 1998, no amounts were outstanding on
this credit facility.

(12) LONG-TERM DEBT

     Long-term debt at May 31, 1999 and 1998 consists of the following:

<TABLE>
<CAPTION>
                                                                MAY 31,
                                                          -------------------
                                                            1999       1998
                                                          --------    -------
<S>                                                       <C>         <C>
Convertible subordinated notes..........................  $115,000    115,000
Term loan payable.......................................        --        248
Notes payable...........................................        --        395
Capital lease obligations, interest rates ranging from
  8.7% to 9.88%.........................................     2,404      3,238
                                                          --------    -------
                                                           117,404    118,881
Less current portion....................................     1,275      1,803
                                                          --------    -------
  Long term debt, net of current portion................  $116,129    117,078
                                                          ========    =======
</TABLE>

                                       49
<PAGE>   50
                              SPEEDFAM-IPEC, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     The Company entered into a loan agreement in April 1996 with a bank. Under
the terms of the agreement, as modified, the Company received a $10,000 term
loan. This loan was paid in full during fiscal 1998 with the proceeds from a
private placement.

     The Company completed a private placement in the first quarter of fiscal
1998 of $115,000 Convertible Subordinated Notes due in 2004 bearing interest at
a rate of 6.25% (Notes). The Notes were subsequently registered with the
Securities and Exchange Commission in fiscal 1998. Interest is payable
semi-annually in March and September. The Notes are subordinated to all existing
and future senior indebtedness and effectively subordinated to all liabilities,
including trade payables and lease obligations of the Company and its
subsidiaries. The Notes can be converted after ninety days from the original
issuance into the Company's common stock at a conversion price of $54.93 per
share. The Notes are not redeemable by the Company prior to September 20, 2000.
Debt issuance costs of $3,800 million incurred in connection with the issuance
have been included in other assets and are being amortized over seven years.

     The Company had a term loan payable in monthly installments of $26
(including interest at a fixed rate of 9.25%) beginning April 1, 1994 for five
years. The remaining balance was repaid during fiscal year 1999.

     The Company issued a $3,200 promissory note to the former owner of an
acquired company. The note bears interest at a rate of 5.58% per year and
principal and interest are payable in monthly installments. Remaining amounts
due on the note were paid during fiscal year 1999.

     The Company entered into lease financing arrangements for certain equipment
that expire at various dates through December 2001.

     The future maturities of long-term debt as of May 31, 1999 are as follows:

<TABLE>
<CAPTION>
                   YEARS ENDING MAY 31,                      AMOUNT
                   --------------------                     --------
<S>                                                         <C>
2000......................................................     1,275
2001......................................................       970
2002......................................................       146
2003......................................................        13
2004......................................................   115,000
                                                            --------
          Total...........................................  $117,404
                                                            ========
</TABLE>

(13) STOCKHOLDERS' EQUITY

  Common Stock

     In February 1997, the Company completed a public offering of common stock.
The Company issued 2,500,000 shares of common stock and received proceeds of
$77,673, net of underwriters' discounts and commissions and offering expenses.

     In October 1997, the Company completed a public offering of common stock.
The Company issued 2,327,000 shares of common stock and received proceeds of
$116,704, net of underwriters' discounts and commissions and offering expenses.

  Preferred Stock

     The holders of Series B preferred stock were entitled to an annual
cumulative dividend amounting to $5.59 per share, payable semiannually on
December 31 and June 30, commencing June 30, 1994. Each share of the Series B-1
preferred stock, Series B-2 preferred stock, and Series B-3 preferred stock was
convertible into 8.90, 8.10, and 10.65 shares of common stock, respectively.
During fiscal 1997, 14 shares of Series B-1, B-2, and B-3 preferred stock were
converted into 141 shares of common stock and in fiscal 1998, .14 shares of

                                       50
<PAGE>   51
                              SPEEDFAM-IPEC, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Series B-1 preferred stock were converted into 1 share of common stock. During
fiscal 1997, 5,370 shares of Series B-1 preferred stock were released from
escrow to the selling stockholders (including a director) of a business acquired
by the Company upon settlement of the purchase price of the acquired business.
In accordance with the escrow settlement, the remaining 5,369 shares of the
Series B-1 preferred stock held in escrow were retired.

     The Company completed a $25.0 million equity financing in fiscal 1997. The
Company sold 100 shares of newly issued Series C convertible preferred stock. On
February 25, 1997 all shares of Series C convertible preferred stock were
converted into 879,662 shares of common stock.

     In connection with the issuance of the Series C convertible preferred
stock, warrants were issued to acquire up to 338,210 shares of the Company's
common stock. These warrants may generally be exercised from and after June 16,
1998 until December 16, 2002 at an exercise price of $34.61 per share.

     At the merger date, all remaining IPEC preferred stock was converted into
SpeedFam-IPEC, Inc. common stock.

  Class A Common Stock

     Each share of Class A common stock was entitled to four votes and was
convertible into one share of the Company's common stock. Each share of common
stock is entitled to one vote. At the merger date, each share of IPEC Class A
common stock was converted into .71 shares of SpeedFam-IPEC, Inc. common stock.

  Warrants

     The following summarizes warrant activity:

<TABLE>
<CAPTION>
                                                  COMMON      COMMON      COMMON
                                                   (A)         (B)         (C)        TOTAL
                                                 --------    --------    --------    -------
<S>                                              <C>         <C>         <C>         <C>
Exercise price...............................    $  41.20    $  20.65    $  34.61         --
Expiration...................................    12/26/00    12/31/99    12/16/02         --
Outstanding at June 30, 1998 and 1999........       7,100     177,500     338,210    522,810
                                                 ========    ========    ========    =======
</TABLE>

---------------
(a) These warrants were issued in connection with services provided during an
    acquisition and were assigned a value of $100.

(b) These warrants were issued in connection with an agreement to accelerate
    planned orders from a significant customer and were assigned a value of
    $1,100.

(c) These warrants were issued in connection with the Series C convertible
    preferred stock and were assigned a value of $4,800.

(14) COMMITMENTS AND CONTINGENCIES

     The Company is subject to lawsuits and other claims arising in the ordinary
course of business. In the opinion of management, based on consultation with
legal counsel, the effect of such matters will not have a material adverse
effect on the Company's financial position or results of operations.

     The Company completed an $18,700 sale/leaseback transaction of its IPEC
Planar manufacturing and administrative facility in the second quarter of fiscal
1997. The Company leased back the facility for an initial fifteen-year term with
two five-year renewal options. Proceeds from the transaction were used to repay
a $10,000 term loan with a bank. Annual rental payments will vary but will range
between $2,100 and $2,400 over the next four years. This facility is no longer
occupied by the Company as a result of the merger although the Company is still
obligated to perform in accordance with the lease terms.

                                       51
<PAGE>   52
                              SPEEDFAM-IPEC, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     The Company and its subsidiaries occupy certain manufacturing and office
facilities and use certain equipment under noncancelable operating leases.
Rental expense aggregated, including the IPEC Planar manufacturing and
administrative facility, approximately $6,243, $5,035, and $3,835 in fiscal
years 1999, 1998, and 1997, respectively.

     Future minimum lease payments for all noncancelable operating leases having
remaining terms in excess of one year at the end of fiscal year 1999 are as
follows:

<TABLE>
<CAPTION>
FISCAL YEAR                                                  AMOUNT
-----------                                                  -------
<S>                                                          <C>
2000.......................................................  $ 5,213
2001.......................................................    4,068
2002.......................................................    3,524
2003.......................................................    3,281
2004 and thereafter........................................   23,526
                                                             -------
          Total............................................  $39,612
                                                             =======
</TABLE>

(15) FORWARD EXCHANGE CONTRACTS

     The notional amounts of foreign exchange contracts as of May 31, 1999 and
1998 were as follows:

<TABLE>
<CAPTION>
                                                               1999     1998
                                                              ------    -----
<S>                                                           <C>       <C>
Forward exchange contracts to buy foreign currency..........  $1,862    2,833
                                                              ======    =====
Forward exchange contracts to sell foreign currency.........  $4,390    1,637
                                                              ======    =====
</TABLE>

     All currency forward contracts outstanding at May 31, 1999 have maturities
of less than one year and are primarily to buy or sell Japanese yen in exchange
for U.S. dollars. Management believes that these contracts should not subject
the Company to undue risk from foreign exchange movements, because gains and
losses on these contracts generally offset gains and losses on the assets,
liabilities, and transactions being hedged.

(16) EMPLOYEE BENEFITS

     The Company maintains defined-contribution savings and profit-sharing plans
for its employees. The plans cover certain employees who meet length of service
requirements. Expenses under the plans, determined by the Company's Board of
Directors, aggregated $1,020, $843, and $2,836 in fiscal years 1999, 1998, and
1997, respectively.

     The Company granted to an officer 50 shares of common stock which vest
monthly from September 1997 through February 2000. The Company deferred the
related compensation of $1.3 million and is amortizing the cost over the vesting
period. In 1999 and 1998, $896 and $448 was recorded as compensation expense,
respectively. At the merger date, all unvested shares became fully vested.

     SpeedFam's 1995 Employee Stock Purchase Plan qualifies under Section 423 of
the Internal Revenue Code and the Company has reserved 1,000 shares of common
stock for issuance under the plan.

     IPEC's 1994 Employee Stock Purchase qualifies under Section 423 of the
Internal Revenue Code. Payroll deductions for the purchase of stock may not
exceed 10% of an employee's base compensation or $25 thousand. The maximum
number of shares that may be issued under this plan is 1,000. This plan was
terminated as a result of the merger effective on the date of the merger.

     The employee stock purchase plans provide that eligible employees may
purchase stock at 85% of its fair value on specified dates. Under the plans, the
Company sold 198, 150, and 135 shares in fiscal years 1999, 1998, and 1997,
respectively.

                                       52
<PAGE>   53
                              SPEEDFAM-IPEC, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(17) STOCK OPTION PLANS

     The Company grants options to employees under the 1991 Employee Incentive
Stock Option Plan and the 1995 Stock Plan for Employees and Directors of the
Company. Under the plans, options may be granted to purchase up to 4,800 shares
of the Company's authorized but unissued common stock. Prior to fiscal year
1995, stock options were granted at 100% to 110% of the value of the Company's
common stock as determined by an established formula. In fiscal year 1995, stock
options were granted at 100% to 110% of the fair value of the Company's common
stock as determined by an independent appraiser. Subsequent to fiscal year 1995
stock options are granted at a price not less than the fair market value on the
date of grant. The stock options vest over five years (i.e., 20% each year) with
the exception of 164 stock options issued in 1992, which vested immediately. The
stock options expire 10 years after the grant date, except for 71 stock options
which expire five years after the grant date.

     The Company's 1992 Stock Option Plan (the "Option Plan") provides for the
issuance of incentive stock options and non-qualified stock options to purchase
up to 3,728 shares of common stock to employees, directors and consultants. The
grants vest over periods ranging up to five years. Under the Option Plan,
options may be granted to purchase shares of the Company's common stock at not
less than fair market value at the date of grant, and are exercisable for a
period not exceeding ten years from that date.

     The following table summarizes option activity and related information:

<TABLE>
<CAPTION>
                                                                                  WEIGHTED
                                                                                  AVERAGE
                                                                                  EXERCISE
                                                   OPTIONS     PRICE PER SHARE     PRICE
                                                  ---------    ---------------    --------
<S>                                               <C>          <C>                <C>
Balance at May 31, 1997.........................  3,435,382     $2.04 - 40.49      19.03
  Granted.......................................  1,127,550     16.20 - 59.00      29.41
  Exercised.....................................   (447,793)     2.04 - 37.86      12.57
  Canceled or expired...........................   (203,181)     2.04 - 56.50      23.98
                                                  ---------     -------------      -----
Balance at May 31, 1998.........................  3,911,958      2.04 - 59.00      20.34
  Granted.......................................    758,086      8.70 - 16.38      11.93
  Exercised.....................................   (222,290)     2.04 - 15.32       2.80
  Canceled or expired...........................   (508,347)     5.83 - 56.25      27.98
                                                  ---------     -------------      -----
Balance at May 31, 1999.........................  3,939,407     $2.04 - 59.00      20.29
                                                  =========     =============      =====
</TABLE>

                                       53
<PAGE>   54
                              SPEEDFAM-IPEC, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     The following table summarizes information about stock options outstanding
at May 31, 1999:

<TABLE>
<CAPTION>
                                    WEIGHTED AVERAGE
                      OPTIONS          REMAINING                              OPTIONS
   RANGE OF         OUTSTANDING     CONTRACTUAL LIFE   WEIGHTED-AVERAGE     EXERCISABLE     WEIGHTED-AVERAGE
EXERCISE PRICES   AT MAY 31, 1999       (YEARS)         EXERCISE PRICE    AT MAY 31, 1999    EXERCISE PRICE
---------------   ---------------   ----------------   ----------------   ---------------   ----------------
<S>               <C>               <C>                <C>                <C>               <C>
$ 2.04 -  5.90         257,217            4.90              $ 3.42             216,399           $ 3.12
$ 5.91 - 11.60         425,060            8.60              $ 9.69             119,390           $ 9.51
$11.81 - 17.70         418,928            9.30              $13.62              56,179           $13.40
$17.71 - 23.60       1,998,518            8.10              $19.69             838,055           $19.72
$23.61 - 29.50         172,619            9.60              $26.64              48,737           $27.98
$29.51 - 35.40           6,818            7.90              $30.76               4,438           $30.24
$35.41 - 41.30         616,772            8.90              $36.91             197,523           $36.93
$41.31 - 47.20          15,925            9.30              $45.03               3,167           $44.17
$47.21 - 53.10             800            8.30              $51.00                 160           $51.00
$53.11 - 59.00          26,750            6.50              $55.48              10,150           $55.84
                     ---------            ----              ------           ---------           ------
$ 2.04 - 59.00       3,939,407            8.30              $20.29           1,494,198           $19.14
==============       =========            ====              ======           =========           ======
</TABLE>

     On August 16, 1996, the Board of Directors of the Company approved a
repricing of options granted after January 20, 1995, and prior to August 16,
1996, with an exercise price exceeding $19.55 per share. Employees, officers and
directors holding options granted with an exercise price exceeding $19.55 per
share, who were active in their respective positions on August 15, 1996, could
elect to keep their options to buy common stock at the original grant price or
reprice their options to $19.55 per share, the fair market value of the common
stock on August 16, 1996. If the option holder elected to reprice the options to
$19.55 per share, the vesting commencement date was extended by periods ranging
from one to thirteen months. Options for 1,581 shares were repriced.

     As permitted under SFAS No. 123, the Company has elected to follow APB No.
25 in accounting for stock-based awards to employees. Accordingly, no
compensation cost has been recognized for the stock option and stock purchase
plans. Had compensation cost for the Company's stock option and stock purchase
plans been determined based on the fair value at the grant date consistent with
the provisions of SFAS No. 123, the Company's net loss and loss per share would
have been reduced to the pro forma amounts indicated below:

<TABLE>
<CAPTION>
                                                      1999         1998        1997
                                                    ---------    --------    --------
<S>                                                 <C>          <C>         <C>
Net loss attributable to common stockholders as
  reported........................................  $(139,949)    (29,640)    (13,811)
Pro forma net loss attributable to common
  stockholders....................................   (148,630)    (43,681)    (30,165)
Basic loss per share as reported..................      (4.84)      (1.08)       (.61)
Basic pro forma loss per share....................      (5.14)      (1.59)      (1.34)
Diluted loss per share as reported................      (4.84)      (1.08)       (.57)
Diluted pro forma loss per share..................      (5.14)      (1.59)      (1.25)
</TABLE>

     The pro forma net loss amounts presented above do not reflect the full
impact of calculating compensation cost for options because compensation cost is
reflected over the options vesting period of up to five years, and compensation
cost for options granted prior to June 1, 1995 is not considered.

     In calculating pro forma compensation, the fair value of each option is
estimated on the date of grant using the Black-Scholes option-pricing model,
with the following weighted average assumptions for grants made in fiscal years
1999, 1998, and 1997.

                                       54
<PAGE>   55
                              SPEEDFAM-IPEC, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

<TABLE>
<CAPTION>
                                                        1999      1998         1997
                                                        ----    ---------    ---------
<S>                                                     <C>     <C>          <C>
Dividend yield........................................  None         None         None
Expected volatility...................................    66%       61-90%       56-90%
Risk-free interest rate...............................  5.63    5.53-6.25    6.25-6.35
Expected lives........................................     3            3            3
                                                        ====    =========    =========
</TABLE>

     The weighted average fair value of options granted during the year was
$5.38 per share, $15.96 per share, and $13.56 per share for fiscal years 1999,
1998, and 1997, respectively.

(18) BUSINESS SEGMENT INFORMATION

     The Company classifies its products into three core business segments: (i)
the CMP Group, which is comprised of the Company's development and production of
chemical mechanical planarization systems; (ii) the Surface Technology Group,
which is comprised of the development and production of high-throughput
precision surface processing equipment used in thin film memory disk media; and
(iii) the Industrial Applications Group, which is comprised of the development
and production of high-throughput precision surface processing equipment used in
general industrial applications. Information concerning the Company's business
segments in fiscal years 1999, 1998, and 1997 is as follows:

<TABLE>
<CAPTION>
                                                        1999        1998       1997
                                                      ---------    -------    -------
<S>                                                   <C>          <C>        <C>
Revenue:
  Sales to unaffiliated customers:
     CMP Group......................................  $ 156,441    280,064    213,873
     Surface Technology Group.......................     40,380     71,900     78,909
     Industrial Applications Group..................     13,287     13,295     12,900
                                                      ---------    -------    -------
          Total net sales to unaffiliated
            customers...............................    210,108    365,259    305,682
  Commissions from affiliate:
     Surface Technology Group.......................      2,157      8,319     12,162
     Industrial Applications Group..................         60        690        268
                                                      ---------    -------    -------
          Total revenue.............................  $ 212,325    374,268    318,112
                                                      =========    =======    =======
Segment operating profit (loss):
  CMP Group.........................................  $ (89,527)    18,917     40,114
  Surface Technology Group..........................    (30,429)     6,751     13,263
  Industrial Applications Group.....................      1,186      1,738      2,628
                                                      ---------    -------    -------
          Total segment operating profit (loss).....   (118,770)    27,406     56,005
                                                      ---------    -------    -------
General corporate income (expense)..................    (27,066)   (24,339)   (42,689)
Interest income (expense)...........................      1,214      3,281       (261)
                                                      ---------    -------    -------
  Earnings (loss) from consolidated companies before
     income taxes...................................  $(144,622)     6,348     13,055
                                                      =========    =======    =======
Identifiable assets:
  CMP Group.........................................  $ 209,066    236,683
  Surface Technology Group..........................     23,982     53,519
  Industrial Applications Group.....................     10,168     12,435
  Investments in affiliates.........................     25,360     24,299
  Corporate assets..................................    175,202    248,718
                                                      ---------    -------
          Total identifiable assets.................  $ 443,778    575,653
                                                      =========    =======
</TABLE>

                                       55
<PAGE>   56
                              SPEEDFAM-IPEC, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

<TABLE>
<CAPTION>
                                                        1999        1998       1997
                                                      ---------    -------    -------
<S>                                                   <C>          <C>        <C>
Capital expenditures:
  CMP Group.........................................  $  29,825     46,675     18,489
  Surface Technology Group..........................        469        295        195
  Industrial Applications Group.....................         45        800         55
  Corporate.........................................      1,022      1,295      2,395
                                                      ---------    -------    -------
          Total capital expenditures................  $  31,361     49,065     21,134
                                                      =========    =======    =======
Depreciation expense:
  CMP Group.........................................  $  16,226      8,709      5,500
  Surface Technology Group..........................      1,250      1,912      1,727
  Industrial Applications Group.....................        321        321        201
  Corporate.........................................      1,305      1,494      1,524
                                                      ---------    -------    -------
          Total depreciation expense................  $  19,102     12,436      8,952
                                                      =========    =======    =======
</TABLE>

     Intersegment sales are not material. Segment operating profit represents
total revenue less cost of sales and operating expenses, and excludes equity in
net earnings of affiliates, general corporate expenses, interest income and
expense, and income taxes. Segment identifiable assets are those assets employed
in each segment's operation. Corporate assets consist primarily of cash and cash
equivalents, and investments.

     Information regarding the Company's operations in the United States and
internationally is presented below:

<TABLE>
<CAPTION>
                                                         1999       1998       1997
                                                       --------    -------    -------
<S>                                                    <C>         <C>        <C>
Third party sales (by location of customer):
  United States......................................  $131,376    245,779    233,948
  Europe.............................................    26,851     62,065     41,970
  Asia...............................................    49,643     59,318     38,607
  Other..............................................     4,455      7,106      3,587
                                                       --------    -------    -------
     Consolidated sales..............................  $212,325    374,268    318,112
                                                       ========    =======    =======
Long-lived assets:
  United States......................................  $128,917    127,212
  Europe.............................................       496        596
                                                       --------    -------
     Consolidated long-lived assets..................  $129,413    127,808
                                                       ========    =======
</TABLE>

                                       56
<PAGE>   57
                              SPEEDFAM-IPEC, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(19) QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

     Following is a summary of unaudited quarterly information:

<TABLE>
<CAPTION>
                                                      FIRST      SECOND      THIRD     FOURTH
                                                     QUARTER     QUARTER    QUARTER    QUARTER
                                                     --------    -------    -------    -------
<S>                                                  <C>         <C>        <C>        <C>
Year ended May 31, 1998:
  Total revenue....................................  $105,121    114,407     89,694     65,046
                                                     ========    =======    =======    =======
  Gross margin.....................................  $ 45,212     51,056     34,052     12,616
                                                     ========    =======    =======    =======
  Net earnings (loss)..............................  $ 10,248      5,907      2,678    (48,229)
                                                     ========    =======    =======    =======
  Net earnings (loss) attributable to common
     stockholders..................................  $ 10,187      5,846      2,617    (48,290)
  Basic earnings (loss) per share..................  $   0.39       0.22       0.09      (1.69)
                                                     ========    =======    =======    =======
  Diluted earnings (loss) per share................  $   0.36       0.20       0.09      (1.69)
                                                     ========    =======    =======    =======
Year ended May 31, 1999:
  Total revenue....................................  $ 64,468     47,748     51,523     48,586
                                                     ========    =======    =======    =======
  Gross margin.....................................  $ 21,620     11,635     13,577    (16,970)
                                                     ========    =======    =======    =======
  Net loss attributable to common stockholders.....  $ (7,310)   (17,000)   (15,729)   (99,910)
  Basic loss per share.............................  $  (0.25)     (0.59)     (0.54)     (3.42)
                                                     ========    =======    =======    =======
  Diluted loss per share...........................  $  (0.25)     (0.59)     (0.54)     (3.42)
                                                     ========    =======    =======    =======
</TABLE>

     The loss recorded by the Company in the fourth quarter of fiscal year 1999
includes $53,900 for merger, integration, and restructuring charges.

(20) FAIR VALUE OF FINANCIAL INSTRUMENTS

     The Company's financial instruments at May 31, 1999 and 1998 include cash
equivalents, short-term investments, trade receivables, trade payables, foreign
exchange contracts, and long-term debt. The carrying value of cash equivalents,
short-term investments, trade receivables, and trade payables approximates fair
value because of the short maturity of these instruments. Fair values relating
to foreign currency contracts (used for hedging purposes) reflect the estimated
net amounts that the Company would receive or pay to terminate the contracts at
the reporting date based on quoted market prices of comparable contracts and are
not material at May 31, 1999 and 1998. The fair value of the Company's long-term
debt is not materially different from its financial statement carrying value.
The fair value of the Company's long-term debt is estimated based on current
rates offered to the Company for debt of the same remaining maturities.

(21) OTHER INCOME (EXPENSE)

     Other income (expense) consisted of the following for fiscal years 1999,
1998, and 1997:

<TABLE>
<CAPTION>
                                                           1999       1998      1997
                                                          -------    ------    ------
<S>                                                       <C>        <C>       <C>
Expenses of canceled public offering....................  $    --        --      (493)
Interest income.........................................    9,691    10,089     1,649
Interest expense........................................   (8,477)   (6,808)   (1,910)
Insurance recovery on damaged shipment..................    2,500        --        --
Miscellaneous, net......................................      582       229      (408)
                                                          -------    ------    ------
                                                          $ 4,296     3,510    (1,162)
                                                          =======    ======    ======
</TABLE>

                                       57
<PAGE>   58
                              SPEEDFAM-IPEC, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(22) OTHER COMPREHENSIVE INCOME

     Changes in accumulated other comprehensive income (loss) are as follows:

<TABLE>
<CAPTION>
                                                            1999      1998      1997
                                                            -----    ------    ------
<S>                                                         <C>      <C>       <C>
Foreign currency translation adjustments:
  Balance at beginning of year............................  $(987)    1,582     4,623
  Adjustments for year....................................   1009    (2,569)   (3,041)
                                                            -----    ------    ------
  Balance at end of year..................................     22      (987)    1,582
                                                            =====    ======    ======
Unrealized holding gains on securities:
  Balance at beginning of year............................  $  --        --        --
  Adjustments for year....................................   (252)       --        --
                                                            -----    ------    ------
  Balance at end of year..................................   (252)       --        --
                                                            =====    ======    ======
Total accumulated other comprehensive income (loss):
  Balance at beginning of year............................  $(987)    1,582     4,623
  Adjustments for year....................................    757    (2,569)   (3,041)
                                                            -----    ------    ------
  Balance at end of year..................................   (230)     (987)    1,582
                                                            =====    ======    ======
</TABLE>

(23) RELATED PARTY TRANSACTIONS

     The Company had purchases of raw materials and services of approximately
$1,314, $6,600, and $7,400 from companies owned by stockholders of the Company
during the years ended May 31, 1999, 1998, and 1997, respectively. The Company
had payables related to these purchases of $1 and $286 at May 31, 1999 and 1998,
respectively.

                                       58
<PAGE>   59

                          INDEPENDENT AUDITORS' REPORT

Board of Directors
SpeedFam-IPEC Co., Ltd.:

     We have audited the accompanying consolidated balance sheets of
SpeedFam-IPEC Co., Ltd. and subsidiaries as of April 30, 1999 and 1998, and the
related consolidated statements of earnings, stockholders' equity and
comprehensive income, and cash flows for each of the years in the three-year
period ended April 30, 1999. These consolidated financial statements are the
responsibility of the management of SpeedFam-IPEC Co., Ltd. Our responsibility
is to express an opinion on these consolidated financial statements based on our
audits.

     We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

     In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
SpeedFam-IPEC Co., Ltd. and subsidiaries as of April 30, 1999 and 1998, and the
results of their operations and their cash flows for each of the years in the
three-year period ended April 30, 1999, in conformity with generally accepted
accounting principles.

KPMG LLP

June 18, 1999
Chicago, Illinois

                                       59
<PAGE>   60

                            SPEEDFAM-IPEC CO., LTD.

                          CONSOLIDATED BALANCE SHEETS
                            APRIL 30, 1999 AND 1998
                   (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
                                                                1999       1998
                                                              --------    -------
<S>                                                           <C>         <C>
                                     ASSETS
Current assets:
  Cash and cash equivalents.................................  $  4,058      8,883
  Short-term investments....................................     4,905      4,729
  Trade accounts and notes receivable, less allowance for
     doubtful accounts of $615 and $910 in 1999 and 1998,
     respectively...........................................    51,959     82,522
  Inventories...............................................    13,445     20,723
  Due from affiliated companies.............................     3,711      6,837
  Refundable income taxes...................................     1,467         --
  Deferred income taxes.....................................     1,445      1,073
  Prepaid expenses and other current assets.................       770      3,612
                                                              --------    -------
     Total current assets...................................    81,760    128,379
Investments in affiliates...................................       840        853
Property, plant, and equipment, net.........................    36,003     35,763
Deferred income taxes.......................................     2,075      2,164
Other assets................................................     7,844      6,123
                                                              --------    -------
                                                              $128,522    173,282
                                                              ========    =======

                      LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Short-term borrowings.....................................  $ 22,094     33,075
  Current portion of long-term debt.........................     3,896      4,411
  Current portion of obligations under capital leases.......       391        293
  Accounts payable..........................................    25,546     58,440
  Accrued expenses..........................................     5,862      6,656
  Income taxes payable......................................        --      3,890
                                                              --------    -------
     Total current liabilities..............................    57,789    106,765
                                                              --------    -------
Long-term liabilities:
  Long-term debt............................................    19,607     18,095
  Obligations under capital leases..........................       823        850
  Liability for employee benefits...........................     6,119      5,126
  Minority interest.........................................       657      1,360
                                                              --------    -------
     Total long-term liabilities............................    27,206     25,431
                                                              --------    -------
Stockholders' equity:
  Common stock, $3 par value, 240,000 shares authorized,
     198,000 shares issued and outstanding at April 30, 1999
     and 1998...............................................       664        664
  Retained earnings.........................................    40,326     41,162
  Accumulated other comprehensive income....................     2,537       (740)
                                                              --------    -------
     Total stockholders' equity.............................    43,527     41,086
                                                              --------    -------
     Total liabilities and stockholders' equity.............  $128,522    173,282
                                                              ========    =======
</TABLE>

          See accompanying notes to consolidated financial statements.
                                       60
<PAGE>   61

                            SPEEDFAM-IPEC CO., LTD.

                      CONSOLIDATED STATEMENTS OF EARNINGS
                   YEARS ENDED APRIL 30, 1999, 1998, AND 1997
                             (DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                1999       1998       1997
                                                              --------    -------    -------
<S>                                                           <C>         <C>        <C>
Net sales...................................................  $136,232    221,738    220,281
Cost of sales...............................................    99,276    165,152    153,508
                                                              --------    -------    -------
Gross margin................................................    36,956     56,586     66,773
Selling, general, and administrative expenses...............    34,626     45,622     45,815
                                                              --------    -------    -------
Operating profit............................................     2,330     10,964     20,958
                                                              --------    -------    -------
Other income (expense):
  Gains (losses) on sales of assets.........................        45       (956)      (222)
  Equity in net earnings (losses) of affiliates.............      (103)       114         48
  Interest income...........................................       604        426        401
  Interest expense..........................................    (1,190)    (1,114)      (751)
  Miscellaneous, net........................................      (832)     1,404      1,398
                                                              --------    -------    -------
                                                                (1,476)      (126)       874
                                                              --------    -------    -------
Earnings before income taxes and minority interest..........       854     10,838     21,832
Income tax expense..........................................     1,332      5,041     10,250
                                                              --------    -------    -------
Earnings (loss) before minority interest....................      (478)     5,797     11,582
Minority interest...........................................       684         66       (569)
                                                              --------    -------    -------
Net earnings................................................  $    206      5,863     11,013
                                                              ========    =======    =======
</TABLE>

          See accompanying notes to consolidated financial statements.
                                       61
<PAGE>   62

                            SPEEDFAM-IPEC CO., LTD.

                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                            AND COMPREHENSIVE INCOME
                   YEARS ENDED APRIL 30, 1999, 1998, AND 1997
                             (DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                           ACCUMULATED
                                                                              OTHER
                                                    COMMON    RETAINED    COMPREHENSIVE
                                                    STOCK     EARNINGS    INCOME (LOSS)    TOTAL
                                                    ------    --------    -------------    ------
<S>                                                 <C>       <C>         <C>              <C>
BALANCE AT APRIL 30, 1996.........................   $664      26,943         9,484        37,091
                                                                                           ------
Comprehensive income
  Net earnings....................................     --      11,013            --        11,013
  Foreign currency translation adjustments........     --          --        (6,529)       (6,529)
  Unrealized gains on securities..................     --          --            58            58
                                                                                           ------
Total comprehensive income........................                                          4,542
                                                                                           ------
Cash dividends....................................     --        (907)           --          (907)
                                                     ----      ------        ------        ------
BALANCE AT APRIL 30, 1997.........................    664      37,049         3,013        40,726
                                                                                           ------
Comprehensive income
  Net earnings....................................     --       5,863            --         5,863
  Foreign currency translation adjustments........     --          --        (3,661)       (3,661)
  Unrealized losses on securities.................     --          --           (92)          (92)
                                                                                           ------
Total comprehensive income........................                                          2,110
                                                                                           ------
Cash dividends....................................     --      (1,750)           --        (1,750)
                                                     ----      ------        ------        ------
BALANCE AT APRIL 30, 1998.........................    664      41,162          (740)       41,086
                                                                                           ------
Comprehensive income
  Net earnings....................................     --         206            --           206
  Foreign currency translation adjustments........     --          --         3,185         3,185
  Unrealized gains on securities..................     --          --            92            92
                                                                                           ------
Total comprehensive income........................                                          3,483
                                                                                           ------
Cash dividends....................................     --      (1,042)           --        (1,042)
                                                     ----      ------        ------        ------
BALANCE AT APRIL 30, 1999.........................   $664      40,326         2,537        43,527
                                                     ====      ======        ======        ======
</TABLE>

          See accompanying notes to consolidated financial statements.
                                       62
<PAGE>   63

                            SPEEDFAM-IPEC CO., LTD.

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                   YEARS ENDED APRIL 30, 1999, 1998, AND 1997
                             (DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                1998       1997       1996
                                                              --------    -------    -------
<S>                                                           <C>         <C>        <C>
Cash flows from operating activities:
  Net earnings..............................................  $    206      5,863     11,013
  Adjustments to reconcile net earnings to net cash provided
     by (used in) operating activities:
     Equity in net (earnings) losses of affiliates..........       103       (114)       (48)
     Depreciation and amortization..........................     5,122      5,338      3,699
     Deferred income tax expense (benefit)..................         5     (1,211)      (810)
     Losses (gains) on sales of assets......................       (45)       956        222
     Other, net.............................................       142        165        291
     Changes in net assets and liabilities:
       Trade accounts and notes receivable and due from
          affiliates........................................    40,375    (16,949)   (29,579)
       Inventories..........................................     8,863      3,334     (9,288)
       Prepaid expenses and other assets....................       452     (2,389)    (1,679)
       Accounts payable.....................................   (36,885)    (3,597)    27,212
       Accrued expenses and other liabilities...............    (1,817)    (2,391)     6,441
       Income taxes, net....................................    (3,895)    (1,585)    (2,053)
                                                              --------    -------    -------
          Net cash provided by (used in) operating
            activities......................................    12,626    (12,580)     5,421
                                                              --------    -------    -------
Cash flows from investing activities:
  Capital expenditures......................................    (1,642)   (14,351)   (18,135)
  Proceeds from sales of assets.............................        74        572        454
  Other investing activities................................       (16)    (2,503)       303
                                                              --------    -------    -------
          Net cash used in investing activities.............    (1,584)   (16,282)   (17,378)
                                                              --------    -------    -------
Cash flows from financing activities:
  Dividends paid............................................    (1,042)    (1,750)      (907)
  Short-term borrowings, net................................   (13,793)    23,086      5,876
  Principal payments under capital lease obligations........       (39)       546       (128)
  Proceeds from long-term debt..............................     6,131     13,866      8,226
  Principal payments on long-term borrowings................    (7,583)    (3,909)    (3,350)
                                                              --------    -------    -------
          Net cash provided by (used in) financing
            activities......................................   (16,326)    31,839      9,717
                                                              --------    -------    -------
Effect of foreign currency rate changes on cash.............       459     (1,191)    (1,656)
                                                              --------    -------    -------
          Net increase (decrease) in cash and cash
            equivalents.....................................    (4,825)     1,786     (3,896)
Cash and cash equivalents at beginning of year..............     8,883      7,097     10,993
                                                              --------    -------    -------
Cash and cash equivalents at end of year....................  $  4,058      8,883      7,097
                                                              ========    =======    =======
Supplemental cash flow information:
  Cash paid during the year for:
     Interest...............................................  $  1,003      1,135        813
                                                              ========    =======    =======
     Income taxes...........................................  $  6,322      8,043     12,794
                                                              ========    =======    =======
  Capital lease obligation increase during the period.......  $    263        528      1,034
                                                              ========    =======    =======
</TABLE>

          See accompanying notes to consolidated financial statements.
                                       63
<PAGE>   64

                            SPEEDFAM-IPEC CO., LTD.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                            APRIL 30, 1999 AND 1998
                             (DOLLARS IN THOUSANDS)

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     SpeedFam-IPEC Co., Ltd. (the Company), formerly SpeedFam Co., Ltd., was
incorporated in 1971 as a joint venture owned equally by two corporate
shareholders, Obara Corporation, a Japanese company, and SpeedFam-IPEC, Inc.,
formerly SpeedFam International, Inc., a U.S. company. The Company changed its
name after the merger of SpeedFam International, Inc. and Integrated Process
Equipment Corp., Inc. effective in April, 1999.

     The Company and its domestic subsidiaries and affiliated companies conduct
operations primarily in Japan, but have subsidiaries and branches in Taiwan,
South Korea, India, Singapore, Hong Kong, Malaysia, and China.

     The Company and its subsidiaries and affiliates are engaged in the design,
engineering, manufacture, and distribution mainly of lapping and polishing
equipment and consumables, through-feed grinders, cleaning machines, and
measuring equipment used in high technology industries.

  (a) Basis of Presentation

     The Company and its consolidated Japanese subsidiaries maintain their books
of account in conformity with the financial accounting standards of Japan. The
Company's non-Japanese subsidiaries maintain their books of account in
conformity with the financial accounting standards of the countries in which
they are located. The consolidated financial statements presented herein in U.S.
dollars have been adjusted to conform to U.S. generally accepted accounting
principles.

  (b) Principles of Consolidation

     The consolidated financial statements include the accounts of the Company
and the following subsidiaries:

<TABLE>
<CAPTION>
                                             PERCENTAGE
                                                 OF                            FISCAL
SUBSIDIARIES                                 OWNERSHIP        LOCATION        YEAR END
------------                                 ----------      -----------      --------
<S>                                          <C>             <C>              <C>
SpeedFam Clean Systems Co., Ltd. ..........     67.50%(*)          Japan      March 31
Saku Seiki Co., Ltd. ......................     74.38(**)          Japan      March 31
SpeedFam-IPEC Taiwan Ltd. .................    100.00             Taiwan      March 31
SpeedFam-IPEC Korea Ltd. ..................    100.00        South Korea      March 31
SpeedFam-IPEC India (Pvt.) Ltd. ...........     82.00              India      March 31
SpeedFam (Malaysia) SDN BHD................    100.00           Malaysia      March 31
SpeedFam-IPEC (S.E.A.) Pte. Ltd. ..........    100.00          Singapore      March 31
</TABLE>

---------------
(*)  62.50% (1998) and 61.25% (1997)

(**) 74.38% (1998) and 53.54% (1997)

     All significant intercompany balances and transactions have been
eliminated. The Company's fiscal year ends on April 30.

     The Company's investments in the common stock of affiliates, Met Coil Ltd.
(50% owned); GRT Co. Ltd. (23.08% owned); and Xevios Corporation (50% owned),
are accounted for by the equity method.

     The investment in Clean Technology Co. Ltd., a 27.5% owned affiliate of
SpeedFam Clean Systems Co., Ltd., and 22.5% owned directly by the Company, is
also accounted for by the equity method.

                                       64
<PAGE>   65
                            SPEEDFAM-IPEC CO., LTD.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)

  (c) Cash and Cash Equivalents

     Cash and cash equivalents include deposits in banks and highly liquid
short-term investments with original maturities of three months or less. These
highly liquid short-term investments are carried at cost which approximates
market.

  (d) Investments

     The Company classifies its investments in debt and equity securities into
one of three categories: trading, available-for-sale, or held-to-maturity.
Trading securities are bought and held principally for the purpose of selling
them in the near term. Held-to-maturity securities are those securities in which
the Company has the ability and intent to hold the security until maturity. All
other securities not included in trading or held-to-maturity are classified as
available-for-sale.

     Trading and available-for-sale securities are recorded at fair value.
Held-to-maturity securities are recorded at amortized cost, adjusted for the
amortization or accretion of premiums or discounts. Unrealized holding gains and
losses, net of the related tax effect, on available-for-sale securities are
excluded from earnings and are reported as a separate component of stockholders'
equity until realized. Realized gains and losses from the sale of
available-for-sale securities are determined on a specific identification basis.

     A decline in the market value of any available-for-sale or held-to-maturity
security below cost that is deemed to be other than temporary results in a
reduction in carrying amount to fair value. The impairment is charged to
earnings and a new cost basis for the security is established. Premiums and
discounts are amortized or accreted over the life of the related
held-to-maturity security as an adjustment to yield using the effective interest
method. Dividend and interest income are recognized when earned.

  (e) Property, Plant, and Equipment

     Property, plant, and equipment are stated at cost. Depreciation is provided
on the declining balance method over the estimated useful lives of the assets.
Depreciation expense was $5,014, $5,256 and $3,542 in fiscal years 1999, 1998,
and 1997, respectively. The estimated useful lives of the assets are as follows:

<TABLE>
<S>                                                           <C>
Buildings and improvements..................................  3 to 60 years
Machinery and equipment.....................................  3 to 13 years
Furniture and fixtures......................................  2 to 20 years
Leasehold improvements......................................        2 years
                                                              =============
</TABLE>

  (f) Inventories

     Inventories are stated at the lower of cost, determined principally by the
first-in, first-out (FIFO) method, or market.

  (g) Income Taxes

     Income taxes are accounted for under the asset and liability method. Under
the asset and liability method, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled. The
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.

                                       65
<PAGE>   66
                            SPEEDFAM-IPEC CO., LTD.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)

  (h) Revenue Recognition

     Sales of the Company's products are recorded upon shipment.

  (i) Warranty Costs

     Generally, the Company provides a one-year warranty against manufacturer's
defects on all machines sold. Provision for warranty expense is provided based
upon an estimate derived from historical experience factors.

  (j) Foreign Currency Translation

     The local currency is the functional currency for all non-Japan operations.
Accordingly, translation gains or losses related to the non-Japan subsidiary's
financial statements are included as a component of stockholders' equity.

  (k) Significant Customer

     The Company had sales to a Japanese company that amounted to approximately
10.3%, 20.3%, and 12.5% of net sales in fiscal years 1999, 1998, and 1997,
respectively.

  (l) Research and Development

     Research and development expense amounted to approximately $7,379, $7,481,
and $11,488 in fiscal years 1999, 1998, and 1997, respectively. Such
expenditures are expensed as incurred.

  (m) Use of Estimates

     The preparation of financial statements in conformity with generally
accepted accounting principles requires the Company's management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent liabilities at the date of the
financial statements, and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.

  (n) Reclassifications

     Certain amounts in the fiscal year 1998 and 1997 financial statements have
been reclassified to conform with the fiscal year 1999 financial statement
presentation.

  (o) Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of

     The Company continually evaluates whether events and circumstances have
occurred that indicate the estimated useful life of long-lived assets or
intangible assets may warrant revision or that the remaining balance may not be
recoverable. When factors indicate that the asset should be evaluated for
possible impairment, the Company uses an estimate of the related undiscounted
net cash flows generated by the asset over the remaining estimated life of the
asset in measuring whether the asset is recoverable. Material factors which may
alter the useful life of the asset or lead to a determination that the balance
may not be recoverable include effects of new technologies, obsolescence,
demand, competition, and other economic factors. If such assets are considered
to be impaired, the impairment to be recognized is measured by the amount by
which the carrying amount of the assets exceed the fair value of the assets.

     Assets to be disposed of are reported at the lower of the carrying amount
or fair value less costs to sell.

                                       66
<PAGE>   67
                            SPEEDFAM-IPEC CO., LTD.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)

  (p) Comprehensive Income

     Effective May 1, 1998, the Company adopted Statement of Financial
Accounting Standard No. 130, "Reporting Comprehensive Income," which established
standards to report and display comprehensive income and its components in a
full set of general purpose financial statements.

(2) INVENTORIES

     Inventories at the end of fiscal years 1999 and 1998 are summarized as
follows:

<TABLE>
<CAPTION>
                                                             1999       1998
                                                            -------    ------
<S>                                                         <C>        <C>
Raw materials.............................................  $ 1,270     1,001
Work-in-process...........................................    9,250    13,788
Finished goods............................................    2,925     5,934
                                                            -------    ------
     Total inventories....................................  $13,445    20,723
                                                            =======    ======
</TABLE>

(3) INVESTMENTS

     Investments at the end of fiscal years 1999 and 1998 are summarized as
follows:

<TABLE>
<CAPTION>
                                                               1999     1998
                                                              ------    -----
<S>                                                           <C>       <C>
Held-to-maturity debt securities, at amortized cost.........  $   96      111
Time deposits...............................................   4,809    4,618
                                                              ------    -----
     Total short-term investments...........................   4,905    4,729
                                                              ------    -----
Available-for-sale equity securities, at fair value.........     864      582
Held-to-maturity debt securities, at amortized cost.........      29       --
                                                              ------    -----
     Total investments, included in other assets............     893      582
                                                              ------    -----
     Total investments......................................  $5,798    5,311
                                                              ======    =====
</TABLE>

     The amortized cost, gross unrealized holding gains, gross unrealized
holding losses, and fair value of available-for-sale and held-to-maturity
securities at the end of fiscal years 1999 and 1998 are as follows:

<TABLE>
<CAPTION>
                                                              GROSS         GROSS
                                                            UNREALIZED    UNREALIZED
                                               AMORTIZED     HOLDING       HOLDING      FAIR
                                                 COST         GAINS         LOSSES      VALUE
                                               ---------    ----------    ----------    -----
<S>                                            <C>          <C>           <C>           <C>
1999:
  Available-for-sale equity securities.......    $526          393           (55)        864
  Held-to-maturity debt securities...........     125           --            --         125
1998:
  Available-for-sale equity securities.......     445          194           (57)        582
  Held-to-maturity debt securities...........    $111           --            --         111
                                                 ====          ===           ===         ===
</TABLE>

     No investments classified as available-for-sale were sold during fiscal
years 1999 and 1998. The Company does not hold securities for trading purposes.

                                       67
<PAGE>   68
                            SPEEDFAM-IPEC CO., LTD.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)

(4) PROPERTY, PLANT, AND EQUIPMENT

     Property, plant, and equipment at the end of fiscal years 1999 and 1998 are
summarized as follows:

<TABLE>
<CAPTION>
                                                            1999       1998
                                                          --------    -------
<S>                                                       <C>         <C>
Land....................................................  $ 12,543     11,351
Buildings and improvements..............................    16,807     15,153
Machinery and equipment.................................    27,293     23,202
Furniture and fixtures..................................     4,271      3,723
Construction in progress................................       136        469
                                                          --------    -------
                                                            61,050     53,898
     Less accumulated depreciation......................   (25,047)   (18,135)
                                                          --------    -------
Net property, plant, and equipment......................  $ 36,003     35,763
                                                          ========    =======
</TABLE>

(5) INCOME TAXES

     Earnings before income taxes and minority interest are as follows:

<TABLE>
<CAPTION>
                                                           1999       1998      1997
                                                          -------    ------    ------
<S>                                                       <C>        <C>       <C>
Japan...................................................  $(2,937)    4,429    16,592
Non-Japan...............................................    3,791     6,409     5,240
                                                          -------    ------    ------
     Total..............................................  $   854    10,838    21,832
                                                          =======    ======    ======
</TABLE>

     The provision (benefit) for income taxes is as follows:

<TABLE>
<CAPTION>
                                                           1999       1998      1997
                                                          -------    ------    ------
<S>                                                       <C>        <C>       <C>
Current:
  Japan.................................................  $   155     4,604     9,699
  Non-Japan.............................................    1,172     1,648     1,361
                                                          -------    ------    ------
                                                            1,327     6,252    11,060
Deferred:
  Japan.................................................       45    (1,291)     (810)
  Non-Japan.............................................      (40)       80        --
                                                          -------    ------    ------
     Total..............................................  $ 1,332     5,041    10,250
                                                          =======    ======    ======
</TABLE>

                                       68
<PAGE>   69
                            SPEEDFAM-IPEC CO., LTD.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)

     The tax effects of temporary differences that give rise to the net deferred
tax asset at the end of fiscal years 1999 and 1998 are attributable to:

<TABLE>
<CAPTION>
                                                              1999      1998
                                                             -------    -----
<S>                                                          <C>        <C>
Property, plant, and equipment.............................  $   (97)    (153)
Inventory..................................................      885      426
Allowance for doubtful accounts............................      (24)     (35)
Accrued employee benefits..................................    2,356    1,880
Accrued vacation...........................................      142      215
Business tax...............................................     (142)     265
Long-term prepaid expenses.................................      136      183
Net operating loss carryforwards...........................    1,487      383
Valuation allowance........................................   (1,404)    (378)
Other......................................................      181      451
                                                             -------    -----
     Net deferred tax asset................................  $ 3,520    3,237
                                                             =======    =====
</TABLE>

     The Company recorded a valuation allowance of $1,404 and $378 for deferred
tax assets at the end of fiscal years 1999 and 1998. Net deferred tax assets are
considered realizable due to the expectation of future taxable income. Deferred
income taxes included as a component of stockholders' equity related to
unrealized gains on marketable securities aggregated $141 and $33 at the end of
fiscal years 1999 and 1998, respectively.

     At April 30, 1999, certain subsidiaries have net operating loss
carryforwards for income tax purposes of $3,919 which are available to offset
future taxable income, if any, through fiscal year 2003.

     Amendments to Japanese tax regulations were enacted into law on March 24,
1999 and March 31, 1998. As a result of these amendments, the normal income tax
rate was reduced from approximately 47% to 42% effective for the Company's
fiscal year 2000 and approximately 51% to 47% effective for the Company's fiscal
year 1999. Current income taxes were calculated at the rate of 47% and 51% in
effect for the years ended April 30, 1999 and 1998, respectively. Deferred
income taxes were calculated at the rate of 42% and 47% for the years ended
April 30, 1999 and 1998, respectively.

     A reconciliation between the Company's effective tax rate and the expected
tax rate of 47% in 1999 and 51% in 1998 and 1997 in Japan on earnings before
income taxes and minority interest is as follows:

<TABLE>
<CAPTION>
                                                              1999    1998    1997
                                                              ----    ----    ----
<S>                                                           <C>     <C>     <C>
Expected income tax rate....................................   47%     51%     51%
Expenses not deductible for tax purposes....................   16       5       4
Equity in earnings of affiliates............................    7      (1)     --
Differences of non-Japan and "expected" tax rates...........  (78)    (15)     (6)
Tax credit for research and development.....................   --      --      (3)
Effect of the income tax rate reduction.....................   46       3      --
Increase in the valuation allowance.........................  114       4      --
Other, net..................................................    4      --       1
                                                              ---     ---      --
Effective income tax rate...................................  156%     47%     47%
                                                              ===     ===      ==
</TABLE>

     No provision is made for income taxes on undistributed earnings of
non-Japan subsidiaries. The Company believes that the amount of income taxes
that would be incurred if these earnings were remitted would not be significant
because of available tax credits.

                                       69
<PAGE>   70
                            SPEEDFAM-IPEC CO., LTD.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)

     The Company's corporate tax returns through the end of fiscal year 1997
have been examined by the Japanese tax authorities.

(6) SHORT-TERM BORROWINGS

     Short-term borrowings are summarized as follows:

<TABLE>
<CAPTION>
                                                             1999       1998
                                                            -------    ------
<S>                                                         <C>        <C>
Bank borrowings, including overdraft......................  $16,713    26,915
Trade notes discounted at banks, with recourse............    5,381     6,160
                                                            -------    ------
                                                            $22,094    33,075
                                                            =======    ======
</TABLE>

     Short-term borrowings are secured by trade notes receivable with a net book
value of $5,381 at the end of fiscal year 1999. The short-term borrowings had
weighted average interest rates of 1.51%, 1.65%, and 1.89% in fiscal years 1999,
1998, and 1997, respectively.

(7) LONG-TERM DEBT

     Long-term debt consists of the following:

<TABLE>
<CAPTION>
                                                             1999       1998
                                                            -------    ------
<S>                                                         <C>        <C>
Mortgage debentures:
  2nd Series, due September 1999, fixed interest rate of
     5.7%.................................................       --     2,259
  3rd Series, due December 2000, fixed interest rate of
     1.7%.................................................      838       753
  4th Series, due September 2005, fixed interest rate of
     1.8%.................................................    2,514        --
Loans from banks and other financial institutions,
  maturing 1998 to 2004, with weighted average interest
  rates of 2.40% and 2.75% in 1999 and 1998,
  respectively............................................   20,151    19,494
                                                            -------    ------
     Total long-term debt.................................   23,503    22,506
  Less current portion of long-term debt..................    3,896     4,411
                                                            -------    ------
     Net long-term debt...................................  $19,607    18,095
                                                            =======    ======
</TABLE>

     The mortgage debentures are secured by land and buildings with a net book
value of $6,639 at the end of fiscal year 1999.

     At the end of fiscal year 1999, the Company has provided guarantees for up
to $45 of bank borrowings by SpeedFam-IPEC India (Pvt.) Ltd., a subsidiary of
the Company. The Company does not anticipate any loss from these arrangements.

     Annual maturities of long-term debt are as follows:

<TABLE>
<CAPTION>
FISCAL YEAR                                                  AMOUNT
-----------                                                  -------
<S>                                                          <C>
2000.......................................................  $ 3,896
2001.......................................................    4,621
2002.......................................................    3,371
2003.......................................................    2,718
2004.......................................................    2,374
2005 and thereafter........................................    6,523
                                                             -------
                                                             $23,503
                                                             =======
</TABLE>

                                       70
<PAGE>   71
                            SPEEDFAM-IPEC CO., LTD.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)

(8) CAPITAL LEASES

     The Company is obligated under various capital leases for certain equipment
which expire at various dates during the next five years. At the end of fiscal
year 1999, the gross amount of equipment and related accumulated amortization
recorded under capital leases was as follows:

<TABLE>
<S>                                                           <C>
Equipment...................................................  $2,029
Less accumulated amortization...............................    (686)
                                                              ------
                                                              $1,343
                                                              ======
</TABLE>

     Amortization of assets held under capital leases is included within
depreciation expense. Future minimum capital lease payments as of the end of
fiscal year 1999 are as follows:

<TABLE>
<CAPTION>
FISCAL YEAR                                                   AMOUNT
-----------                                                   ------
<S>                                                           <C>
2000........................................................  $  431
2001........................................................     431
2002........................................................     276
2003........................................................      91
2004........................................................      65
                                                              ------
     Total minimum lease payments...........................   1,294
  Less amount representing interest (at rate of 3.02%)......     (80)
                                                              ------
Present value of net minimum capital lease payments.........   1,214
  Less current installments of obligations under capital
     leases.................................................    (391)
                                                              ------
Obligation under capital leases, excluding current
  installments..............................................  $  823
                                                              ======
</TABLE>

(9) COMMITMENTS AND CONTINGENCIES

     The Company and its subsidiaries occupy certain manufacturing and office
facilities and use certain equipment under noncancelable operating leases
expiring at various dates through fiscal year 2003. Rental expense aggregated
approximately $1,678, $1,861 and $1,728 in fiscal years 1999, 1998, and 1997,
respectively.

     Future minimum lease payments for all noncancelable operating leases having
a remaining term in excess of one year at the end of fiscal year 1999 are as
follows:

<TABLE>
<CAPTION>
FISCAL YEAR                                                   AMOUNT
-----------                                                   ------
<S>                                                           <C>
2000........................................................  $  671
2001........................................................     370
2002........................................................     234
2003........................................................     118
2004 and thereafter.........................................      23
                                                              ------
     Total..................................................  $1,416
                                                              ======
</TABLE>

(10) PENSION AND SEVERANCE BENEFITS

     The Company maintains pension and severance benefit plans for its
employees. Employees who leave the Company upon retirement because of age or
sever their connection with the Company for reasons other than dismissal for
cause are entitled to lump-sum payments based on their current rate of pay and
length of service.

                                       71
<PAGE>   72
                            SPEEDFAM-IPEC CO., LTD.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)

     Effective June 1, 1984 the Company adopted an insured pension plan which
also covers employees of SpeedFam Clean Systems Co., Ltd., the terms of which
provide for the ultimate funding of retirement benefits when due. Premiums paid
under the insured plan constitute the funding of the current costs of the
liability under the plan and the funding of the related past service costs over
a 15-year period.

     The Company adopted Statement of Financial Accounting Standards No. 132,
"Employees' Disclosures about Pensions and Other Postretirement Benefits" (SFAS
132) in fiscal year 1999. SFAS 132 revises employers' disclosures about pensions
and other postretirement benefits and does not change the recognition or
measurement of the Plan. SFAS 132 does not have an effect on the Company's
consolidated financial position and results of operations. All prior year
disclosures have been restated to conform with the provisions of SFAS 132.

     Reconciliations of beginning and ending balances of benefit obligations and
the fair value of the plan assets are as follows:

<TABLE>
<CAPTION>
                                                              PENSION BENEFITS
                                                              -----------------
                                                               1999       1998
                                                              -------    ------
<S>                                                           <C>        <C>
Change in benefit obligation:
  Benefit obligation at beginning of period.................  $2,217     1,663
  Service cost..............................................     199       177
  Interest cost.............................................      60        90
  Actuarial (gains) losses..................................    (152)      510
  Benefits paid.............................................    (462)     (113)
  Foreign currency translation..............................     222      (110)
                                                              ------     -----
Benefit obligation at end of year...........................  $2,084     2,217
                                                              ======     =====
Change in plan assets:
  Fair value of Plan assets at beginning of period..........  $1,623     1,579
  Actual return on plan assets..............................     (41)       40
  Employer contributions....................................     245       188
  Benefits paid.............................................    (462)     (113)
  Foreign currency translation..............................     163       (71)
                                                              ------     -----
Fair value of Plan assets at end of year....................  $1,528     1,623
                                                              ======     =====
Funded status...............................................  $ (556)     (594)
Unrecognized net transition obligation......................     125       122
Unrecognized net actuarial loss.............................     461       511
                                                              ------     -----
     Net amount recognized..................................  $   30        39
                                                              ======     =====
Amounts recognized in the statement of financial position
  consist of:
  Accrued benefit liability.................................  $  (35)      (31)
  Intangible assets.........................................      65        70
                                                              ------     -----
Net amount recognized.......................................  $   30        39
                                                              ======     =====
Actuarial present value of accumulated benefit
  obligations...............................................  $1,562     1,655
                                                              ======     =====
</TABLE>

                                       72
<PAGE>   73
                            SPEEDFAM-IPEC CO., LTD.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)

     The components of net periodic pension cost for the insured pension plan
are shown below.

<TABLE>
<CAPTION>
                                                              1999    1998    1997
                                                              ----    ----    ----
<S>                                                           <C>     <C>     <C>
Components of net periodic pension cost:
  Service cost..............................................  $212    166     150
  Interest cost.............................................    63     85      79
  Expected return on Plan assets............................   (39)   (46)    (43)
  Amortization of transition assets.........................    11     13      13
  Recognized actuarial loss.................................    26     --      --
                                                              ----    ---     ---
     Net periodic pension cost..............................  $273    218     199
                                                              ====    ===     ===
Actuarial assumptions:
  Weighted average discount rate............................   3.5%   3.5%    5.5%
  Expected return on Plan assets............................   2.8%   2.8%    3.0%
  Rate of compensation increase.............................   2.8%   2.8%    3.0%
                                                              ====    ===     ===
</TABLE>

     The measurement date of the benefit obligations and the plan assets has
been changed from April 30 to January 31. The period of calculation in fiscal
year 1999 was for the nine months ended January 31, 1999. The effect of the
change of the measurement date is immaterial.

     Plan assets represent the Company's shares of funds invested by a trustee
in pooled accounts comprised of cash in banks, securities, and real estate.

     A separate retirement benefits program for directors and statutory auditors
is not covered by the pension plan described above. The program provides that
directors and statutory auditors who retire or sever their connection with the
Company are entitled to lump-sum payments based on current rates of pay,
determined according to their title and the length of service. Directors and
statutory auditors may also be granted, at the discretion of the Company,
additional lump-sum payments for meritorious service. It is not the policy of
the Company to fund these retirement and severance benefits, but provision has
been made in the financial statements for the estimated accrued liabilities
under the plan. The liability related to these retirement benefits included in
the accompanying consolidated balance sheets at the end of fiscal years 1999 and
1998 amounted to $5,794 and $4,905, respectively. The plan was amended during
fiscal year 1996 and the resulting past service costs of $1,008 are being
amortized over a period of five years. Unamortized past service cost at the end
of fiscal years 1999 and 1998 amounting to $194 and $349, respectively, is
classified as other assets in the accompanying consolidated balance sheets. The
retirement benefit expenses amounted to $495, $1,492, and $1,545 in fiscal years
1999, 1998, and 1997, respectively.

     Two subsidiaries of the Company have separate employee retirement and
severance plan arrangements. Payments with respect to voluntary severance are
less in amount than payments for involuntary severance and retirement. The
subsidiaries have recorded estimated liabilities in the accompanying
consolidated balance sheets at the end of fiscal years 1999 and 1998 of $326 and
$221, respectively, based upon the amount, net of the benefits to be paid by a
government-sponsored small enterprise mutual aid retirement fund, which would be
payable if all employees had to retire voluntarily. Plan assets plus the accrued
liability approximate vested benefits. The expense related to these employee
retirement and severance plans amounted to $143, $28, and $67 in fiscal years
1999, 1998, and 1997, respectively. The Company believes that the effect of not
adopting SFAS No. 87, "Employers' Accounting for Pensions," for these plans is
not material to the consolidated financial statements.

                                       73
<PAGE>   74
                            SPEEDFAM-IPEC CO., LTD.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)

(11) LEGAL RESERVE AND CASH DIVIDENDS

     The Japanese Commercial Code provides that earnings in an amount equal to
at least 10% of retained earnings be appropriated as a legal reserve, until such
reserve equals 25% of stated common stock. This legal reserve is not available
for dividends but may be used to reduce a deficit or may be transferred to
stated common stock. Certain non-Japanese subsidiaries are also required to
appropriate their earnings to legal reserves under the laws of the respective
countries in which they operate. The legal reserve included as a component of
retained earnings at the end of fiscal years 1999 and 1998 amounted to $1,453
and $670, respectively.

(12) OTHER COMPREHENSIVE INCOME

     Changes in accumulated other comprehensive income (loss) are as follows:

<TABLE>
<CAPTION>
                                                            1999      1998      1997
                                                           ------    ------    ------
<S>                                                        <C>       <C>       <C>
Foreign currency translation adjustments:
  Balance at beginning of year...........................  $ (844)    2,817     9,346
  Adjustments for year...................................   3,185    (3,661)   (6,529)
                                                           ------    ------    ------
  Balance at end of year.................................  $2,341      (844)    2,817
                                                           ======    ======    ======
Unrealized holding gains on securities:
  Balance at beginning of year...........................  $  104       196       138
  Adjustments for year...................................      92       (92)       58
                                                           ------    ------    ------
  Balance at end of year.................................  $  196       104       196
                                                           ======    ======    ======
Total accumulated other comprehensive income (loss):
  Balance at beginning of year...........................  $ (740)    3,013     9,484
  Adjustments for year...................................   3,277    (3,753)   (6,471)
                                                           ------    ------    ------
  Balance at end of year.................................  $2,537      (740)    3,013
                                                           ======    ======    ======
</TABLE>

<TABLE>
<CAPTION>
                                                  BEFORE TAX    TAX (EXPENSE)    NET-OF-TAX
                                                    AMOUNT       OR BENEFIT        AMOUNT
                                                  ----------    -------------    ----------
<S>                                               <C>           <C>              <C>
1997
  Foreign currency translation adjustments......   $(6,529)           --           (6,529)
  Net unrealized gains..........................       118           (60)              58
                                                   -------          ----           ------
  Other comprehensive income (loss).............   $(6,411)          (60)          (6,471)
                                                   =======          ====           ======
1998
  Foreign currency translation adjustments......   $(3,661)           --           (3,661)
  Net unrealized losses.........................      (201)          109              (92)
                                                   -------          ----           ------
  Other comprehensive income (loss).............   $(3,862)          109           (3,753)
                                                   =======          ====           ======
1999
  Foreign currency translation adjustments......   $ 3,185            --            3,185
  Net unrealized gains..........................       201          (109)              92
                                                   -------          ----           ------
  Other comprehensive income (loss).............   $ 3,386          (109)           3,277
                                                   =======          ====           ======
</TABLE>

                                       74
<PAGE>   75
                            SPEEDFAM-IPEC CO., LTD.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)

(13) RELATED-PARTY TRANSACTIONS

     The following is a summary of SpeedFam-IPEC Co., Ltd. and consolidated
subsidiaries' transactions with SpeedFam-IPEC, Inc. and its consolidated
subsidiaries:

<TABLE>
<CAPTION>
                                                           1999       1998      1997
                                                          -------    ------    ------
<S>                                                       <C>        <C>       <C>
Sales to SpeedFam-IPEC, Inc.............................  $12,985    30,239    42,531
Purchases from SpeedFam-IPEC, Inc.......................    1,246     1,279     2,127
Commission income.......................................    3,191     4,316     3,044
Commission expense......................................      298       426       107
                                                          =======    ======    ======
</TABLE>

     Included in sales to SpeedFam-IPEC, Inc. are transactions for which
commissions are paid to SpeedFam-IPEC, Inc. on sales to third party customers in
the U.S.

     The following is summary of SpeedFam Co., Ltd. transactions with Met-Coil
Ltd., a 50% owned affiliate, accounted for by the equity method:

<TABLE>
<CAPTION>
                                                              1999    1998     1997
                                                              ----    -----    -----
<S>                                                           <C>     <C>      <C>
Sales to Met-Coil Ltd.......................................  $92       597      275
Purchases from Met-Coil Ltd.................................   15     1,944    2,125
                                                              ===     =====    =====
</TABLE>

(14) FAIR VALUE OF FINANCIAL INSTRUMENTS

     The Company's financial instruments at April 30, 1999 and 1998 include cash
equivalents, trade receivables, short-term investments, short-term borrowings,
trade payables, noncurrent receivables and long-term debt. The carrying amount
of cash equivalents, trade receivables, short-term borrowings, and trade
payables approximates fair value because of the short maturity of these
instruments. The fair value of short-term investments has been determined based
on quoted market prices and approximates their financial statement carrying
values. The fair value of the Company's noncurrent receivables and long-term
debt has been determined based on discounted cash flows using current interest
rates of similar instruments, and is not materially different from their
carrying values.

                                       75
<PAGE>   76

ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.

     None.

                                    PART III

ITEM 10, 11, 12 AND 13.

     These items, constituting Part III of the Form 10-K, have been omitted from
this annual report pursuant to the provisions of Instruction G to Form 10-K,
because a definitive proxy statement (which is incorporated herein by reference,
except for the report of the compensation committee of the board of directors
and the performance graph) will be filed on or about September 10, 1999.
Information required for executive officers is included in Part I, Item 1.

                                    PART IV

ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.

     (a) (1) Financial Statements:

             See Part II, Item 8.

         (2) Financial Statement Schedules:

<TABLE>
<CAPTION>
                                                              PAGE
                                                              ----
<S>                                                           <C>
Independent Auditors' Report................................  S-1
Schedule II.................................................  S-2
</TABLE>

         (3) Exhibits filed:

          See Exhibit Index.

     (b) Reports filed on Form 8-K:

          Form 8-K was filed on April 13, 1999.

     (c) Exhibits filed:

          See Exhibit Index.

     (d) Financial Statements Omitted from Annual Report to Security Holders:

          Financial Statements of SpeedFam-IPEC Co., Ltd. are filed herewith.
     See Part II, Item 8.

                                       76
<PAGE>   77

                                   SIGNATURES

     PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) 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.

                                          SPEEDFAM-IPEC, INC.

                                          /s/ J. MICHAEL DODSON
                                          --------------------------------------
                                          J. Michael Dodson
                                          Treasurer, Assistant Secretary
                                          and Chief Financial Officer
                                          (Principal financial and accounting
                                          officer)

                               POWER OF ATTORNEY

     KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints jointly and severally, J. Michael Dodson
and Richard J. Faubert, and each of them as his true and lawful attorney-in-fact
and agents, with full power of substitution and resubstitution, for him and in
his name, place and stead, in any and all capacities, to sign any and all
amendments to this Annual Report on Form 10-K, and file the same, with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in connection therewith,
as fully to all intents and purposes as he might or could do in person, hereby
ratifying, and confirming all that said attorney-in-fact and agents, or any of
them, or their or his substitute or substitutes, may lawfully do or cause to be
done by virtue hereof.

     PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND IN
THE CAPACITIES AND ON THE DATES INDICATED.

<TABLE>
<CAPTION>
NAME                                                                 TITLE                      DATE
----                                                                 -----                      ----
<S>                                                  <C>                                      <C>

/s/ JAMES N. FARLEY                                  Co-Chairman                               8/27/99
------------------------------------------------
James N. Farley

/s/ SANJEEV CHITRE                                   Co-Chairman                               8/27/99
------------------------------------------------
Sanjeev Chitre

/s/ J. MICHAEL DODSON                                Treasurer, Assistant Secretary and        8/27/99
------------------------------------------------     Chief Financial Officer (Principal
J. Michael Dodson                                    financial and accounting officer)

/s/ RICHARD J. FAUBERT                               President, Chief Executive Officer        8/27/99
------------------------------------------------     and Director
Richard J. Faubert

/s/ NEIL R. BONKE                                    Director                                  8/27/99
------------------------------------------------
Neil R. Bonke

/s/ WILLIAM FRESCHI                                  Director                                  8/27/99
------------------------------------------------
William Freschi

/s/ RICHARD S. HILL                                  Director                                  8/27/99
------------------------------------------------
Richard S. Hill
</TABLE>

                                       77
<PAGE>   78

<TABLE>
<CAPTION>
NAME                                                                 TITLE                      DATE
----                                                                 -----                      ----
<S>                                                  <C>                                      <C>
/s/ MAKOTO KOUZUMA                                   Director                                  8/27/99
------------------------------------------------
Makoto Kouzuma

/s/ KENNETH LEVY                                     Director                                  8/27/99
------------------------------------------------
Kenneth Levy

/s/ ROGER MCDANIEL                                   Director                                  8/27/99
------------------------------------------------
Roger McDaniel
</TABLE>

                                       78
<PAGE>   79

                          INDEPENDENT AUDITORS' REPORT

The Board of Directors
SpeedFam-IPEC, Inc.:

     Under date of July 7, 1999, we reported on the consolidated balance sheets
of SpeedFam-IPEC, Inc. and consolidated subsidiaries as of May 31, 1999 and
1998, and the related consolidated statements of operations, stockholders'
equity and comprehensive income, and cash flows for each of the years in the
three-year period ended May 31, 1999, which are included in this Form 10-K. In
connection with our audits of the aforementioned consolidated financial
statements, we also audited the related consolidated financial statement
schedule as listed in Item 14(a)(2) of this Form 10-K. This financial statement
schedule is the responsibility of the Company's management. Our responsibility
is to express an opinion on this financial statement schedule based on our
audits.

     In our opinion, such financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.

KPMG LLP

July 7, 1999
Chicago, Illinois

                                       79
<PAGE>   80

                                                                     SCHEDULE II

                          SPEEDFAM INTERNATIONAL, INC.

                       VALUATION AND QUALIFYING ACCOUNTS
       FOR EACH OF THE YEARS IN THE THREE-YEAR PERIOD ENDED MAY 31, 1999
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                  CHARGED TO
                                                                OTHER ACCOUNTS
                                                   CHARGED       (TRANSLATION       DEDUCTIONS
                                   BALANCE AT     TO COSTS       ADJUSTMENTS       (WRITE-OFFS       BALANCE
                                   BEGINNING         AND             AND               AND            AT END
           DESCRIPTION              OF YEAR        EXPENSE       RECOVERIES)       ADJUSTMENTS)      OF YEAR
           -----------             ----------    -----------    --------------    --------------    ----------
<S>                                <C>           <C>            <C>               <C>               <C>
Allowance for doubtful accounts:
  1997...........................   $   595          2,905             5                 173         $ 3,332
  1998...........................   $ 3,332          3,402            --               2,247         $ 4,487
  1999...........................   $ 4,487          3,598            (1)              2,484         $ 5,600
</TABLE>

                                       80
<PAGE>   81

                                 EXHIBIT INDEX

<TABLE>
<CAPTION>
EXHIBIT
NUMBER                            DESCRIPTION
-------                           -----------
<C>       <S>
10.19     Employment Agreement between the Registrant and J. Michael
          Dodson.
10.20     Mutual Separation and Consulting Agreement between the
          Registrant and James N. Farley.
10.21     Mutual Separation and Consulting Agreement between the
          Registrant and Sanjeev Chitre.
21.1      Subsidiaries of the Registrant
23.1      Consent of KPMG LLP.
27.1      Financial Data Schedule.
</TABLE>

                                       81