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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549


Form 10-Q

|           |  |                                                                                         
|---------- |  | ----------------------------------------------------------------------------------------
|(Mark One) |  |                                                                                         
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|x          |  | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 
|          
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|           |  |                                                                                         
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|           |  | For the quarterly period ended August 31, 2002                                          
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|           |  |                                                                                         
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|o          |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

Commission File Number 0-26784

SPEEDFAM-IPEC, INC.

(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)


|                                                               |  |                                        
|-------------------------------------------------------------- |  | ---------------------------------------
|Illinois                                                       |  | 36-2421613                             
|                                                               |  |                                        
|(State or other jurisdiction of
incorporation or organization) |  | (I.R.S. Employer
Identification Number)
|                                                              
|                                                              
|                                                              
|                                                              
|                                                               |  |                                        
|                                                              
|                                                              
|                                                              
|                                                              
|305 North 54th Street, Chandler, Arizona                       |  | 85226                                  
|                                                               |  |                                        
|(Address of principal executive offices)                       |  | (Zip Code)                             

Registrants telephone number, including area code (480) 705-2100

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     ü    No

Indicate the number of shares outstanding of each of the issuers classes
of common stock, as of the latest practicable date (September 30, 2002).

Common Stock, no par value: 31,103,409 shares



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TABLE OF CONTENTS



|                            |                                                                                               |                                                      |  |  |  |  |  | 
|--------------------------- | --------------------------------------------------------------------------------------------- | ---------------------------------------------------- |  |  |  |  |  | 
|                            | PART I  FINANCIAL INFORMATION                                                               
|                            |                                                                                               | Condensed Consolidated Balance Sheets               
|                            |                                                                                               | Condensed Consolidated Statements of Operations     
|                            |                                                                                               | Condensed Consolidated Statements of Cash Flows     
|                            |                                                                                               | Notes to Condensed Consolidated Financial Statements
|                            | Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
|                            | ITEM 3. Quantitative and Qualitative Disclosures About Market Risk.                          
|                            | ITEM 4. Controls and Procedures.                                                             
|PART II  OTHER INFORMATION
|Signature                  
|EXHIBIT INDEX              
|EX-99.1                    



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SPEEDFAM-IPEC, INC.

INDEX

|              |  |                       |  |                                                                                                           |  |     
|------------- |  | --------------------- |  | --------------------------------------------------------------------------------------------------------- |  | ----
|              |  |                       |  |                                                                                                           |  | Page
|              |  |                       |  |                                                                                                           |  |     
|PART I        |  | FINANCIAL INFORMATION |  |                                                                                                          
|             
|             
|             
|             
|              |  |                       |  | Condensed Consolidated Balance Sheets
August 31, 2002 and June 1, 2002                                    |  | 2   
|             
|             
|             
|             
|              |  |                       |  | Condensed Consolidated Statements of Operations
First Quarter Ended August 31, 2002 and September 1, 2001 |  | 3   
|             
|             
|             
|             
|              |  |                       |  | Condensed Consolidated Statements of Cash Flows
First Quarter Ended August 31, 2002 and September 1, 2001 |  | 4   
|             
|             
|             
|             
|              |  |                       |  | Notes to Condensed Consolidated Financial Statements                                                      |  | 5   
|             
|             
|             
|             
|              |  | Item 2.               |  | Managements Discussion and Analysis of Financial Condition
and Results of Operations                     |  | 10  
|             
|             
|             
|             
|              |  | Item 3.               |  | Quantitative and Qualitative Disclosures about Market Risk                                                |  | 23  
|             
|             
|             
|             
|PART II       |  | OTHER INFORMATION     |  | 23                                                                                                       
|             
|             
|             
|             
|SIGNATURES    |  |                       |  | 25                                                                                                       
|             
|             
|             
|             
|EXHIBIT INDEX |  |                       |  |                                                                                                          

1



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##### Table of Contents






PART I  FINANCIAL INFORMATION




SPEEDFAM-IPEC, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)

|                                   |                                                                                                                                                         |                             |                                      |                                            |         |            |         |          |         |   |         | 
|---------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------- | ------------------------------------ | ------------------------------------------ | ------- | ---------- | ------- | -------- | ------- | - | ------- | 
|                                   |                                                                                                                                                         |                             |                                      |                                            |         | AUGUST 31, |         | JUNE 1, 
|                                   |                                                                                                                                                         |                             |                                      |                                            |         | 2002       |         | 2002    
|                                   |                                                                                                                                                         |                             |                                      |                                            |         |            |         |         
|                                   |                                                                                                                                                         |                             |                                      | ASSETS                                     |         |            |         |          |         |   |         | 
|                                  
|                                  
|                                  
|                                  
|Current assets:                    |                                                                                                                                                         |                             |                                      |                                            |         |            |         |         
|                                  
|                                  
|                                  
|                                  
|                                   | Cash and cash equivalents                                                                                                                               |                             | $                                    | 60,391                                     |         |            | $       | 33,358   |        
|                                  
|                                  
|                                  
|                                  
|                                   | Trade accounts receivable, net                                                                                                                          |                             |                                      | 21,995                                     |         |            |         | 22,162   |        
|                                  
|                                  
|                                  
|                                  
|                                   | Inventories                                                                                                                                             |                             |                                      | 42,500                                     |         |            |         | 44,545   |        
|                                  
|                                  
|                                  
|                                  
|                                   | Shipped systems pending acceptance                                                                                                                      |                             |                                      | 6,379                                      |         |            |         | 9,175    |        
|                                  
|                                  
|                                  
|                                  
|                                   | Prepaid expenses and other current assets                                                                                                               |                             |                                      | 3,000                                      |         |            |         | 3,896    |        
|                                   |                                                                                                                                                         |                             |                                      |                                            |         |            |         |          |        
|                                   |                                                                                                                                                         | Total current assets        |                                      |                                            | 134,265 |            |         |          | 113,136 |  
|                                  
|                                  
|                                  
|                                  
|Property, plant and equipment, net |                                                                                                                                                         |                             | 31,413                               |                                            |         |            | 58,007  |         
|                                  
|                                  
|                                  
|                                  
|Other assets                       |                                                                                                                                                         |                             | 5,883                                |                                            |         |            | 5,684   |         
|                                   |                                                                                                                                                         |                             |                                      |                                            |         |            |         |          |        
|                                   |                                                                                                                                                         | Total assets                |                                      | $                                          | 171,561 |            |         | $        | 176,827 |  
|                                   |                                                                                                                                                         |                             |                                      |                                            |         |            |         |          |        
|                                   |                                                                                                                                                         |                             | LIABILITIES AND STOCKHOLDERS EQUITY |                                            |         |            |         |          |         |   |        
|                                  
|                                  
|                                  
|                                  
|Current liabilities:               |                                                                                                                                                         |                             |                                      |                                            |         |            |         |         
|                                  
|                                  
|                                  
|                                  
|                                   | Current portion of long-term debt                                                                                                                       |                             | $                                    | 48                                         |         |            | $       | 65       |        
|                                  
|                                  
|                                  
|                                  
|                                   | Accounts payable                                                                                                                                        |                             |                                      | 13,513                                     |         |            |         | 11,061   |        
|                                  
|                                  
|                                  
|                                  
|                                   | Deferred systems revenue                                                                                                                                |                             |                                      | 14,752                                     |         |            |         | 18,238   |        
|                                  
|                                  
|                                  
|                                  
|                                   | Accrued liabilities                                                                                                                                     |                             |                                      | 14,934                                     |         |            |         | 13,904   |        
|                                   |                                                                                                                                                         |                             |                                      |                                            |         |            |         |          |        
|                                   |                                                                                                                                                         | Total current liabilities   |                                      |                                            | 43,247  |            |         |          | 43,268  |  
|                                   |                                                                                                                                                         |                             |                                      |                                            |         |            |         |          |        
|Long-term liabilities:             |                                                                                                                                                         |                             |                                      |                                            |         |            |         |         
|                                  
|                                  
|                                  
|                                  
|                                   | Long-term debt                                                                                                                                          |                             |                                      | 115,057                                    |         |            |         | 115,054  |        
|                                  
|                                  
|                                  
|                                  
|                                   | Other liabilities                                                                                                                                       |                             |                                      | 4,711                                      |         |            |         | 4,620    |        
|                                   |                                                                                                                                                         |                             |                                      |                                            |         |            |         |          |        
|                                   |                                                                                                                                                         | Total long-term liabilities |                                      |                                            | 119,768 |            |         |          | 119,674 |  
|                                   |                                                                                                                                                         |                             |                                      |                                            |         |            |         |          |        
|Stockholders equity:              |                                                                                                                                                         |                             |                                      |                                            |         |            |         |         
|                                  
|                                  
|                                  
|                                  
|                                   | Common stock, no par value, 60,000 shares authorized,
31,099 and 30,672 shares issued and outstanding
at August 31, 2002 and June 1, 2002, respectively |                             |                                      | 1                                          |         |            |         | 1        |        
|                                  
|                                  
|                                  
|                                  
|                                   | Additional paid-in capital                                                                                                                              |                             |                                      | 436,897                                    |         |            |         | 435,663  |        
|                                  
|                                  
|                                  
|                                  
|                                   | Retained deficit                                                                                                                                        |                             |                                      | (429,538                                   | )       |            |         | (423,049 | )      
|                                  
|                                  
|                                  
|                                  
|                                   | Accumulated comprehensive income                                                                                                                        |                             |                                      | 1,186                                      |         |            |         | 1,270    |        
|                                   |                                                                                                                                                         |                             |                                      |                                            |         |            |         |          |        
|                                   |                                                                                                                                                         | Total stockholders equity  |                                      |                                            | 8,546   |            |         |          | 13,885  |  
|                                   |                                                                                                                                                         |                             |                                      |                                            |         |            |         |          |        
|                                   |                                                                                                                                                         |                             |                                      | Total liabilities and stockholders equity |         | $          | 171,561 |          |         | $ | 176,827 | 
|                                   |                                                                                                                                                         |                             |                                      |                                            |         |            |         |          |        

See Accompanying Notes to Condensed Consolidated Financial Statements.

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##### Table of Contents



SPEEDFAM-IPEC, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FIRST QUARTER ENDED AUGUST 31, 2002 AND SEPTEMBER 1, 2001
(in thousands, except per share data)




|                                                                    |                                    |   |                                               |              |   |                     |         |              |   |        |       | 
|------------------------------------------------------------------- | ---------------------------------- | - | --------------------------------------------- | ------------ | - | ------------------- | ------- | ------------ | - | ------ | ----- | 
|                                                                    |                                    |   |                                               |              |   | First Quarter Ended
|                                                                    |                                    |   |                                               |              |   |                    
|                                                                    |                                    |   |                                               |              |   | August 31,          |         | September 1,
|                                                                    |                                    |   |                                               |              |   | 2002                |         | 2001        
|                                                                    |                                    |   |                                               |              |   |                     |         |             
|Net sales                                                           |                                    | $ | 33,789                                        |              |   | $                   | 41,082  |             
|                                                                   
|                                                                   
|                                                                   
|                                                                   
|Cost of sales                                                       |                                    |   | 25,536                                        |              |   |                     | 31,695  |             
|                                                                    |                                    |   |                                               |              |   |                     |         |             
|                                                                    |                                    |   |                                               | Gross margin |   |                     | 8,253   |              |   |        | 9,387 | 
|                                                                    |                                    |   |                                               |              |   |                     |         |             
|Operating expenses:                                                 |                                    |   |                                               |              |   |                     |         |             
|                                                                   
|                                                                   
|                                                                   
|                                                                   
|                                                                    |                                    |   | Research, development and engineering         |              |   | 7,781               |         |              |   | 12,388 |      
|                                                                   
|                                                                   
|                                                                   
|                                                                   
|                                                                    |                                    |   | Selling, general and administrative           |              |   | 5,696               |         |              |   | 8,120  |      
|                                                                   
|                                                                   
|                                                                   
|                                                                   
|                                                                    |                                    |   | Litigation settlement costs                   |              |   |                    |         |              |   | 1,800  |      
|                                                                    |                                    |   |                                               |              |   |                     |         |             
|                                                                    |                                    |   | Total operating expenses                      |              |   | 13,477              |         |              |   | 22,308 |      
|                                                                    |                                    |   |                                               |              |   |                     |         |             
|Operating loss                                                      |                                    |   | (5,224                                        | )            |   |                     | (12,921 | )           
|                                                                   
|                                                                   
|                                                                   
|                                                                   
|                                                                    |                                    |   | Other expense, net                            |              |   | (1,266              | )       |              |   | (1,502 | )    
|                                                                    |                                    |   |                                               |              |   |                     |         |             
|Loss before income taxes and cumulative effect of
accounting change |                                    |   | (6,490                                        | )            |   |                     | (14,423 | )           
|                                                                   
|                                                                   
|                                                                   
|                                                                   
|                                                                    |                                    |   | Income taxes                                  |              |   |                    |         |              |   |       |      
|                                                                    |                                    |   |                                               |              |   |                     |         |             
|Loss before cumulative effect of accounting change                  |                                    |   | (6,490                                        | )            |   |                     | (14,423 | )           
|                                                                   
|                                                                   
|                                                                   
|                                                                   
|Cumulative effect of accounting change                              |                                    |   |                                              |              |   |                     | (2,582  | )           
|                                                                    |                                    |   |                                               |              |   |                     |         |             
|Net loss                                                            |                                    | $ | (6,490                                        | )            |   | $                   | (17,005 | )           
|                                                                    |                                    |   |                                               |              |   |                     |         |             
|Net loss per common share:                                          |                                    |   |                                               |              |   |                     |         |             
|                                                                   
|                                                                   
|                                                                   
|                                                                   
|                                                                    | Basic and diluted:                 |   |                                               |              |   |                     |         |              |  
|                                                                   
|                                                                   
|                                                                   
|                                                                   
|                                                                    |                                    |   | Before cumulative effect of accounting change |              | $ | (0.21               | )       |              | $ | (0.48  | )    
|                                                                   
|                                                                   
|                                                                   
|                                                                   
|                                                                    |                                    |   | From cumulative effect of accounting change   |              |   |                    |         |              |   | (0.08  | )    
|                                                                    |                                    |   |                                               |              |   |                     |         |             
|                                                                    |                                    |   | Net loss                                      |              | $ | (0.21               | )       |              | $ | (0.56  | )    
|                                                                    |                                    |   |                                               |              |   |                     |         |             
|
|                                                                    | Weighted average number of shares: |   |                                               |              |   |                     |         |              |  
|                                                                   
|                                                                   
|                                                                   
|                                                                   
|                                                                    |                                    |   | Basic and diluted                             |              |   | 30,871              |         |              |   | 30,223 |      
|                                                                    |                                    |   |                                               |              |   |                     |         |             

See Accompanying Notes to Condensed Consolidated Financial Statements.

3



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SPEEDFAM-IPEC, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FIRST QUARTER ENDED AUGUST 31, 2002 AND SEPTEMBER 1, 2001
(in thousands)

|                                     |                                                                                           |                                                     |                                                |        |                     |        |              |         |       |         |  
|------------------------------------ | ----------------------------------------------------------------------------------------- | --------------------------------------------------- | ---------------------------------------------- | ------ | ------------------- | ------ | ------------ | ------- | ----- | ------- | -
|                                     |                                                                                           |                                                     |                                                |        | First Quarter Ended
|                                     |                                                                                           |                                                     |                                                |        |                    
|                                     |                                                                                           |                                                     |                                                |        | August 31,          |        | September 1,
|                                     |                                                                                           |                                                     |                                                |        | 2002                |        | 2001        
|                                     |                                                                                           |                                                     |                                                |        |                     |        |             
|Cash flows from operating activities |                                                                                           |                                                     |                                                |        |                     |        |              |        
|                                    
|                                    
|                                    
|                                    
|                                     | Net loss                                                                                  |                                                     | $                                              | (6,490 | )                   |        | $            | (17,005 | )    
|                                    
|                                    
|                                    
|                                    
|                                     | Adjustments to reconcile net loss
to net cash provided by (used in) operating activities: |                                                     |                                                |        |                     |        |              |         |      
|                                    
|                                    
|                                    
|                                    
|                                     |                                                                                           | Depreciation and amortization                       |                                                |        | 2,561               |        |              |         | 4,557 |        
|                                    
|                                    
|                                    
|                                    
|                                     |                                                                                           | Loss on disposal of assets                          |                                                |        | 85                  |        |              |         |      |        
|                                    
|                                    
|                                    
|                                    
|                                     |                                                                                           | Cumulative effect of change in accounting principle |                                                |        |                    |        |              |         | 2,582 |        
|                                    
|                                    
|                                    
|                                    
|                                     |                                                                                           | Contribution of stock to employee benefit plan      |                                                |        | 160                 |        |              |         |      |        
|                                    
|                                    
|                                    
|                                    
|                                     |                                                                                           | Changes in assets and liabilities:                  |                                                |        |                     |        |              |         |       |        
|                                    
|                                    
|                                    
|                                    
|                                     |                                                                                           |                                                     | Decrease in trade accounts receivable          |        |                     | 403    |              |         |       | 14,156  |  
|                                    
|                                    
|                                    
|                                    
|                                     |                                                                                           |                                                     | (Increase) decrease in inventories             |        |                     | 2,318  |              |         |       | (5,806  | )
|                                    
|                                    
|                                    
|                                    
|                                     |                                                                                           |                                                     | Decrease in shipped systems pending acceptance |        |                     | 2,796  |              |         |       | 5,218   |  
|                                    
|                                    
|                                    
|                                    
|                                     |                                                                                           |                                                     | Decrease in other current assets               |        |                     | 914    |              |         |       | 1,030   |  
|                                    
|                                    
|                                    
|                                    
|                                     |                                                                                           |                                                     | Increase (decrease) in accounts payable        |        |                     | 1,583  |              |         |       | (5,275  | )
|                                    
|                                    
|                                    
|                                    
|                                     |                                                                                           |                                                     | Decrease in deferred systems revenue           |        |                     | (3,486 | )            |         |       | (11,838 | )
|                                    
|                                    
|                                    
|                                    
|                                     |                                                                                           |                                                     | Increase in accrued liabilities                |        |                     | 1,088  |              |         |       | 2,856   |  
|                                     |                                                                                           |                                                     |                                                |        |                     |        |              |         |      
|                                     | Net cash provided by (used in) operating activities                                       |                                                     |                                                | 1,932  |                     |        |              | (9,525  | )    
|                                     |                                                                                           |                                                     |                                                |        |                     |        |              |         |      
|Cash flows from investing activities |                                                                                           |                                                     |                                                |        |                     |        |              |        
|                                    
|                                    
|                                    
|                                    
|                                     | Proceeds from sale of assets                                                              |                                                     |                                                | 25,000 |                     |        |              |        |      
|                                    
|                                    
|                                    
|                                    
|                                     | Maturities of short-term investments                                                      |                                                     |                                                |       |                     |        |              | 7,115   |      
|                                    
|                                    
|                                    
|                                    
|                                     | Capital expenditures                                                                      |                                                     |                                                | (570   | )                   |        |              | (1,169  | )    
|                                    
|                                    
|                                    
|                                    
|                                     | Other investing activities                                                                |                                                     |                                                | (634   | )                   |        |              | (548    | )    
|                                     |                                                                                           |                                                     |                                                |        |                     |        |              |         |      
|                                     | Net cash provided by investing activities                                                 |                                                     |                                                | 23,796 |                     |        |              | 5,398   |      
|                                     |                                                                                           |                                                     |                                                |        |                     |        |              |         |      
|Cash flows from financing activities |                                                                                           |                                                     |                                                |        |                     |        |              |        
|                                    
|                                    
|                                    
|                                    
|                                     | Proceeds from exercise of stock options and employee stock purchases                      |                                                     |                                                | 1,074  |                     |        |              | 544     |      
|                                    
|                                    
|                                    
|                                    
|                                     | Principal payments on long-term debt                                                      |                                                     |                                                | (68    | )                   |        |              | (19     | )    
|                                     |                                                                                           |                                                     |                                                |        |                     |        |              |         |      
|                                     | Net cash provided by financing activities                                                 |                                                     |                                                | 1,006  |                     |        |              | 525     |      
|                                     |                                                                                           |                                                     |                                                |        |                     |        |              |         |      
|                                     | Effects of foreign currency rate changes on cash                                          |                                                     |                                                | 299    |                     |        |              | 71      |      
|                                     |                                                                                           |                                                     |                                                |        |                     |        |              |         |      
|                                     | Net increase (decrease) in cash and cash equivalents                                      |                                                     |                                                | 27,033 |                     |        |              | (3,531  | )    
|                                    
|                                    
|                                    
|                                    
|                                     | Cash and cash equivalents at beginning of year                                            |                                                     |                                                | 33,358 |                     |        |              | 47,344  |      
|                                     |                                                                                           |                                                     |                                                |        |                     |        |              |         |      
|                                     | Cash and cash equivalents at end of quarter                                               |                                                     | $                                              | 60,391 |                     |        | $            | 43,813  |      
|                                     |                                                                                           |                                                     |                                                |        |                     |        |              |         |      

See Accompanying Notes to Condensed Consolidated Financial Statements.

4



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##### Table of Contents






SPEEDFAM-IPEC, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share amounts)



|(1) |  | BASIS OF PRESENTATION
|--- |  | ---------------------

The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with accounting principles generally accepted
in the United States for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they
do not include all of the information and footnotes required for comprehensive
financial statements. The preparation of financial statements in conformity
with accounting principles generally accepted in the United States 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 as well as the reported
amounts of revenues and expenses during the reporting period. In the opinion
of management, all adjustments (consisting of normal recurring items)
considered necessary for a fair presentation have been included. Actual results
may differ from these estimates. Operating results for the quarter ended August
31, 2002 are not necessarily indicative of the results that may be expected for
the year ending May 31, 2003. For further information, refer to the
consolidated financial statements and notes thereto included in the Companys
Annual Report on Form 10-K for the year ended June 1, 2002.

The Companys fiscal year consists of 52 or 53 weeks ending on the
Saturday nearest May 31. Accordingly, the 2003 fiscal year ends on May 31, 2003
and contains 52 weeks whereas the 2002 fiscal year ended on June 1, 2002 and
also contained 52 weeks. All references to quarters and years relate to fiscal
quarters and fiscal years unless otherwise noted.



|(2) |  | INVENTORIES
|--- |  | -----------

The components of inventory were:

|                |  |            |        |         |  |   |        | 
|--------------- |  | ---------- | ------ | ------- |  | - | ------ | 
|                |  | August 31, |        | June 1,
|                |  | 2002       |        | 2002   
|                |  |            |        |        
|Raw materials   |  | $          | 21,956 |         |  | $ | 19,164 | 
|               
|               
|               
|               
|Work-in-process |  |            | 10,522 |         |  |   | 11,490 | 
|               
|               
|               
|               
|Finished goods  |  |            | 10,022 |         |  |   | 13,891 | 
|                |  |            |        |         |  |   |        | 
|                |  | $          | 42,500 |         |  | $ | 44,545 | 
|                |  |            |        |         |  |   |        | 

5



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##### Table of Contents





|(3) |  | ACCRUED LIABILITIES
|--- |  | -------------------

Accrued liabilities are as follows:

|                                                     |  |            |        |         |  |   |        | 
|---------------------------------------------------- |  | ---------- | ------ | ------- |  | - | ------ | 
|                                                     |  | August 31, |        | June 1,
|                                                     |  | 2002       |        | 2002   
|                                                     |  |            |        |        
|Accrued warranty                                     |  | $          | 833    |         |  | $ | 804    | 
|                                                    
|                                                    
|                                                    
|                                                    
|Accrued payroll and benefits                         |  |            | 2,736  |         |  |   | 2,310  | 
|                                                    
|                                                    
|                                                    
|                                                    
|Accrued merger, integration, and
restructuring costs |  |            | 1,156  |         |  |   | 1,288  | 
|                                                    
|                                                    
|                                                    
|                                                    
|Other accrued liabilities                            |  |            | 10,209 |         |  |   | 9,502  | 
|                                                     |  |            |        |         |  |   |        | 
|                                                     |  | $          | 14,934 |         |  | $ | 13,904 | 
|                                                     |  |            |        |         |  |   |        | 



|(4) |  | COMPREHENSIVE LOSS
|--- |  | ------------------

The Companys comprehensive loss was as follows:

|                                   |                                         |   |                     |     |              |   |         |     |  
|---------------------------------- | --------------------------------------- | - | ------------------- | --- | ------------ | - | ------- | --- | -
|                                   |                                         |   | First Quarter Ended
|                                   |                                         |   |                    
|                                   |                                         |   | August 31,          |     | September 1,
|                                   |                                         |   | 2002                |     | 2001        
|                                   |                                         |   |                     |     |             
|Net loss                           |                                         | $ | (6,490              | )   |              | $ | (17,005 | )  
|                                  
|                                  
|                                  
|                                  
|Other comprehensive income (loss): |                                         |   |                     |     |              |   |         |    
|                                  
|                                  
|                                  
|                                  
|                                   | Unrealized loss on securities           |   |                     |    |              |   |         | (12 | )
|                                  
|                                  
|                                  
|                                  
|                                   | Foreign currency translation adjustment |   |                     | (84 | )            |   |         | 112 |  
|                                   |                                         |   |                     |     |              |   |         |    
|Comprehensive loss                 |                                         | $ | (6,574              | )   |              | $ | (16,905 | )  
|                                   |                                         |   |                     |     |              |   |         |    

Accumulated other comprehensive income (loss) was as follows:

|                             |                    |   |             |     |               |   |               |     |   |   |             |     |  
|---------------------------- | ------------------ | - | ----------- | --- | ------------- | - | ------------- | --- | - | - | ----------- | --- | -
|                             |                    |   |             |     |               |   |               |     |   |   | Accumulated
|                             |                    |   | Foreign     |     | Unrealized    |   | Other        
|                             |                    |   | Currency    |     | Gain (Loss)   |   | Comprehensive
|                             |                    |   | Translation |     | on Securities |   | Income (Loss)
|                             |                    |   |             |     |               |   |              
|Balance at June 1, 2002      |                    | $ | 1,270       |     |               | $ |              |     |   | $ | 1,270       |    
|                            
|                            
|                            
|                            
|                             | One quarter change |   |             | (84 | )             |   |               |    |   |   |             | (84 | )
|                             |                    |   |             |     |               |   |               |     |   |   |             |    
|Balance at August 31, 2002   |                    | $ | 1,186       |     |               | $ |              |     |   | $ | 1,186       |    
|                             |                    |   |             |     |               |   |               |     |   |   |             |    
|Balance at June 2, 2001      |                    | $ | 803         |     |               | $ | 24            |     |   | $ | 827         |    
|                            
|                            
|                            
|                            
|                             | One quarter change |   |             | 112 |               |   |               | (12 | ) |   |             | 100 |  
|                             |                    |   |             |     |               |   |               |     |   |   |             |    
|Balance at September 1, 2001 |                    | $ | 915         |     |               | $ | 12            |     |   | $ | 927         |    
|                             |                    |   |             |     |               |   |               |     |   |   |             |    

6



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##### Table of Contents





|(5) |  | BASIC EARNINGS (LOSS) PER COMMON 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 and warrants which are dilutive, whether
exercisable or not.

In calculating diluted net loss per common share, the dilutive effect of
28,895 and 591,772 common stock equivalent shares (determined under the
treasury stock method) have been excluded for the first quarter ended August
31, 2002 and September 1, 2001, respectively, because their inclusion would
have been anti-dilutive due to the net losses recorded for the periods.



|(6) |  | 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
(STG), which is comprised of the distribution of high-throughput precision
surface processing equipment used in the silicon wafer industry; and (iii) the
Industrial Applications Group (IAG), 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 during the first quarter ended August 31, 2002 and September 1, 2001
is as follows (in thousands):

|                                                                     |                               |   |                     |        |              |   |         |        |  
|-------------------------------------------------------------------- | ----------------------------- | - | ------------------- | ------ | ------------ | - | ------- | ------ | -
|                                                                     |                               |   | First Quarter Ended
|                                                                     |                               |   |                    
|                                                                     |                               |   | August 31,          |        | September 1,
|                                                                     |                               |   | 2002                |        | 2001        
|                                                                     |                               |   |                     |        |             
|Net sales:                                                           |                               |   |                     |        |              |   |         |       
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|                                                                     | CMP Group                     |   | $                   | 28,103 |              |   | $       | 32,619 |  
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|                                                                     | Surface Technology Group      |   |                     | 3,442  |              |   |         | 5,015  |  
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|                                                                     | Industrial Applications Group |   |                     | 2,244  |              |   |         | 3,448  |  
|                                                                     |                               |   |                     |        |              |   |         |        |  
|Total net sales to unaffiliated customers                            |                               |   | 33,789              |        |              |   | 41,082  |       
|                                                                     |                               |   |                     |        |              |   |         |        |  
|Segment operating profit (loss):                                     |                               |   |                     |        |              |   |         |       
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|                                                                     | CMP Group                     |   |                     | (2,683 | )            |   |         | (8,393 | )
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|                                                                     | Surface Technology Group      |   |                     | (328   | )            |   |         | 100    |  
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|                                                                     | Industrial Applications Group |   |                     | (154   | )            |   |         | 599    |  
|                                                                     |                               |   |                     |        |              |   |         |        |  
|Total segment operating loss                                         |                               |   | (3,165              | )      |              |   | (7,694  | )     
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|General corporate expense, net                                       |                               |   | (1,551              | )      |              |   | (5,227  | )     
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|Interest expense, net                                                |                               |   | (1,774              | )      |              |   | (1,502  | )     
|                                                                     |                               |   |                     |        |              |   |         |        |  
|Loss before income taxes and cumulative effect of
accounting changes |                               | $ | (6,490              | )      |              | $ | (14,423 | )     
|                                                                     |                               |   |                     |        |              |   |         |        |  



|(7) |  | CHANGES IN ACCOUNTING PRINCIPLES
|--- |  | --------------------------------

In July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible
Assets. SFAS No. 142 supersedes prior guidance and requires that goodwill no
longer be amortized to earnings, but instead be annually reviewed for
impairment. In addition, goodwill should be tested for impairment upon
adoption of the statement. The Company early adopted

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SFAS No. 142 in the first quarter of 2002 and recorded a cumulative effect of a
change in accounting principle for the write-off of goodwill of ($2.6) million,
or ($0.08) per share, as of the beginning of 2002 (June 3, 2001). The
circumstances leading to the impairment of goodwill primarily relate to
operating losses, the absence of positive cash flows and uncertainties
resulting from the duration and severity of the industry downturn. The fair
value of the reporting units, which correspond to the Companys business
segments, were estimated using quoted market prices.

In June 2001, the Financial Accounting Standards Board issued SFAS No.
141, Business Combinations. SFAS No. 141 supersedes prior guidance and
requires that all business combinations in the scope of this statement be
accounted for using the purchase method. The provisions of this statement
apply to all business combinations initiated after June 30, 2001, as well as
all business combinations accounted for using the purchase method for which the
date of acquisition is July 1, 2001 or later. The Company adopted this
statement as required on July 1, 2001 and it did not affect the financial
statements.

In October 2001, the Financial Accounting Standards Board issued SFAS No.
144, Accounting for the Impairment or Disposal of Long-Lived Assets. SFAS No.
144, which replaces SFAS No. 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of, requires long-lived assets
to be measured at the lower of carrying amount or fair value less the cost to
sell. SFAS No. 144 also broadens disposal transactions reporting related to
discontinued operations. SFAS No. 144 is effective for financial statements
issued for fiscal years beginning after December 15, 2001. The Company has not
yet determined the effects SFAS No. 144 will have on its financial position,
results of operations or cash flows but does not anticipate that the impact
will be significant.

In April 2002, the Financial Accounting Standards Board issued SFAS No.
145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB
Statement No. 13, and Technical Corrections. SFAS No. 145 rescinds SFAS No. 4,
Reporting Gains and Losses from Extinguishment of Debt, and an amendment of
that Statement, SFAS No. 64, Extinguishments of Debt Made to Satisfy
Sinking-Fund Requirements. SFAS No. 145 also rescinds SFAS No. 44, Accounting
for Intangible Assets of Motor Carriers. SFAS No. 145 amends SFAS No. 13,
Accounting for Leases, to eliminate an inconsistency between the required
accounting for sale-leaseback transactions and the required accounting for
certain lease modifications that have economic effects that are similar to
sale-leaseback transactions. SFAS No. 145 also amends other existing
authoritative pronouncements to make various technical corrections, clarify
meanings, or describe their applicability under changed conditions. The Company
adopted SFAS No. 145 on June 2, 2002 and it did not have a material impact on
the financial position or results of operations of the Company.



|(8) |  | SUBSEQUENT EVENTS
|--- |  | -----------------

On August 11, 2002, the Company entered into an Agreement and Plan of
Reorganization with Novellus Systems, Inc. (Novellus), a California corporation
and a leader in thin film deposition technology for the semiconductor industry.
Novellus will acquire all outstanding shares of SpeedFam-IPEC in a
stock-for-stock merger transaction. If the merger is completed, the Company
would become a wholly-owned subsidiary of Novellus. Each share of SpeedFam-IPEC
common stock outstanding as of the closing date will be converted into 0.1818
shares of Novellus common stock on a fixed exchange ratio basis. The merger is
intended to qualify as a tax-free reorganization under IRS regulations. The
transaction has been approved by the board of directors of both companies and
is expected to formally close in the fourth calendar quarter of 2002.



|(9) |  | RELATED PARTY TRANSACTIONS
|--- |  | --------------------------

On June 21, 2002, the Company completed a sale-leaseback transaction of
its corporate headquarters and research and development facilities in Chandler,
Arizona. The purchaser/lessor is Phoenix Industrial Investment Partners, L.P.
(the Buyer), a firm controlled by Kenneth Levy, a director of the Company. The sales price was
$25.0 million.

In connection with the sale of the buildings, the Company has
simultaneously entered into a 15-year lease for the buildings. The lease, which
has been accounted for as an operating lease, contains provisions for three,
five-year extensions and requires minimum annual rental payments of $3.0
million. Annual operating expenses will

8



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##### Table of Contents



increase by approximately $2.4 million, reflecting the new rental
payments, offset by interest income on the net proceeds and reduced
depreciation expense.

As
a result of the transaction, the Company received cash proceeds of
$25.0 million. The book value of buildings and improvements
removed from the balance sheet in the first quarter of 2003 is $25.1 million.
The loss on the sale of the buildings was immaterial.

9



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##### Table of Contents






Managements Discussion and Analysis
of Financial Condition and Results of Operations

Overview

SpeedFam-IPEC, Inc. (the Company) designs, develops, manufactures and
markets chemical mechanical planarization (CMP) systems for use in the
fabrication of semiconductor chips. The Company also supplies parts and
provides ongoing support for these systems.

Semiconductor chips are built on a base of silicon, called a wafer, and
include multiple layers of wiring, which connect a variety of circuit
components, such as transistors and other structures. The construction of
semiconductor chips is accomplished through the deposition onto a wafer of
layers of metal for wire connections and silicon dioxide for insulation.
Copper is fast becoming the metal of choice among chip manufacturers due to its
superior conductivity capability. Insulators, or dielectrics, of which silicon
dioxide is the conventional material, are used to prevent interference between
closely spaced metal interconnects.

Deposition is done with varying degrees of thickness and uniformity,
leaving behind bumpy or uneven layers of metal or insulating material. CMP is
used to planarizeor smooththe surface of the wafer to prepare it for the next
layer of processing. This smoothing is accomplished through a polishing
process using high-performance equipment, consumables  such as slurries, and
related technologies. A slurry is a suspension of abrasives in reactive
chemicals. In some instances, slurry may contain no abrasives, but may consist
only of reactive chemicals. Different metals or oxides require different
slurries.

CMP has become an increasingly critical processing step as semiconductor
manufacturers are continually designing chips with smaller feature sizes that
utilize thinner and more numerous layers of interconnect on increasingly larger
wafers. This facilitates the production of smaller, faster and more complex
chips at a lower cost.

In addition to CMP systems, the Company markets high-throughput precision
surface processing equipment for the wafer market, and consumables used in
surface processing. The Company also manufactures and markets polishing
systems for general industrial applications.

The Companys total revenue consists of net sales of the products
described above and service revenues, as well as revenue derived from the
distribution by the Company in the U.S. and Europe of products manufactured by
the former SpeedFam-IPEC, Co., Ltd. (the Far East Joint Venture). The Company
distributes such products throughout the U.S. and Europe acting as sales agent,
under a five-year agreement. Related costs to import this equipment are
recorded as cost of goods sold. The Companys CMP segment has provided the
substantial majority of our revenues during the last several years. In fiscal
years 2002, 2001 and 2000, the CMP Group accounted for 75%, 81% and 84% of
revenues, respectively. For the quarter ended August 31, 2002, the CMP Group
accounted for 83% of revenues.

The Companys fiscal year consists of 52 or 53 weeks ending on the
Saturday nearest May 31. Accordingly, the 2003 fiscal year ends on May 31, 2003
and the 2002 fiscal year ended on June 1, 2002. All references to quarters and
years relate to fiscal quarters and fiscal years unless otherwise noted.

Beginning in 2001 and continuing into 2003, there has been a significant
decrease in the worldwide demand for semiconductor capital equipment. As a
result of a rapid decline in the demand for semiconductor devices, inventory
buildups in telecommunications products, slower than expected personal computer
sales and overall slower global economic growth, many semiconductor
manufacturers reevaluated their capital spending plans. Accordingly, several of
the Companys customers rescheduled delivery or canceled existing orders.
Furthermore, the Company has experienced a substantial decline in new orders.
In response to industry conditions, the Company has recorded significant
inventory write-downs, charges related to asset impairments and severance costs
in connection with across-the-board headcount reductions. Furthermore, the
Company implemented measures to reduce discretionary spending.

10



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##### Table of Contents



Recent Events

On August 11, 2002, the Company entered into an Agreement and Plan of
Reorganization with Novellus Systems, Inc., a California corporation and a
leader in thin film deposition technology for the semiconductor industry.
Novellus will acquire all outstanding shares of SpeedFam-IPEC in a
stock-for-stock merger transaction. If the merger is completed, the Company
would become a wholly-owned subsidiary of Novellus. Each share of SpeedFam-IPEC
common stock outstanding as of the closing date will be converted into 0.1818
shares of Novellus common stock on a fixed exchange ratio basis. The merger is
intended to qualify as a tax-free reorganization under IRS regulations. The
transaction has been approved by the board of directors of both companies and
is expected to formally close in the fourth calendar quarter of 2002.

Results of Operations

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

|                                                   |              |  |                     |      |              |  |       |      | 
|-------------------------------------------------- | ------------ |  | ------------------- | ---- | ------------ |  | ----- | ---- | 
|                                                   |              |  | First Quarter Ended
|                                                   |              |  |                    
|                                                   |              |  | August 31,          |      | September 1,
|                                                   |              |  | 2002                |      | 2001        
|                                                   |              |  |                     |      |             
|Net sales                                          |              |  | 100.0               | %    |              |  | 100.0 | %   
|                                                  
|                                                  
|                                                  
|                                                  
|Cost of sales                                      |              |  | 75.6                |      |              |  | 77.2  |     
|                                                   |              |  |                     |      |              |  |       |     
|                                                   | Gross margin |  |                     | 24.4 |              |  |       | 22.8 | 
|                                                  
|                                                  
|                                                  
|                                                  
|Research, development and engineering              |              |  | 23.0                |      |              |  | 30.2  |     
|                                                  
|                                                  
|                                                  
|                                                  
|Selling, general and administrative                |              |  | 16.9                |      |              |  | 19.8  |     
|                                                  
|                                                  
|                                                  
|                                                  
|Litigation settlement costs                        |              |  |                    |      |              |  | 4.3   |     
|                                                   |              |  |                     |      |              |  |       |     
|Operating loss                                     |              |  | (15.5               | )    |              |  | (31.5 | )   
|                                                  
|                                                  
|                                                  
|                                                  
|Other expense, net                                 |              |  | (3.7                | )    |              |  | (3.7  | )   
|                                                   |              |  |                     |      |              |  |       |     
|Loss before cumulative effect of
Accounting change |              |  | (19.2               | )    |              |  | (35.1 | )   
|                                                  
|                                                  
|                                                  
|                                                  
|Cumulative effect of accounting change             |              |  |                    |      |              |  | (6.3  | )   
|                                                   |              |  |                     |      |              |  |       |     
|Net loss                                           |              |  | (19.2               | )%   |              |  | (41.4 | )%  
|                                                   |              |  |                     |      |              |  |       |     

Net Sales.Net sales for the first quarter of 2003 were $33.8 million,
down 18% from net sales of $41.1 million in the first quarter of 2002. Net
sales of CMP products for the first quarter of 2003 totaled $28.1 million, or
83% of net sales, compared to $32.6 million, or 79% of net sales, in the first
quarter of 2002. Sales of CMP systems products decreased in 2003 due to the
continued slowing of worldwide demand for semiconductor manufacturing equipment
caused by a rapid decline in demand for semiconductor devices. Inventory
buildups in telecommunication products, slower than expected personal computer
sales and slower global economic growth have caused semiconductor companies to
reevaluate their capital spending plans. A number of the Companys customers
revised the timing of their capital spending, resulting in the postponement of
equipment delivery and a decline in new orders and net sales.

Upon implementation of SAB 101 in fiscal 2001, the Company recorded a
non-cash charge of $36.5 million for the three quarters ended March 3, 2001 to
reflect the cumulative effect of the accounting change as of the beginning of
fiscal 2001, June 4, 2000. The deferred systems revenue balance at June 4,
2000, was $60.8 million. This amount is comprised of equipment that was
shipped and previously recorded as revenue but had not been accepted or did not
qualify for mulitple-element accounting as of June 3, 2000. In addition to
deferred systems

11



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##### Table of Contents



revenue, the Company recorded deferred amounts related to cost of sales
totaling $21.3 million as of June 4, 2000. This amount represents costs
related to shipped systems that were pending acceptance as of June 3, 2002. As of
June 4, 2000, the Company also reversed accruals associated with
its warranty and installation costs of $3.0 million related to
shipped systems pending customer acceptance. Of
the $60.8 million in deferred systems revenue, $1.3 million and $10.5 million
were recognized as revenue, respectively for the quarter ended August 31, 2002
and September 1, 2001. Of the $21.3 million in deferred cost of sales $6.5
million was recognized as cost of sales for the quarter ended September 1,
2001. For the quarter ended August 31, 2002, there were no deferred costs
recognized as cost of sales which were reflected in the cumulative effect of
the accounting change.

Net sales of the Surface Technology Group (STG) in the first quarter of
2003 accounted for $3.4 million, or 10% of net sales, compared to $5.0 million,
or 12% of net sales, in the first quarter of 2002. During 2003, the silicon
wafer market has experienced continued softness in demand due to ongoing
manufacturing over-capacity caused by various factors including available
capacity and increased production efficiencies due to the fact that more chips
can be produced on a given wafer.

Net sales of the Industrial Applications Group (IAG) in the first quarter
of 2003 totaled $2.2 million, or 7% of net sales, compared to $3.5 million or
8% of net sales, in the first quarter of 2002.

Gross Margin.In the first quarter of 2003, gross margin was $8.3 million,
or 24% of net sales, compared to $9.4 million, or 23% of net sales, in the
first quarter of 2002. The increase in gross margin as a percentage of net
sales was primarily due to the product mix of systems shipped. The Companys
gross margins are below historical levels due primarily to decreased production
volume resulting in lower overhead absorption on a reduced revenue base.
During the industry downturn, the Company expects this trend of reduced gross
margins to continue. The Companys gross margin has significantly fluctuated in
the past and will continue to fluctuate based on several factors including the
severity and duration of the current industry downturn, product mix, overhead
absorption levels and costs associated with the introduction of new products.

Research, Development and Engineering.In the first quarter of 2003,
research, development and engineering expenses decreased to $7.8 million, or
23% of net sales, compared to $12.4 million, or 30% of net sales, in the first
quarter of 2002. Research, development and engineering expense decreased by
$4.6 million or 37% as a result of certain cost cutting measures, including a
reduction in headcount and discretionary spending, which were implemented by
the Company in response to the industry wide downturn. The Company expects to
continue investing substantial resources in research, development and
engineering programs.

Selling, General and Administrative.In the first quarter of 2003,
selling, general and administrative expenses decreased to $5.7 million, or 17%
of net sales, compared $8.1 million, or 20% of net sales, in the first quarter
of 2002. Selling, general and administrative expense decreased by $2.4 million
or 30% as a result of certain cost cutting measures, including a reduction in
headcount and discretionary spending, which were implemented by the Company in
response to the industry downturn.

Litigation settlement costs.On October 5, 2001, the Company settled its
outstanding litigation with MEMC. In connection with this settlement the
Company agreed to pay MEMC $1.8 million.

Other Expense, net.Other expense, net decreased to ($1.3) million during
the first quarter of 2003 from ($1.5) million during the same period a year
ago. This decrease primarily resulted from higher average balances in cash and
cash equivalents as a result of the $25.0 million of proceeds received in
connection with the Companys sale-leaseback transaction.

Provision for Income Taxes.At the end of the first quarter of 2003 and
2002, the Company established a valuation allowance for deferred tax assets
generated by its operating losses and is in a net operating loss carry-forward
position. As a result, the effective tax rate for the first quarter of 2003 and
2002 was zero. While the Company will reassess its tax situation each quarter,
the Company expects that its effective tax rate will approximate zero
throughout 2003.

12



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##### Table of Contents



Liquidity and Capital Resources

As of August 31, 2002, the Company had $60.4 million in cash and cash
equivalents, compared to $33.4 million at June 1, 2002. During the first
quarter of 2003, the Company had $1.9 million of cash provided by operating
activities compared to cash used of $9.5 million in operating activities during
the same period in 2002. The difference is primarily related to a reduction in
the net loss in the first quarter of 2003 as compared to the first quarter of
2001. Approximately $5.6 million of cash was provided in the first quarter of
2003 due to a decrease in working capital. The net loss of $6.5 million
included non-cash items totaling $2.8 million: depreciation and amortization
expense of $2.6 million; contribution of stock to employee benefit plan of $0.1
million and loss on disposal of assets of $0.1 million.

Net cash provided by investing activities totaled $23.8 million during the
first quarter of 2003 compared with net cash provided of $5.4 million during
the same period in 2002. Net cash proceeds received from the sale of the
Companys corporate headquarters and research and development facilities
(discussed below) provided $25.0 million and was offset by cash used for
capital expenditures of $0.6 million during the first quarter of 2003. Cash
provided by investing activities in the first quarter of 2002 primarily related
to maturities- of short-term investments.

Financing activities provided cash of $1.0 million during the first
quarter of 2003 compared with approximately $0.5 million during the same period
of 2002. The sale of stock to employees and the exercise of stock options
generated proceeds of $1.1 million during the quarter ended August 31, 2002.

On June 21, 2002, the Company completed a sale-leaseback transaction of
its corporate headquarters and research and development facilities in Chandler,
Arizona. As a result of the sale transaction, the Company received cash
proceeds of $25.0 million. The book value of buildings and improvements
removed from the balance sheet in the first quarter of 2003 was $25.1 million.
The loss on the sale of the buildings was $0.1 million. The Company
simultaneously entered into a 15-year lease for the buildings which contains
provisions for three five-year extensions, requires minimum annual rental
payments of $3.0 million and required a $0.7 million
deposit which was paid at the time of closing. In addition, the Company recorded expenses related to the lease
of $0.6 million at the time the transaction closed. Annual operating expenses
will increase by approximately $2.4 million, reflecting the new rental
payments, offset by interest income on the net proceeds and reduced
depreciation expense.

Beginning in 2001 and continuing into 2003, there was a significant
decrease in the worldwide demand for semiconductor capital equipment. As a
result of a rapid decline in the demand for semiconductor devices, inventory
buildups in telecommunications products, slower than expected personal computer
sales and overall slower global economic growth, many semiconductor
manufacturers reevaluated their capital spending plans. Accordingly, several of
the Companys customers rescheduled delivery or canceled existing orders.
Furthermore, the Company experienced a substantial decline in new orders. In
response to industry conditions and the introduction of new products that are
technologically advanced, the Company recorded significant inventory
write-downs, charges related to asset impairments and severance costs related
to across-the-board headcount reductions. In addition, the Company implemented
measures to reduce discretionary spending.

Due to the continuation and severity of the industry-wide downturn, the
Company implemented additional cost-cutting measures during 2002, which
included further decreases in discretionary spending and reductions in
worldwide headcount. Despite the expected continuation of the industry-wide
downturn and uncertainty associated with the introduction of new products, and
taking into account the Companys actions to restructure and downsize the
Company, management believes that the Companys current cash and investment
balances will be sufficient to meet the Companys anticipated cash needs for
working capital and capital expenditures at least through May 31, 2003.
However, due to significant uncertainties related to the duration and severity
of the semiconductor industry downturn and overall economic conditions, the
Company may require additional sources of funds in order to strengthen its
working capital position. Based on discussions with various lenders, the
Company believes that the sources of funds available include a line of credit
facility and term debt. If the Company were to raise additional funds through
the issuance of equity securities, the percentage ownership of the Companys
stockholders would be reduced. In addition, these equity securities may have
rights, preferences or privileges senior to the Companys common stock.
Furthermore, the Company may need to raise additional funds in future periods
through a public or private financing, or other sources, to fund working
capital requirements driven by the expansion of the business during the
industrys upturn. There are no assurances that the Company will be able to
consummate any of these

13



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transactions. For more detailed information, see Certain Factors
Affecting the Companys Business, set forth below.

The terms of the Agreement and Plan of Reorganization with Novellus
substantially limits our ability to incur indebtedness without the consent of
Novellus. In addition, the merger agreement with Novellus precludes the
issuance of debt or equity securities except under certain limited
circumstances and only with the prior consent of Novellus. Further, we made
certain covenants in the merger agreement that prevent us from entering into
certain agreements and prevent us from taking certain actions without the
consent of Novellus except agreements and actions that arise in the ordinary
course of business and which are consistent with past practices.

Related Party Transactions

On June 21, 2002, the Company completed a sale-leaseback transaction of
its corporate headquarters and research and development facilities in Chandler,
Arizona. The Company was assisted by a national real estate consulting firm,
which obtained 12 qualified offers from across the United States on behalf of
the Company. The winning offer was made by Phoenix Industrial Investment
Partners, L.P. (the Buyer), a firm controlled by Kenneth Levy, a director of
the Company, in a competitive arms length bidding process. The offer was
approved by the independent directors of the Company, based in large part on
the opinion of the Companys outside real estate consulting firm that it was
superior to all other offers. In this regard, the Buyers $25.0 million cash
purchase price offered the highest net proceeds and the most favorable net
present value. Moreover, the offer did not require a financing contingency.

In connection with the sale of the buildings, the Company has
simultaneously entered into a 15-year lease for the buildings. The lease, which
has been accounted for as an operating lease in accordance with SFAS No. 13,
Accounting for Leases, contains provisions for three five-year extensions and
requires minimum annual rental payments of $3.0 million.

As a result of the transaction, the Company received cash proceeds of
$25.0 million. The book value of buildings and improvements removed from the
balance sheet in the first quarter of 2003 is $25.1 million. The loss on the
sale of the buildings and improvements was $0.1 million.

Changes in Accounting Principles

In July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible
Assets. SFAS No. 142 supercedes prior guidance and requires that goodwill no
longer be amortized to earnings, but instead be annually reviewed for
impairment. In addition, goodwill should be tested for impairment upon
adoption. The Company early adopted SFAS No. 142 in the first quarter of 2002
and recorded a cumulative effect of change in accounting principle for the
write-off of goodwill of ($2.6) million, or ($0.08) per share, as of the
beginning of 2002 (June 3, 2001). The circumstances leading to the impairment
of goodwill primarily relate to current operating losses, the absence of
positive cash flows and uncertainties resulting from the duration and severity
of the industry downturn. The fair value of the reporting units, which
correspond to the Companys business segments, were estimated using quoted
market prices.

In June 2001, the Financial Accounting Standards Board issued SFAS No.
141, Business Combinations. SFAS No. 141 supercedes prior guidance and
requires that all business combinations in the scope of this statement be
accounted for using the purchase method. The provisions of this statement
apply to all business combinations initiated after June 30, 2001, as well as
all business combinations accounted for using the purchase method for which the
date of acquisition is July 1, 2001 or later. The Company adopted this
statement as required on July 1, 2001 and it did not affect the financial
statements.

In October 2001, the Financial Accounting Standards Board issued SFAS No.
144, Accounting for the Impairment or Disposal of Long-Lived Assets. SFAS No.
144, which replaces SFAS No. 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of, requires long-lived assets
to be measured at the lower of carrying amount or fair value less the cost to
sell. SFAS No. 144 also broadens disposal transactions reporting related to
discontinued operations. SFAS No. 144 is effective for financial statements
issued

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for fiscal years beginning after December 15, 2001. The Company has not
yet determined the effects SFAS No. 144 will have on its financial position,
results of operations or cash flows but does not anticipate that the impact
will be significant.

In April 2002, the Financial Accounting Standards Board issued SFAS No.
145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB
Statement No. 13, and Technical Corrections. SFAS No. 145 rescinds SFAS No. 4,
Reporting Gains and Losses from Extinguishment of Debt, and an amendment of
that Statement, SFAS No. 64, Extinguishments of Debt Made to Satisfy
Sinking-Fund Requirements. SFAS No. 145 also rescinds SFAS No. 44, Accounting
for Intangible Assets of Motor Carriers. SFAS No. 145 amends SFAS No. 13,
Accounting for Leases, to eliminate an inconsistency between the required
accounting for sale-leaseback transactions and the required accounting for
certain lease modifications that have economic effects that are similar to
sale-leaseback transactions. SFAS No. 145 also amends other existing
authoritative pronouncements to make various technical corrections, clarify
meanings, or describe their applicability under changed conditions. The Company
adopted SFAS No. 145 on June 2, 2002 and it did not have a material impact on
the financial position or results of operations of the Company.

Contractual Obligations and Commercial Commitments

The Company has Convertible Subordinated Notes of $115.0 million due in
September 2004. The Company also leases certain facilities and equipment under
capital leases and non-cancelable operating leases, which expire at various
dates through 2011. Other cash obligations consist of non-cancelable commercial
commitments, which the Company anticipates paying through March 2003.

Contractual cash obligations and commitments relating to debt, lease
payments and commercial commitments are as follows (in thousands):

|                              |  |      |         |           |  |             |        |            |  |   |       | 
|----------------------------- |  | ---- | ------- | --------- |  | ----------- | ------ | ---------- |  | - | ----- | 
|                              |  |      |         |           |  | Operating   |        | Commercial
|                              |  | Debt |         | Leases(1) |  | Commitments
|                              |  |      |         |           |  |            
|Through August 2003           |  | $    | 48      |           |  | $           | 4,504  |            |  | $ | 6,845 | 
|                             
|                             
|                             
|                             
|September 2003 to August 2006 |  |      | 115,057 |           |  |             | 10,787 |            |  |   |      | 
|                             
|                             
|                             
|                             
|September 2006 to August 2008 |  |      |        |           |  |             | 6,669  |            |  |   |      | 
|                             
|                             
|                             
|                             
|Thereafter                    |  |      |        |           |  |             | 32,337 |            |  |   |      | 
|                              |  |      |         |           |  |             |        |            |  |   |       | 
|Total                         |  | $    | 115,105 |           |  | $           | 54,297 |            |  | $ | 6,845 | 
|                              |  |      |         |           |  |             |        |            |  |   |       | 



---

|(1) |  | Reported amounts for operating leases have been reduced for income from
subleases. Sublease income is as follows: $2,326 through August 2003,
$7,584 September 2003 to August 2006; $5,097 September 2006 to August
2008; $8,822 thereafter.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Impact of Recently Issued Accounting Standards

In June 2001, the Financial Accounting Standards Board issued SFAS No.
143, Accounting for Asset Retirement Obligations. SFAS No. 143 addresses
financial accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and the associated asset retirement
costs. This Statement applies to all entities and applies to legal obligations
associated with the retirement of long-lived assets that result from the
acquisition, construction, development and (or) the normal operation of a long-lived
asset, except for certain obligations of lessees. It requires that the
fair value of a liability for an asset retirement obligation be recognized in
the period in which it is incurred if a reasonable estimate of fair value can
be made. The associated asset retirement costs would be capitalized as part of
the carrying amount of the long-lived asset. SFAS No. 143 is effective for
financial statements issued for fiscal years beginning after June 15, 2002. The
Company has not yet determined the effects SFAS No. 143 will have on its
financial position, results of operations or cash flows.

In June 2002, the Financial Accounting Standards Board issued SFAS No.
146, Accounting for Costs Associated with Exit or Disposal Activities. SFAS
No. 146 requires that a liability for a cost associated with an exit

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or disposal activity be recognized when the liability is incurred. Prior
guidance required that a liability for an exit cost be recognized at the date
of an entitys commitment to an exit plan. This Statement also establishes that
fair value techniques should be used to measure the liability. SFAS No. 146 is
effective for exit or disposal activities that are initiated after December 31,
2002.

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

This report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. SpeedFam-IPEC claims the protection of the safe-harbor
for forward-looking statements contained in those Sections. These
forward-looking statements are often characterized by the terms may,
believes, projects, expects, or anticipates, and do not reflect
historical facts. Specific forward-looking statements contained in this report
relate to, but are not limited to: (i) SpeedFam-IPECs expectation that the
merger with Novellus will close; (ii) the continuation of the trend in reduced
or fluctuating gross margins; (iii) the continuation of investment in research,
development, and engineering programs; (iv) SpeedFam-IPECs expectation that
its effective tax rate will approximate zero throughout 2003; (v)
SpeedFam-IPECs expectation that the industry-wide downturn in the
semiconductor industry will continue; and (vi) managements belief that
current cash and investment balances along with cash generated through
operations will be sufficient to meet the Companys cash needs or that sources
of additional financings may be available. Forward-looking statements involve
risks, uncertainties and other factors that may cause actual results,
performance or achievements of SpeedFam-IPEC to be materially different from
those expressed or implied by such forward-looking statements. Factors that
could affect SpeedFam-IPECs results and cause them to materially differ from
those contained in the forward-looking statements include those listed below
under the heading Certain Factors Affecting the Companys Business.
Forward-looking statements speak only as of the date the statement was made.
SpeedFam-IPEC does not undertake and specifically declines any obligation to
update any forward-looking statements.

CERTAIN FACTORS AFFECTING THE COMPANYS BUSINESS

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

We may not achieve the benefits we expect from the merger with Novellus.
We entered into the merger agreement with Novellus with the expectation that
the merger will result in significant benefits to both parties. Achieving the
benefits of the merger depends on the timely, efficient and successful
execution of a number of post-merger events, including integrating the
operations, products, personnel and technologies of the two companies. In
addition, the attention and effort devoted to the integration of the two
companies could significantly divert managements attention from other
important issues, and could seriously harm the combined company.

There may be fluctuations in the price of the common stock of Novellus,
which, based on the fixed exchange ratio set forth in our merger agreement with
Novellus and investors belief that the merger will be consummated at such
stock price, may affect the market price of our common stock which could result
in substantial losses for investors.

Failure to complete the merger could negatively impact our stock price and
future business and operations.If the merger is not completed for any reason,
we may be subject to a number of material risks, including the following:



| |  |  | we may be required under certain circumstances to pay
Novellus a termination fee in cash equal to $5.0 million and
reimburse Novellus for its expenses;                      
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | the price of our common stock may decline to the extent that
the current market price of our common stock reflects a market
assumption that the merger will be completed; and
|
| |  |  | costs related to the merger, such as legal, accounting and
financial advisor fees, must be paid even if the merger is not
completed.                                         

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Additionally, our customers and suppliers, in response to the announcement
of the merger, may delay or defer decisions concerning us or decide to
terminate their relationship with us. Any delay or deferral in those decisions
or any decision to terminate such relationships by our customers or suppliers
could have a material adverse effect on our business, regardless of whether the
merger is ultimately completed. Similarly, this may adversely affect our
ability to attract and retain key management, sales, marketing and technical
personnel to the extent we need to keep such personnel.

Further, if the merger is terminated and our board of directors determines
to seek another merger or business combination, there can be no assurance that
it will be able to find a partner willing to pay an equivalent or more
attractive price than the price to be paid in the proposed merger. In addition,
during the period in which the merger agreement is in effect and subject to
very narrowly defined exceptions, we are prohibited from soliciting, initiating
or encouraging or entering into certain extraordinary transactions, such as a
merger, sale of assets or other business combination, with any party other than
Novellus.

We are using substantial cash reserves to fund operations during the
industry downturn, and there can be no assurance we will be able to achieve
positive cash flow in the foreseeable future. Although during the first quarter
of 2003, we generated $1.9 million in cash from operating activities, we
remained cash flow negative. We are currently exploring options to
generate positive cash flow, including continued reduction in operating
expenses. However, we continue to experience depressed revenues and orders and
we are unable to determine when increasing demand for our products will resume,
if ever. Accordingly, we can provide no assurances that we will achieve a
positive cash flow position in the future or obtain or generate sufficient cash
proceeds from financings to sustain our operations.

Our common stock may be delisted by Nasdaq if we do not comply with its
listing maintenance requirements.Our common stock is listed on the Nasdaq
National Market. We are currently in compliance with Nasdaqs continued listing
requirements. However, if the price of our common stock falls below $3.00 for
30 consecutive days and if our stockholders equity falls below
$10.0 million, or
if we are not otherwise able to demonstrate to Nasdaq our ability to comply
with its other listing standards, our shares of common stock might be delisted.
A delisting is likely to make the price of our common stock fall steeply. This
lack of liquidity also could make it more difficult for us to raise capital in
the future. As of August 31, 2002 our stockholders equity was $8.5 million and
our stock price as quoted on Nasdaq was $3.71 per share as of September 30,
2002.

Our current business model is predicated on the successful launch and
market acceptance of our Momentum and Momentum300 products. Our failure to win
qualification contests and obtain volume orders for our 200 and 300 millimeter
would materially adversely affect our cash flow and operations.A significant
portion of our projected revenue depends on sales of our Momentum product. Any
positive response to Momentum through evaluation testing may not translate into
sales of Momentum on the scale or in the time frame we anticipate. If we are
unable to close anticipated orders, sell products at profitable levels, or
fulfill orders for the Momentum product, our revenues, cash flow and
profitability will be adversely affected.

In particular, we must succeed in selling CMP equipment for leading-edge
technologies such as 300 millimeter wafer processing, 0.13 micron and below
processing, and copper applications in order to increase our cash flows and
maintain market share. To compete for market share in these leading-edge
technologies, we must enter into qualification contests that will result in
manufacturers choosing a line of equipment and purchasing such equipment in
volume. To date, we have not won any qualification contests for our 300
millimeter tool. If we fail to win qualification contests for 300 millimeter,
0.13 micron and below processing, and copper applications, we may experience
difficulty achieving volume sales of Momentum and Momentum300 equipment to
semiconductor manufacturers, which would adversely affect revenues and cash
flows.

The rollout of Momentum and Momentum300 may be slowed due to:



| |  |  | continuation of the semiconductor industry downturn;
| | - |  | ----------------------------------------------------
|
| |  |  | manufacturing problems;                             

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| |  |  | unforeseen technical problems with the Momentum or Momentum300 product
itself;
| | - |  | ------------------------------------------------------------------------------
|
| |  |  | changes in the CMP marketplace that differ from our expectations; or          
|
| |  |  | competitive factors.                                                          

The sales and implementation cycles for our products are long, and we may
incur substantial, non-recoverable expenses or devote significant resources to
sales that may not occur when anticipated, if at all.A customers decision to
purchase our products involves a significant commitment of its resources and a
lengthy evaluation and product qualification process. Our sales cycle for new
customers is lengthy, typically from six to eighteen months. After a customer
decides to purchase our products, the timing of their deployment and
implementation depends on a variety of factors specific to each customer.
Further, prospective customers may delay purchasing our products in order to
evaluate new technologies. Throughout the sales cycle, we spend considerable
resources educating and providing information to prospective customers
regarding the use and benefits of our products.

Our dependence on selling a small number of high-priced machines to a
small number of major customers may lead to reduced revenues and profits should
our customers delay or cancel delivery orders.We derive a significant portion
of our revenue from the sale of a relatively small number of high-priced CMP
systems to a select group of CMP customers. The following customers each
represented more than 10% of SpeedFam-IPECs revenues for the fiscal years
indicated: Intel Corporation and United Microelectronics for the fiscal year
ended June 1, 2002; Intel Corporation, United Microelectronics and Silterra
Malaysia Sdn. Bhd for the fiscal year ended June 2, 2001; and Intel Corporation
and United Microelectronics for the fiscal year ended June 3, 2000. The loss of
a significant customer or a substantial reduction in orders by any significant
customer, including reductions due to customer departures from previous buying
patterns, would damage our business and results of operations. Moreover, we are
subject to the credit risk of our customers. Consequently, if any one of our
significant customers delays payment or is unable to pay, our financial
condition and business would be affected.

We are transitioning our manufacturing process to more of an outsourced
model, which will increase our dependence on a few key suppliers.For our
Momentum products, we are moving toward an outsourced production model, in
which a limited number of key vendors will supply a limited number of modules
designed to our specifications that we will assemble into our products.
Historically, we have manufactured our own products from parts, components and
subassemblies provided by more than one hundred suppliers. Although we
anticipate that our new processes will streamline production, reduce our
inventories, and increase our margins, our operating results and relationships
with our customers may suffer in the event of:



| |  |  | insufficient quantity or quality of parts from suppliers;                             
| | - |  | --------------------------------------------------------------------------------------
|
| |  |  | our failure to receive shipments from suppliers in a cost-effective and
timely manner;
|
| |  |  | our suppliers failure to obtain necessary raw materials or other parts;
or           
|
| |  |  | our suppliers inability to obtain credit or maintain sufficient cash
flows.          

Orders in backlog may not result in future revenue if customers cancel or
reschedule orders.We include in backlog only those customer orders for which
we have accepted purchase orders. Expected revenue may be lower if customers
cancel or reschedule orders, which they can generally do without penalty. For
instance, during fiscal 2002, we decreased our backlog by approximately $19
million for orders that were canceled or had shipment dates that were
rescheduled beyond the next twelve months.

The downturn in the semiconductor industry has led and may continue to
lead to decreased revenues.Beginning in 2001 and continuing into 2003, slowing
worldwide demand for semiconductors resulted in significant inventory buildups
for semiconductor companies and a rapid decline in demand for semiconductor
manufacturing equipment. Presently, we have little visibility regarding how
long the semiconductor industry downturn will last or how severe the downturn
will be. During fiscal 2002, we experienced cancellations and suspensions of
orders for

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our products and a significant decrease in orders. If the downturn
continues or worsens, we may experience additional cancellations and/or
suspensions of orders for our products and a continuing slowdown in orders.

Our quarterly results of operations could fluctuate due to factors outside
of our control, which may cause fluctuations and a corresponding decrease to
the price of our securities.Our quarterly operating results may fluctuate for
reasons that are not within our control, including:



| |  |  | industry demand for our products, which depends on economic
conditions in the semiconductor and silicon wafer markets;                                        
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | timing of new product introductions and market acceptance of
new or enhanced versions of our or our customers products;                                      
|
| |  |  | ability to develop and implement new technologies in a timely fashion to
meet market demand;                                                                  
|
| |  |  | the health of other industries on which we are directly or
indirectly dependant, such as the personal computer,
telecommunications and electronics industries;
|
| |  |  | consolidation in the chip manufacturing industry;                                                                                                             
|
| |  |  | the actions of our competitors;                                                                                                                               
|
| |  |  | timing, cancellation or delay of customer orders, shipments and
acceptance;                                                                                   
|
| |  |  | unexpected costs associated with sales and service of the CMP tools and
processes; and                                                                        
|
| |  |  | foreign currency exchange rates.                                                                                                                              

The fluctuation of our quarterly operating results, as well as other
factors, could cause the market price of our securities to fluctuate and
decrease. Some of these factors include:



| |  |  | enhanced credit risk associated with our debt;                                                                                                                
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | the announcement of new customers or the loss of significant customers;                                                                                       
|
| |  |  | delays in orders;                                                                                                                                             
|
| |  |  | announcements by our competitors;                                                                                                                             
|
| |  |  | sales or purchases of Company securities by officers, directors and
insiders;                                                                                 
|
| |  |  | government regulation;                                                                                                                                        
|
| |  |  | changes in earnings estimates or recommendations by
securities analysts, or our failure to achieve analysts earnings
estimates;                              
|
| |  |  | announcements regarding restructuring, technological
innovations, departures of key officers, directors or employees, or
the introduction of new products; and
|
| |  |  | general market conditions and other factors, including
factors unrelated to our operating performance or that of our
competitors.                             

In addition, the stock prices of many companies in the semiconductor
industry have experienced wide fluctuations that have often been unrelated to
the operating performance of those companies. These factors and price
fluctuations may materially and adversely affect the market price of our
securities. Investors in our securities should be willing to incur the risk of
such price fluctuations.

19



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##### Table of Contents



We face intense competition, including from companies with greater
resources. This competitive pressure could lead to continued decreases in our
revenues, which would adversely affect our operating results.Several companies
currently market CMP systems that directly compete with our products, including
Applied Materials, Inc. and Ebara Corporation. For several reasons, we may not
compete effectively with existing and potential competitors. These reasons may
include:



| |  |  | Some competitors have greater financial resources and are in better
financial condition than us.                                                                                                                                                                                                                        
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Some competitors have more extensive engineering,
manufacturing, marketing and customer service and support
capabilities.                                                                                                                                                                                               
|
| |  |  | Some competitors may supply a broader range of semiconductor
capital equipment, enabling them to serve more or all of their
customers needs. This could limit sales for us and strengthen
existing relationships that competitors have with semiconductor
manufacturers, including our current and potential customers.
|
| |  |  | Some competitors may be able to better adapt to changing market
conditions and customer demand.                                                                                                                                                                                                                         
|
| |  |  | Competitors are expected to continue to improve their
existing technology and introduce new products. These products may
be better than ours, cheaper than ours or more efficient than ours.                                                                                                                            
|
| |  |  | 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 our products.                                                                                                                                       

Increased competitive pressure could lead to lower prices and reduced
margins for our products. If we experience continued reductions in our revenue
for any reason, our margins will continue to be reduced, which would adversely
affect our results of operations. We cannot assure you that we will be able to
compete successfully in the future.

We may not develop products in time to meet changing technologies, which
could lead to reduced revenue and market share.Semiconductor manufacturing
equipment and processes are subject to rapid technological changes and product
obsolescence. Our success in developing, introducing and selling new and
enhanced products and technologies depends upon a variety of factors including:



| |  |  | anticipation of market trends;                                              
| | - |  | ----------------------------------------------------------------------------
|
| |  |  | product selection;                                                          
|
| |  |  | timely and efficient completion of product design and development;          
|
| |  |  | timely and efficient implementation of manufacturing and assembly
processes;
|
| |  |  | adjustment of production and pricing to meet customer demand;               
|
| |  |  | product performance in the field; and                                       
|
| |  |  | effective sales and marketing.                                              

If we are unable to timely develop new products and technologies, we will
likely experience reduced revenue and market share.

Product or process development problems could harm our results of
operations.Our products are complex, and from time to time have defects or
bugs that are difficult and costly to fix. This can harm our results of
operations in the following ways:

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| |  |  | We incur substantial costs to ensure the functionality and reliability
of products early in their life cycle.                                         
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Repeated defects or bugs can reduce orders, increase
manufacturing costs, adversely impact working capital and increase
service and warranty expenses.
|
| |  |  | We require significant lead-times between product introduction and
commercial shipment.                                                               

As a result, we may have to write off inventory and other assets related
to products and could lose customers and revenue. There is no assurance that we
will be successful in preventing product and process development problems that
could potentially harm our results of operations.

Our dependence on international sales, particularly in Asia and Europe,
subjects us to a risk of decreased revenues.International sales are subject
to additional risks and uncertainties, including:



| |  |  | foreign exchange issues, including risks associated with our
forward exchange contracts to buy and sell foreign currency;                                                 
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | language and other cultural differences that may inhibit our
sales and marketing efforts and create internal communication
problems among our US and foreign counterparts;
|
| |  |  | political, economic and regulatory environment of the countries where
customers are located;                                                                              
|
| |  |  | tariffs, quotas, and other trade barriers or restrictions;                                                                                                                
|
| |  |  | collection of accounts receivable;                                                                                                                                        
|
| |  |  | inadequate intellectual property protection;                                                                                                                              
|
| |  |  | potentially adverse tax consequences; and                                                                                                                                 
|
| |  |  | intense price competition.                                                                                                                                                

International sales accounted for 63% of our total revenue in the first
quarter of 2003, 64% for 2002 and 61% for 2001. We expect that international
sales will continue to account for a significant portion of total revenue in
future periods. If international sales are adversely effected as a result of
any of the foregoing risks or uncertainties, our cash flows and financial
condition would be similarly effected.

If we are unable to protect our intellectual property, our business could
suffer.Our intellectual property is very important to our success. We may not
be able to protect our technology for several reasons:



| |  |  | 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 our intellectual property;                                                                                              
|
| |  |  | third parties may prevent us from selling products by
alleging infringement, obtaining intellectual property rights that
limit our ability to do business or require us to license
technology; and
|
| |  |  | we may not have adequate financial resources to address a dispute.                                                                                                                                

21



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The occurrence of any of the foregoing risks or uncertainties concerning
our intellectual property could make us less competitive and adversely affect
our revenues, cash flows and financial condition.

Third parties hold many patents relating to CMP machines and processes,
which expose us to the possibility that we may be forced to cease production of
our products.If we lose any of our intellectual property rights or need to
obtain licenses to third party intellectual property, we cannot assure you that
we will be able to obtain such licenses on reasonable terms, if at all. If we
are unable to secure the necessary licenses, we may be forced to cease a
substantial portion of our operations.

We are subject to environmental regulations and our inability or failure
to comply with these regulations could adversely affect our business.We are
subject to environmental regulations in connection with our business
operations, including but not limited to regulations related to the
development, manufacturing and use of our products. From time to time, we
receive notices alleging violations of these regulations. It is our policy to
respond promptly to these notices and to take necessary corrective action.
Failure or inability to comply with existing or future environmental
regulations could result in significant remediation liabilities, the imposition
of fines and/or the suspension or termination of development, manufacturing or
use of certain of our products, each of which could damage our financial
condition and results of operations.

Terrorist attacks and threats or actual war may negatively impact all
aspects of our operations, revenues, costs and stock price.Recent terrorist
attacks in the United States, as well as future events occurring in response or
connection to them, including, without limitation, future terrorist attacks
against United States targets, rumors or threats of war, actual conflicts
involving the United States or its allies or military or trade disruptions
impacting our domestic or foreign suppliers of parts, components and
subassemblies, may impact our operations, including, among other things,
causing delays or losses in the delivery of supplies to us and decreased sales
of our products. More generally, any of these events could cause consumer
confidence and spending to decrease or result in increased volatility in the
United States and worldwide financial markets and economy. They also could
result in economic recession in the United States or abroad. Any of these
occurrences could have a significant impact on our operating results, revenues
and costs.

22



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##### Table of Contents






ITEM 3. Quantitative and Qualitative Disclosures About Market Risk.

For financial market risks related to changes in interest rates and
foreign currency exchange rates, refer to Part II, Item 7A, Quantitative and
Qualitative Disclosures About Market Risk, in the Companys Annual Report on
Form 10-K for the year ended June 1, 2002.




ITEM 4. Controls and Procedures.

Based on the evaluation of the Companys disclosure controls and
procedures as of a date within 90 days of the filing date of this quarterly
report, each of the Companys Chief Executive Officer and Chief Financial
Officer have concluded that the Companys disclosure controls and procedures
are effective in ensuring that information required to be disclosed by the
Company in the reports that it files or submits under the Securities and
Exchange Act of 1934, as amended, is recorded, processed, summarized and
reported, within the time period specified by the Securities and Exchange
Commissions rules and forms.

There were no significant changes in the Companys internal controls or in
other factors that could significantly affect these controls subsequent to the
date of their evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.




PART II  OTHER INFORMATION

Item 1. Legal Proceedings



| |  |  | None
| |  |  | ----

Item 2. Changes in Securities



| |  |  | None
| |  |  | ----

Item 3. Defaults upon Senior Securities



| |  |  | None
| |  |  | ----

Item 4. Submission of Matters to a Vote of Security Holders



| |  |  | None
| |  |  | ----

Item 5. Other Information



| |  |  | None
| |  |  | ----

Item 6. Exhibits and Reports on Form 8-K.



| | (a) |  | Exhibits.           
| | --- |  | --------------------
|
| |     |  | See Exhibit Index   
|
| | (b) |  | Reports on Form 8-K.

A report on Form 8-K, Item 2 was filed on June 27, 2002 concerning the
completion of the Companys sale/leaseback transaction.

A report on Form 8-K, Item 5 was filed on August 13, 2002 concerning the
execution of an Agreement

23



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##### Table of Contents



and Plan of Reorganization pursuant to which
SpeedFam-IPEC will become a wholly-owned subsidiary of
Novellus Systems, Inc. through the merger of a wholly-owned subsidiary
of Novellus with and into SpeedFam-IPEC. The consummation of the merger is
contingent upon receiving requisite approval of SpeedFam-IPEC shareholders.

24



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##### Table of Contents






SIGNATURE

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

|                       |  |                                                                                          |  | 
|---------------------- |  | ---------------------------------------------------------------------------------------- |  | 
|                       |  | /s/ J. Michael Dodson                                                                    |  | 
|                       |  |                                                                                          |  | 
|Date: October 15, 2002 |  | By J. Michael Dodson
Secretary and Chief Financial Officer
(Principal Financial Officer) |  | 
|                      
|                      
|                      
|                      
|                       |  |                                                                                          |  | 
|                      
|                      
|                      
|                      
|                       |  | /s/ G. Michael Latta                                                                     |  | 
|                       |  |                                                                                          |  | 
|Date: October 15, 2002 |  | By G. Michael Latta
Corporate Controller
(Principal Accounting Officer)                  |  | 

25



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##### Table of Contents



CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER

I, Richard J. Faubert, certify that:



| | 1. |  | I have reviewed this quarterly report on Form 10-Q of SpeedFam-IPEC, Inc. (the reigstrant);                                                                                                                                                                                                                                                                                          
| | -- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | 2. |  | Based on my knowledge, this quarterly report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements made, in
light of the circumstances under which such statements were made, not misleading with
respect to the period covered by this quarterly report;                                                       
|
| | 3. |  | Based on my knowledge, the financial statements, and other financial information included
in this quarterly report, fairly present, in all material respects, the financial
condition, results of operations and cash flows of the registrant as of, and for, the
periods presented in this quarterly report;                                                                        
|
| | 4. |  | The Companys other certifying officer and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14
and 15d-14) for the registrant and we have:                                                                                                                                                                
|
| |    |  | a) designed such disclosure controls and procedures to ensure that material information
relating to the Company, including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in which this quarterly
report is being prepared;                                                                                      
|
| |    |  | b) evaluated the effectiveness of the Companys disclosure controls and procedures as of a
date within 90 days prior to the filing date of this quarterly report (the Evaluation
Date); and                                                                                                                                                                                        
|
| |    |  | c) presented in this quarterly report our conclusions about the effectiveness of the
disclosure controls and procedures based on our evaluation as of the Evaluation Date;                                                                                                                                                                                                           
|
| | 5. |  | The Companys other certifying officer and I have disclosed, based on our most recent
evaluation, to the Companys auditors and the audit committee of Companys board of
directors:                                                                                                                                                                                                 
|
| |    |  | a) all significant deficiencies in the design or operation of internal controls which
could adversely affect the Companys ability to record, process, summarize and report
financial data and have identified for the Companys auditors any material weaknesses in
internal controls; and                                                                                          
|
| |    |  | b) any fraud, whether or not material, that involves management or other employees who
have a significant role in the Companys internal controls; and                                                                                                                                                                                                                               
|
| | 6. |  | The Companys other certifying officer and I have indicated in this quarterly report
whether or not there were significant changes in internal controls or in other factors
that could significantly affect internal controls subsequent to the date of our most
recent evaluation, including any corrective actions with regard to significant
deficiencies and material weaknesses.

Date: October 15, 2002

/s/ Richard J. Faubert
Richard J. Faubert
Chief Executive Officer

26



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##### Table of Contents



CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER

I, J. Michael Dodson, certify that:



| | 1. |  | I have reviewed this quarterly report on Form 10-Q of SpeedFam-IPEC, Inc. (the registant);                                                                                                                                                                                                                                                                                           
| | -- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | 2. |  | Based on my knowledge, this quarterly report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements made, in
light of the circumstances under which such statements were made, not misleading with
respect to the period covered by this quarterly report;                                                       
|
| | 3. |  | Based on my knowledge, the financial statements, and other financial information included
in this quarterly report, fairly present, in all material respects, the financial
condition, results of operations and cash flows of the registrant as of, and for, the
periods presented in this quarterly report;                                                                        
|
| | 4. |  | The Companys other certifying officer and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14
and 15d-14) for the registrant and we have:                                                                                                                                                                
|
| |    |  | a) designed such disclosure controls and procedures to ensure that material information
relating to the Company, including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in which this quarterly
report is being prepared;                                                                                      
|
| |    |  | b) evaluated the effectiveness of the Companys disclosure controls and procedures as of
a date within 90 days prior to the filing date of this quarterly report (the Evaluation
Date); and                                                                                                                                                                                        
|
| |    |  | c) presented in this quarterly report our conclusions about the effectiveness of the
disclosure controls and procedures based on our evaluation as of the Evaluation Date;                                                                                                                                                                                                           
|
| | 5. |  | The Companys other certifying officer and I have disclosed, based on our most recent
evaluation, to the Companys auditors and the audit committee of Companys board of
directors:                                                                                                                                                                                                 
|
| |    |  | a) all significant deficiencies in the design or operation of internal controls which
could adversely affect the Companys ability to record, process, summarize and report
financial data and have identified for the Companys auditors any material weaknesses in
internal controls; and                                                                                          
|
| |    |  | b) any fraud, whether or not material, that involves management or other employees who
have a significant role in the Companys internal controls; and                                                                                                                                                                                                                               
|
| | 6. |  | The Companys other certifying officer and I have indicated in this quarterly report
whether or not there were significant changes in internal controls or in other factors
that could significantly affect internal controls subsequent to the date of our most
recent evaluation, including any corrective actions with regard to significant
deficiencies and material weaknesses.

Date: October 15, 2002

/s/ J. Michael Dodson
J. Michael Dodson
Chief Financial Officer

27



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EXHIBIT INDEX

|        |  |                                                                                                                                                                                 
|------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                                                                                                 
|Number  |  | Description                                                                                                                                                                     
|        |  |                                                                                                                                                                                 
|*3.1    |  | Articles of Incorporation of SpeedFam-IPEC, Inc.
(incorporated by reference to Exhibit 3.1 to the Registrants
Form 10-Q for the quarter ended March 2, 2002 (File No. 0-26784))
|       
|       
|       
|       
|        |  |                                                                                                                                                                                 
|       
|       
|       
|       
|*3.2    |  | By-laws of SpeedFam-IPEC, Inc. (incorporated by
Reference to Exhibit 3.2 to the Registrants Form 10-Q for
the quarter ended March 2, 2002 (File No. 0-26784))                  
|       
|       
|       
|       
|        |  |                                                                                                                                                                                 
|       
|       
|       
|       
|99.1    |  | Certification of Chief Executive Officer and Chief Financial
Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002   



---

|* |  | Previously filed.
|- |  | -----------------

28