##### Table of Contents



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United States Securities and Exchange Commission
Washington, D.C. 20549

Form 10-Q

(Mark One)

|        |  |                                                                    
|------- |  | -------------------------------------------------------------------
|[X].gif |  | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities 
|       
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|        |  | Exchange Act of 1934                                               
|        |  |                                                                    
|       
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|        |  | For the quarterly period ended March 2, 2002                       
|        |  |                                                                    
|       
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|       
|[ ].gif |  | Transition Report Pursuant to Section 13 or 15(d) of the Securities
|       
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|        |  | Exchange Act of 1934                                               

For the transition period from ____________ to ____________

Commission File Number 0-26784

SpeedFam-IPEC, Inc.(Exact name of registrant as specified in its charter)

|                                                                                  |  |                                                   
|--------------------------------------------------------------------------------- |  | --------------------------------------------------
|Illinois
(State or other jurisdiction of
incorporation or organization)           |  | 36-2421613
(I.R.S. Employer
Identification Number)
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|305 North 54th Street, Chandler, Arizona
(Address of principal executive offices) |  | 85226
(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 [X].gif  No [ ].gif

The Registrant had 30,602,532 shares of its common stock, no par value,
outstanding as of March 31, 2002.



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TABLE OF CONTENTS



|                               |                                                                                                            |  |  |  |  |  |  | 
|------------------------------ | ---------------------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|                               | Condensed Consolidated Balance Sheets                                                                     
|Part I  Financial Information
|                               | Condensed Consolidated Statements of Operations                                                           
|                               | Condensed Consolidated Statements of Cash Flows                                                           
|                               | Notes to Condensed Consolidated Financial Statements                                                      
|                               | Managements Discussion and Analysis                      of Financial Condition and Results of Operations
|                               | ITEM 3. Quantitative and Qualitative Disclosures About Market Risk.                                       
|PART II  OTHER INFORMATION   
|                               | Item 1. Legal Proceedings                                                                                 
|                               | Item 6. Exhibits and Reports on Form 8-K                                                                  
|Signature                     
|EXHIBIT INDEX                 
|EX-3.1                        
|EX-3.2                        



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##### Table of Contents



SpeedFam-IPEC, Inc.Index

|                             |                                                                                              |                                                                                                                             |    |      |   | 
|---------------------------- | -------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------- | -- | ---- | - | 
|                             |                                                                                              |                                                                                                                             |    | Page
|                             |                                                                                              |                                                                                                                             |    |     
|Part I Financial Information |                                                                                              |                                                                                                                             |    |     
|                            
|                            
|                            
|                            
|                             | Item 1. Financial Statements                                                                 |                                                                                                                             |    |      |  
|                            
|                            
|                            
|                            
|                             |                                                                                              | Condensed
Consolidated Balance SheetsMarch 2, 2002 and June 2, 2001                                                         |    |      | 3 | 
|                            
|                            
|                            
|                            
|                             |                                                                                              | Condensed Consolidated Statements of OperationsThird Quarter Ended and Three Quarters Ended
March 2, 2002 and March 3, 2001 |    |      | 4 | 
|                            
|                            
|                            
|                            
|                             |                                                                                              | Condensed Consolidated Statements of Cash FlowsThree Quarters Ended March 2, 2002 and March 3, 2001                         |    |      | 5 | 
|                            
|                            
|                            
|                            
|                             |                                                                                              | Notes to Condensed Consolidated Financial Statements                                                                        |    |      | 6 | 
|                            
|                            
|                            
|                            
|                             | Item 2. Managements
Discussion and Analysis of Financial Conditionand Results of Operations |                                                                                                                             |    | 13   |  
|                            
|                            
|                            
|                            
|                             | Item 3. Quantitative and Qualitative Disclosures about Market Risk                           |                                                                                                                             |    | 25   |  
|                            
|                            
|                            
|                            
|Part II Other Information    |                                                                                              |                                                                                                                             | 25 |     
|                            
|                            
|                            
|                            
|                             | Item 1. Legal Proceedings                                                                    |                                                                                                                             |    | 25   |  
|                            
|                            
|                            
|                            
|                             | Item 6. Exhibits and Reports on Form 8-K                                                     |                                                                                                                             |    | 26   |  
|                            
|                            
|                            
|                            
|Signatures                   |                                                                                              |                                                                                                                             | 27 |     
|                            
|                            
|                            
|                            
|Exhibit index                |                                                                                              |                                                                                                                             | 28 |     

2



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##### Table of Contents









Part 1  Financial
Information

SpeedFam-IPEC, Inc.
Condensed Consolidated Balance Sheets
(in thousands)

|                                   |                                                                                                                                                       |                             |                                      |                                            |         |             |         |           |         |   |         | 
|---------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------- | ------------------------------------ | ------------------------------------------ | ------- | ----------- | ------- | --------- | ------- | - | ------- | 
|                                   |                                                                                                                                                       |                             |                                      |                                            |         | March 2,    |         | June 2,  
|                                   |                                                                                                                                                       |                             |                                      |                                            |         | 2002        |         | 2001     
|                                   |                                                                                                                                                       |                             |                                      |                                            |         | (Unaudited) |         | (Audited)
|                                   |                                                                                                                                                       |                             |                                      |                                            |         |             |         |          
|                                   |                                                                                                                                                       |                             |                                      | Assets                                     |         |             |         |           |         |   |         | 
|                                  
|                                  
|                                  
|                                  
|Current assets:                    |                                                                                                                                                       |                             |                                      |                                            |         |             |         |          
|                                  
|                                  
|                                  
|                                  
|                                   | Cash and cash equivalents                                                                                                                             |                             | $                                    | 36,164                                     |         |             | $       | 47,344    |        
|                                  
|                                  
|                                  
|                                  
|                                   | Short-term investments                                                                                                                                |                             |                                      |                                           |         |             |         | 13,495    |        
|                                  
|                                  
|                                  
|                                  
|                                   | Trade accounts receivable, net                                                                                                                        |                             |                                      | 20,959                                     |         |             |         | 60,619    |        
|                                  
|                                  
|                                  
|                                  
|                                   | Inventories                                                                                                                                           |                             |                                      | 39,622                                     |         |             |         | 83,857    |        
|                                  
|                                  
|                                  
|                                  
|                                   | Shipped systems pending acceptance                                                                                                                    |                             |                                      | 6,668                                      |         |             |         | 13,953    |        
|                                  
|                                  
|                                  
|                                  
|                                   | Prepaid expenses and other current assets                                                                                                             |                             |                                      | 2,511                                      |         |             |         | 4,549     |        
|                                   |                                                                                                                                                       |                             |                                      |                                            |         |             |         |           |        
|                                   |                                                                                                                                                       | Total current assets        |                                      |                                            | 105,924 |             |         |           | 223,817 |  
|                                  
|                                  
|                                  
|                                  
|Property, plant and equipment, net |                                                                                                                                                       |                             | 60,773                               |                                            |         |             | 75,241  |          
|                                  
|                                  
|                                  
|                                  
|Other assets                       |                                                                                                                                                       |                             | 15,627                               |                                            |         |             | 15,827  |          
|                                   |                                                                                                                                                       |                             |                                      |                                            |         |             |         |           |        
|                                   |                                                                                                                                                       | Total assets                |                                      | $                                          | 182,324 |             |         | $         | 314,885 |  
|                                   |                                                                                                                                                       |                             |                                      |                                            |         |             |         |           |        
|                                   |                                                                                                                                                       |                             | Liabilities and Stockholders Equity |                                            |         |             |         |           |         |   |        
|                                  
|                                  
|                                  
|                                  
|Current liabilities:               |                                                                                                                                                       |                             |                                      |                                            |         |             |         |          
|                                  
|                                  
|                                  
|                                  
|                                   | Current portion of long-term debt                                                                                                                     |                             | $                                    | 87                                         |         |             | $       | 229       |        
|                                  
|                                  
|                                  
|                                  
|                                   | Accounts payable                                                                                                                                      |                             |                                      | 10,067                                     |         |             |         | 23,314    |        
|                                  
|                                  
|                                  
|                                  
|                                   | Deferred systems revenue                                                                                                                              |                             |                                      | 18,061                                     |         |             |         | 46,281    |        
|                                  
|                                  
|                                  
|                                  
|                                   | Accrued liabilities                                                                                                                                   |                             |                                      | 16,150                                     |         |             |         | 18,675    |        
|                                   |                                                                                                                                                       |                             |                                      |                                            |         |             |         |           |        
|                                   |                                                                                                                                                       | Total current liabilities   |                                      |                                            | 44,365  |             |         |           | 88,499  |  
|                                   |                                                                                                                                                       |                             |                                      |                                            |         |             |         |           |        
|Long-term liabilities:             |                                                                                                                                                       |                             |                                      |                                            |         |             |         |          
|                                  
|                                  
|                                  
|                                  
|                                   | Long-term debt                                                                                                                                        |                             |                                      | 115,043                                    |         |             |         | 115,124   |        
|                                  
|                                  
|                                  
|                                  
|                                   | Other liabilities                                                                                                                                     |                             |                                      | 4,789                                      |         |             |         | 5,321     |        
|                                   |                                                                                                                                                       |                             |                                      |                                            |         |             |         |           |        
|                                   |                                                                                                                                                       | Total long-term liabilities |                                      |                                            | 119,832 |             |         |           | 120,445 |  
|                                   |                                                                                                                                                       |                             |                                      |                                            |         |             |         |           |        
|Stockholders equity:              |                                                                                                                                                       |                             |                                      |                                            |         |             |         |          
|                                  
|                                  
|                                  
|                                  
|                                   | Common stock, no par value, 60,000 shares
authorized, 30,602 and 30,116 shares issued
and outstanding at
March 2, 2002 and June 2, 2001, respectively |                             |                                      | 1                                          |         |             |         | 1         |        
|                                  
|                                  
|                                  
|                                  
|                                   | Additional paid-in capital                                                                                                                            |                             |                                      | 435,406                                    |         |             |         | 434,090   |        
|                                  
|                                  
|                                  
|                                  
|                                   | Retained deficit                                                                                                                                      |                             |                                      | (418,072                                   | )       |             |         | (328,977  | )      
|                                  
|                                  
|                                  
|                                  
|                                   | Accumulated comprehensive income                                                                                                                      |                             |                                      | 792                                        |         |             |         | 827       |        
|                                   |                                                                                                                                                       |                             |                                      |                                            |         |             |         |           |        
|                                   |                                                                                                                                                       | Total stockholders equity  |                                      |                                            | 18,127  |             |         |           | 105,941 |  
|                                   |                                                                                                                                                       |                             |                                      |                                            |         |             |         |           |        
|                                   |                                                                                                                                                       |                             |                                      | Total liabilities and stockholders equity |         | $           | 182,324 |           |         | $ | 314,885 | 
|                                   |                                                                                                                                                       |                             |                                      |                                            |         |             |         |           |        

See Accompanying Notes to Condensed Consolidated Financial Statements.

3



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##### Table of Contents






SpeedFam-IPEC, Inc.
Condensed Consolidated Statements of Operations
Third Quarter Ended and Three Quarters Ended March 2, 2002 and March 3, 2001
(in thousands, except per share data)

|                                                                                       |                    |                   |                                                |                                              |       |                     |         |                      |       |          |         |          |       |        |          |   |       |        |         |  
|-------------------------------------------------------------------------------------- | ------------------ | ----------------- | ---------------------------------------------- | -------------------------------------------- | ----- | ------------------- | ------- | -------------------- | ----- | -------- | ------- | -------- | ----- | ------ | -------- | - | ----- | ------ | ------- | -
|                                                                                       |                    |                   |                                                |                                              |       | Third Quarter Ended |         | Three Quarters Ended
|                                                                                       |                    |                   |                                                |                                              |       |                     |         |                     
|                                                                                       |                    |                   |                                                |                                              |       | March 2,            |         | March 3,             |       | March 2, |         | March 3,
|                                                                                       |                    |                   |                                                |                                              |       | 2002                |         | 2001                 |       | 2002     |         | 2001    
|                                                                                       |                    |                   |                                                |                                              |       |                     |         |                      |       |          |         |         
|Net sales                                                                              |                    | $                 | 25,119                                         |                                              |       | $                   | 58,818  |                      |       | $        | 92,028  |          |       | $      | 215,748  |  
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                      
|Cost of sales                                                                          |                    |                   | 18,799                                         |                                              |       |                     | 74,107  |                      |       |          | 108,404 |          |       |        | 187,968  |  
|                                                                                       |                    |                   |                                                |                                              |       |                     |         |                      |       |          |         |          |       |        |          |  
|                                                                                       |                    |                   |                                                | Gross margin                                 |       |                     | 6,320   |                      |       |          | (15,289 | )        |       |        | (16,376  | ) |       |        | 27,780  |  
|                                                                                       |                    |                   |                                                |                                              |       |                     |         |                      |       |          |         |          |       |        |          |  
|Operating expenses:                                                                    |                    |                   |                                                |                                              |       |                     |         |                      |       |          |         |          |       |        |          |  
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                       |                    |                   |                                                | Research, development and engineering        |       |                     | 7,398   |                      |       |          | 18,474  |          |       |        | 37,637   |   |       |        | 49,443  |  
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                       |                    |                   |                                                | Selling, general and administrative          |       |                     | 7,170   |                      |       |          | 12,636  |          |       |        | 22,573   |   |       |        | 44,105  |  
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                       |                    |                   |                                                | Litigation settlement costs                  |       |                     |        |                      |       |          |        |          |       |        | 1,800    |   |       |        |        |  
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                       |                    |                   |                                                | Restructuring charges                        |       |                     |        |                      |       |          | 3,460   |          |       |        | 3,000    |   |       |        | 8,583   |  
|                                                                                       |                    |                   |                                                |                                              |       |                     |         |                      |       |          |         |          |       |        |          |  
|                                                                                       |                    |                   |                                                | Total operating expenses                     |       |                     | 14,568  |                      |       |          | 34,570  |          |       |        | 65,010   |   |       |        | 102,131 |  
|                                                                                       |                    |                   |                                                |                                              |       |                     |         |                      |       |          |         |          |       |        |          |  
|Operating loss                                                                         |                    |                   | (8,248                                         | )                                            |       |                     | (49,859 | )                    |       |          | (81,386 | )        |       |        | (74,351  | )
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                       |                    |                   | Other expense, net                             |                                              |       | (2,186              | )       |                      |       | (1,070   | )       |          |       | (5,148 | )        |   |       | (1,279 | )      
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                       |                    |                   |                                                | Loss on disposal of investment in affiliate  |       |                     |        |                      |       |          |        |          |       |        |         |   |       |        | (10,653 | )
|                                                                                       |                    |                   |                                                |                                              |       |                     |         |                      |       |          |         |          |       |        |          |  
|Loss before income taxes and cumulative effect
of accounting changes                   |                    |                   | (10,434                                        | )                                            |       |                     | (50,929 | )                    |       |          | (86,534 | )        |       |        | (86,283  | )
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                       |                    |                   |                                                | Income taxes                                 |       |                     |        |                      |       |          |        |          |       |        |         |   |       |        |        |  
|                                                                                       |                    |                   |                                                |                                              |       |                     |         |                      |       |          |         |          |       |        |          |  
|Loss before cumulative effect of accounting
changes                                    |                    |                   | (10,434                                        | )                                            |       |                     | (50,929 | )                    |       |          | (86,534 | )        |       |        | (86,283  | )
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                      
|Cumulative effect of accounting changes                                                |                    |                   |                                               |                                              |       |                     |        |                      |       |          | (2,582  | )        |       |        | (36,542  | )
|                                                                                       |                    |                   |                                                |                                              |       |                     |         |                      |       |          |         |          |       |        |          |  
|Net loss                                                                               |                    | $                 | (10,434                                        | )                                            |       | $                   | (50,929 | )                    |       | $        | (89,116 | )        |       | $      | (122,825 | )
|                                                                                       |                    |                   |                                                |                                              |       |                     |         |                      |       |          |         |          |       |        |          |  
|Net loss per common share:                                                             |                    |                   |                                                |                                              |       |                     |         |                      |       |          |         |          |       |        |          |  
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                       | Basic and diluted: |                   |                                                |                                              |       |                     |         |                      |       |          |         |          |       |        |          |   |      
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                       |                    |                   | Before cumulative effect of accounting changes |                                              | $     | (0.34               | )       |                      | $     | (1.70    | )       |          | $     | (2.85  | )        |   | $     | (2.89  | )      
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                       |                    |                   |                                                | From cumulative effect of accounting changes |       |                     |        |                      |       |          |        |          |       |        | (0.09    | ) |       |        | (1.22   | )
|                                                                                       |                    |                   |                                                |                                              |       |                     |         |                      |       |          |         |          |       |        |          |  
|                                                                                       |                    |                   |                                                | Net loss                                     |       | $                   | (0.34   | )                    |       | $        | (1.70   | )        |       | $      | (2.94    | ) |       | $      | (4.11   | )
|                                                                                       |                    |                   |                                                |                                              |       |                     |         |                      |       |          |         |          |       |        |          |  
|Weighted average number of shares -                                                    |                    |                   |                                                |                                              |       |                     |         |                      |       |          |         |          |       |        |          |  
|Basic and diluted                                                                      |                    |                   | 30,474                                         |                                              |       |                     | 29,996  |                      |       |          | 30,338  |          |       |        | 29,909   |  
|                                                                                       |                    |                   |                                                |                                              |       |                     |         |                      |       |          |         |          |       |        |          |  
|Amounts as if the fiscal 2002 accounting change
to goodwill was applied retroactively: |                    |                   |                                                |                                              |       |                     |         |                      |       |          |         |          |       |        |          |  
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                      
|Net loss                                                                               |                    | $                 | (10,434                                        | )                                            |       | $                   | (50,693 | )                    |       | $        | (89,116 | )        |       | $      | (122,132 | )
|                                                                                       |                    |                   |                                                |                                              |       |                     |         |                      |       |          |         |          |       |        |          |  
|Net loss per share:                                                                    |                    |                   |                                                |                                              |       |                     |         |                      |       |          |         |          |       |        |          |  
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                       |                    | Basic and diluted |                                                | $                                            | (0.34 | )                   |         | $                    | (1.69 | )        |         | $        | (2.94 | )      |          | $ | (4.08 | )     
|                                                                                       |                    |                   |                                                |                                              |       |                     |         |                      |       |          |         |          |       |        |          |  

See Accompanying Notes to Condensed Consolidated Financial Statements.

4



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##### Table of Contents






SpeedFam-IPEC, Inc.
Condensed Consolidated Statements of Cash Flows
Three Quarters Ended March 2, 2002 and March 3, 2001
(in thousands)

|                                                                     |                                                                             |                                                       |                                                                     |         |                      |         |          |         |        |         |  
|-------------------------------------------------------------------- | --------------------------------------------------------------------------- | ----------------------------------------------------- | ------------------------------------------------------------------- | ------- | -------------------- | ------- | -------- | ------- | ------ | ------- | -
|                                                                     |                                                                             |                                                       |                                                                     |         | Three Quarters Ended
|                                                                     |                                                                             |                                                       |                                                                     |         |                     
|                                                                     |                                                                             |                                                       |                                                                     |         | March 2,             |         | March 3,
|                                                                     |                                                                             |                                                       |                                                                     |         | 2002                 |         | 2001    
|                                                                     |                                                                             |                                                       |                                                                     |         |                      |         |         
|Cash flows from operating activities                                 |                                                                             |                                                       |                                                                     |         |                      |         |          |        
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|Net loss                                                             |                                                                             | $                                                     | (89,116                                                             | )       |                      | $       | (122,825 | )      
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|                                                                     | Adjustments to reconcile net loss
to net cash used in operating activities: |                                                       |                                                                     |         |                      |         |          |         |       
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|                                                                     |                                                                             | Depreciation and amortization                         |                                                                     |         | 11,172               |         |          |         | 12,910 |        
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|                                                                     |                                                                             | Non-cash portion of restructuring and other charges   |                                                                     |         | 48,295               |         |          |         | 58,026 |        
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|                                                                     |                                                                             | Cumulative effect of changes in accounting principles |                                                                     |         | 2,582                |         |          |         | 36,542 |        
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|                                                                     |                                                                             | Changes in assets and liabilities:                    |                                                                     |         |                      |         |          |         |        |        
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|                                                                     |                                                                             |                                                       | Decrease in trade accounts receivable                               |         |                      | 39,326  |          |         |        | 52,163  |  
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|                                                                     |                                                                             |                                                       | (Increase) decrease in inventories, excluding restructuring charges |         |                      | 2,710   |          |         |        | (41,050 | )
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|                                                                     |                                                                             |                                                       | (Increase) decrease in shipped systems pending acceptance           |         |                      | 7,286   |          |         |        | (1,396  | )
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|                                                                     |                                                                             |                                                       | (Increase) decrease in other current assets                         |         |                      | 2,254   |          |         |        | (498    | )
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|                                                                     |                                                                             |                                                       | Decrease in accounts payable                                        |         |                      | (13,183 | )        |         |        | (12,593 | )
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|                                                                     |                                                                             |                                                       | Increase (decrease) in deferred systems revenue                     |         |                      | (28,220 | )        |         |        | 958     |  
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|                                                                     |                                                                             |                                                       | Increase (decrease) in accrued liabilities                          |         |                      | (5,158  | )        |         |        | 6,810   |  
|                                                                     |                                                                             |                                                       |                                                                     |         |                      |         |          |        
|                                                                     | Net cash used in operating activities                                       |                                                       |                                                                     | (22,052 | )                    |         |          | (10,953 | )     
|                                                                     |                                                                             |                                                       |                                                                     |         |                      |         |          |        
|Cash flows from investing activities                                 |                                                                             |                                                       |                                                                     |         |                      |         |          |        
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|Purchases of short-term investments                                  |                                                                             |                                                       |                                                                    |         |                      |         | (19,797  | )      
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|                                                                     | Matured short-term investments                                              |                                                       |                                                                     | 13,495  |                      |         |          | 31,212  |       
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|                                                                     | Capital expenditures                                                        |                                                       |                                                                     | (2,635  | )                    |         |          | (13,419 | )     
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|                                                                     | Other investing activities                                                  |                                                       |                                                                     | (809    | )                    |         |          | (2,366  | )     
|                                                                     |                                                                             |                                                       |                                                                     |         |                      |         |          |        
|                                                                     | Net cash provided by (used in) investing activities                         |                                                       |                                                                     | 10,051  |                      |         |          | (4,370  | )     
|                                                                     |                                                                             |                                                       |                                                                     |         |                      |         |          |        
|Cash flows from financing activities                                 |                                                                             |                                                       |                                                                     |         |                      |         |          |        
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|Proceeds from exercise of stock options and employee stock purchases |                                                                             |                                                       | 1,119                                                               |         |                      |         | 3,581    |        
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|                                                                     | Principal payments on long-term debt                                        |                                                       |                                                                     | (38     | )                    |         |          | (1,581  | )     
|                                                                     |                                                                             |                                                       |                                                                     |         |                      |         |          |        
|                                                                     | Net cash provided by financing activities                                   |                                                       |                                                                     | 1,081   |                      |         |          | 2,000   |       
|                                                                     |                                                                             |                                                       |                                                                     |         |                      |         |          |        
|                                                                     | Effects of foreign currency rate changes on cash                            |                                                       |                                                                     | (260    | )                    |         |          | (428    | )     
|                                                                     |                                                                             |                                                       |                                                                     |         |                      |         |          |        
|                                                                     | Net decrease in cash and cash equivalents                                   |                                                       |                                                                     | (11,180 | )                    |         |          | (13,751 | )     
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|                                                                     | Cash and cash equivalents at beginning of year                              |                                                       |                                                                     | 47,344  |                      |         |          | 72,060  |       
|                                                                     |                                                                             |                                                       |                                                                     |         |                      |         |          |        
|                                                                     | Cash and cash equivalents at end of quarter                                 |                                                       | $                                                                   | 36,164  |                      |         | $        | 58,309  |       
|                                                                     |                                                                             |                                                       |                                                                     |         |                      |         |          |        

See Accompanying Notes to Condensed Consolidated Financial Statements.

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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 of
SpeedFam-IPEC, Inc. (The Company) 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 or three quarters ended March 2,
2002 are not necessarily indicative of the results that may be expected for the
year ending June 1, 2002. 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 2, 2001.

The Companys fiscal year consists of 52 or 53 weeks ending on the
Saturday nearest May 31. Accordingly, the 2002 fiscal year ends on June 1, 2002
and the 2001 fiscal year ended on June 2, 2001. All references to quarters and
years relate to fiscal quarters and fiscal years unless otherwise noted.

Certain prior period amounts have been reclassified to conform to the
current year presentation.

Since 1971, the Company had owned a 50% interest in SpeedFam-IPEC Co.,
Ltd. (together with its subsidiaries and joint ventures, also known as the Far
East Joint Venture) which was accounted for using the equity method of
accounting. The remaining 50% was owned by Obara Corporation, a publicly traded
Japanese company that supplies products to the automotive industry. On August
30, 2000, the Far East Joint Venture between the Company and Obara Corporation
was officially dissolved. Under the terms of the Master Reorganization
Agreement, ownership of the chemical mechanical planarization (CMP) operations
of the Far East Joint Venture was transferred to the Company. The CMP
operations, as of the date of dissolution, have been consolidated in the
accompanying unaudited condensed consolidated financial statements.

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(2) INVENTORIES

The components of inventory are as follows:

|                |  |          |        |         |  |   |        | 
|--------------- |  | -------- | ------ | ------- |  | - | ------ | 
|                |  | March 2, |        | June 2,
|                |  | 2002     |        | 2001   
|                |  |          |        |        
|Raw materials   |  | $        | 14,647 |         |  | $ | 49,081 | 
|               
|               
|               
|               
|Work-in-process |  |          | 13,870 |         |  |   | 19,422 | 
|               
|               
|               
|               
|Finished goods  |  |          | 11,105 |         |  |   | 15,354 | 
|                |  |          |        |         |  |   |        | 
|                |  | $        | 39,622 |         |  | $ | 83,857 | 
|                |  |          |        |         |  |   |        | 

(3) ACCRUED LIABILITIES

Accrued liabilities are as follows:

|                                           |  |          |        |         |  |   |        | 
|------------------------------------------ |  | -------- | ------ | ------- |  | - | ------ | 
|                                           |  | March 2, |        | June 2,
|                                           |  | 2002     |        | 2001   
|                                           |  |          |        |        
|Accrued warranty and installation costs    |  | $        | 1,386  |         |  | $ | 6,156  | 
|                                          
|                                          
|                                          
|                                          
|Accrued payroll and benefits               |  |          | 3,671  |         |  |   | 3,361  | 
|                                          
|                                          
|                                          
|                                          
|Accrued restructuring and one-time
charges |  |          | 1,436  |         |  |   | 1,719  | 
|Other accrued liabilities                  |  |          | 9,657  |         |  |   | 7,439  | 
|                                           |  |          |        |         |  |   |        | 
|                                           |  | $        | 16,150 |         |  | $ | 18,675 | 
|                                           |  |          |        |         |  |   |        | 

(4) COMPREHENSIVE LOSS

The comprehensive loss is as follows:

|                                   |                                         |   |                     |    |                      |   |          |      |          |   |         |     |   |   |          |        |  
|---------------------------------- | --------------------------------------- | - | ------------------- | -- | -------------------- | - | -------- | ---- | -------- | - | ------- | --- | - | - | -------- | ------ | -
|                                   |                                         |   | Third Quarter Ended |    | Three Quarters Ended
|                                   |                                         |   |                     |    |                     
|                                   |                                         |   | March 2,            |    | March 3,             |   | March 2, |      | March 3,
|                                   |                                         |   | 2002                |    | 2001                 |   | 2002     |      | 2001    
|                                   |                                         |   |                     |    |                      |   |          |      |         
|Net loss                           |                                         | $ | (10,434             | )  |                      | $ | (50,929  | )    |          | $ | (89,116 | )   |   | $ | (122,825 | )     
|                                  
|                                  
|                                  
|                                  
|Other comprehensive income (loss): |                                         |   |                     |    |                      |   |          |      |          |   |         |     |   |   |          |       
|                                  
|                                  
|                                  
|                                  
|                                   | Unrealized gain (loss) on securities    |   |                     | (1 | )                    |   |          | 164  |          |   |         | (24 | ) |   |          | 477    |  
|                                  
|                                  
|                                  
|                                  
|                                   | Foreign currency translation
adjustment |   |                     | 49 |                      |   |          | (729 | )        |   |         | (11 | ) |   |          | (1,142 | )
|                                   |                                         |   |                     |    |                      |   |          |      |          |   |         |     |   |   |          |       
|Comprehensive loss                 |                                         | $ | (10,386             | )  |                      | $ | (51,494  | )    |          | $ | (89,151 | )   |   | $ | (123,490 | )     
|                                   |                                         |   |                     |    |                      |   |          |      |          |   |         |     |   |   |          |       

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Accumulated other comprehensive income (loss) is as follows:

|                         |                      |   |       |             |   |               |      |               |   |   |     |             |   | 
|------------------------ | -------------------- | - | ----- | ----------- | - | ------------- | ---- | ------------- | - | - | --- | ----------- | - | 
|                         |                      |   |       |             |   |               |      |               |   |   |     | Accumulated
|                         |                      |   |       | Foreign     |   | Unrealized    |      | Other        
|                         |                      |   |       | Currency    |   | Gain (Loss)   |      | Comprehensive
|                         |                      |   |       | Translation |   | on Securities |      | Income (Loss)
|                         |                      |   |       |             |   |               |      |              
|Balance at June 2, 2001  |                      | $ | 803   |             |   | $             | 24   |               |   | $ | 827 |            
|                        
|                        
|                        
|                        
|                         | Three quarter change |   |       | (11         | ) |               |      | (24           | ) |   |     | (35         | )
|                         |                      |   |       |             |   |               |      |               |   |   |     |            
|Balance at March 2, 2002 |                      | $ | 792   |             |   | $             |     |               |   | $ | 792 |            
|                         |                      |   |       |             |   |               |      |               |   |   |     |            
|Balance at June 3, 2000  |                      | $ | 1,239 |             |   | $             | (487 | )             |   | $ | 752 |            
|                        
|                        
|                        
|                        
|                         | Three quarter change |   |       | (1,142      | ) |               |      | 477           |   |   |     | (665        | )
|                         |                      |   |       |             |   |               |      |               |   |   |     |            
|Balance at March 3, 2001 |                      | $ | 97    |             |   | $             | (10  | )             |   | $ | 87  |            
|                         |                      |   |       |             |   |               |      |               |   |   |     |            

(5) RESTRUCTURING AND OTHER CHARGES ASSOCIATED WITH THE INDUSTRY DOWNTURN

During the third quarter of 2001, slowing worldwide demand for
semiconductors resulted in a rapid decline in demand for manufacturing
equipment. Inventory buildups in telecommunication products, slower than
expected personal computer sales and slower global economic growth caused
semiconductor companies to reevaluate their capital spending plans. A number
of the Companys customers revised the timing of their capital spending and
rescheduled or canceled existing orders, resulting in the postponement or
cancellation of equipment delivery and a decline in new orders. As a result,
the Company was forced to record inventory write-downs and take swift actions
to substantially reduce overall operating expenses. Cost-cutting measures
included an 18-percent reduction in workforce, a 10-percent salary cutback for
executives, the deferment of management raises until business conditions
improve and a decrease in overall discretionary spending.

During the third quarter ended March 3, 2001, the Company recorded
approximately $39.1 million in restructuring and other special charges which
included inventory write-downs of $31.3 million; asset impairments of $4.3
million; lease termination costs of $1.7 million; severance costs of $1.0
million for 247 employees, primarily manufacturing technicians, engineers and
field service representatives; and $0.8 million of other charges.

These costs were classified in the statement of operations for the third
quarter ended March 3, 2001 in cost of sales and operating expenses. The
following table summarizes the classification of the restructuring and other
charges:

|                                          |  |   |        | 
|----------------------------------------- |  | - | ------ | 
|Cost of sales                             |  | $ | 31,707 | 
|                                         
|                                         
|                                         
|                                         
|Research and development costs            |  |   | 3,623  | 
|                                         
|                                         
|                                         
|                                         
|Selling, general and administrative costs |  |   | 296    | 
|                                         
|                                         
|                                         
|                                         
|Restructuring charges                     |  |   | 3,460  | 
|                                          |  |   |        | 
|                                          |  | $ | 39,086 | 
|                                          |  |   |        | 

This decline in demand for semiconductors has continued in 2002 and
several of the Companys customers have rescheduled deliveries or canceled
existing orders and the Company has experienced a substantial decline in new
orders. Because the duration of this downturn in demand has been longer than
originally anticipated, the Company believes that purchases in the next upturn
will be primarily for the Companys MomentumTM products. As a result of the
extended downturn, the Company recorded significant inventory write-downs for
obsolete inventory and inventory in excess of forecasted requirements during
the second quarter ended December 1, 2001. In addition, the Company
implemented additional cost cutting measures during the second quarter
including the downsizing and consolidation of operations in the Phoenix, AZ,
Portland, OR and Austin, TX areas. During the

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##### Table of Contents



second quarter ended December 1, 2001, the Company recorded charges of $48.1
million which included inventory write-downs of $36.3 million; asset
impairments of $8.5 million; lease termination costs of $1.1 million; $1.3
million in non-cancelable purchase commitments; and $0.9 million of other
charges. In the third quarter the Company spent $0.9 million for
non-cancelable purchase commitments and anticipates spending the remaining $0.4
million in the next quarter. Additional cash outlays for non-cancelable leases
were $0.2 million in the third quarter and the Company anticipates spending the
remaining $0.9 million over the next three and a half years.

These costs were classified in the statement of operations for the second
quarter ended December 1, 2001 in cost of sales and operating expenses. The
following table summarizes the classification of the restructuring and other
charges:

|                                          |  |   |        | 
|----------------------------------------- |  | - | ------ | 
|Cost of sales                             |  | $ | 37,602 | 
|                                         
|                                         
|                                         
|                                         
|Research and development costs            |  |   | 7,338  | 
|                                         
|                                         
|                                         
|                                         
|Selling, general and administrative costs |  |   | 159    | 
|                                         
|                                         
|                                         
|                                         
|Restructuring charges                     |  |   | 3,000  | 
|                                          |  |   |        | 
|                                          |  | $ | 48,099 | 
|                                          |  |   |        | 

(6) RESTRUCTURING AND OTHER CHARGES ASSOCIATED WITH DISPOSAL OF THE FAR EAST JOINT VENTURE

On August 30, 2000, the Company and Obara Corporation (Obara) dissolved
SpeedFam-IPEC Co., Ltd. (together with its subsidiaries and joint ventures, the
Far East Joint Venture). Under the terms of the Master Reorganization Agreement
with Obara, ownership of the CMP operations of the Far East Joint Venture was
transferred to the Company and specific personnel involved in CMP efforts
became employees of the Company. Obara continues the non-CMP activities of the
joint venture, which include the manufacture of silicon wafer and thin film
memory disk polishing products.

Under the terms of a distributor agreement signed on August 31, 2000, the
Company continues to act as a direct distributor in the United States and
Europe for the wafer and disk polishing products manufactured by Obara but is
prohibited from manufacturing these products.

During the first quarter of 2001, the Company recorded charges totaling
$10.8 million related to the loss on disposal of the Companys 50% investment
interest in the Far East Joint Venture and $8.4 million related to the
Companys exit from the manufacturing of wafer and disk polishing products as
the Company is prohibited from manufacturing these products. The $8.4 million
includes $3.3 million of inventory write-downs of raw materials and spare parts
related to silicon wafer and thin film memory disk polishing products
classified as a component of cost of sales. Impairment of fixed assets of the
exited operations, severance costs for three employees including a former
executive of the Far East Joint Venture and other charges associated with the
Companys exit from the manufacturing of wafer and disk polishing products
totaled $5.1 million and were classified as restructuring charges.

(7) 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 market; 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 third quarter and three quarters ended March 2, 2002 and
March 3, 2001 is as follows (in thousands):
9Table of Contents

|                                                    |                               |   |                     |        |                      |   |          |         |          |   |         |         |   |   |         |         |  
|--------------------------------------------------- | ----------------------------- | - | ------------------- | ------ | -------------------- | - | -------- | ------- | -------- | - | ------- | ------- | - | - | ------- | ------- | -
|                                                    |                               |   | Third Quarter Ended |        | Three Quarters Ended
|                                                    |                               |   |                     |        |                     
|                                                    |                               |   | March 2,            |        | March 3,             |   | March 2, |         | March 3,
|                                                    |                               |   | 2002                |        | 2001                 |   | 2002     |         | 2001    
|                                                    |                               |   |                     |        |                      |   |          |         |         
|Net sales:                                          |                               |   |                     |        |                      |   |          |         |          |   |         |         |   |   |         |        
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | CMP Group                     |   | $                   | 18,230 |                      |   | $        | 47,710  |          |   | $       | 68,650  |   |   | $       | 183,535 |  
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Surface Technology Group      |   |                     | 4,065  |                      |   |          | 5,178   |          |   |         | 13,444  |   |   |         | 17,916  |  
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Industrial Applications Group |   |                     | 2,824  |                      |   |          | 5,930   |          |   |         | 9,934   |   |   |         | 14,297  |  
|                                                    |                               |   |                     |        |                      |   |          |         |          |   |         |         |   |   |         |         |  
|Total net sales to unaffiliated customers           |                               |   | 25,119              |        |                      |   | 58,818   |         |          |   | 92,028  |         |   |   | 215,748 |        
|                                                    |                               |   |                     |        |                      |   |          |         |          |   |         |         |   |   |         |         |  
|Segment operating profit (loss):                    |                               |   |                     |        |                      |   |          |         |          |   |         |         |   |   |         |        
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | CMP Group                     |   |                     | (5,136 | )                    |   |          | (46,605 | )        |   |         | (67,814 | ) |   |         | (53,484 | )
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Surface Technology Group      |   |                     | (364   | )                    |   |          | (493    | )        |   |         | (944    | ) |   |         | (3,196  | )
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Industrial Applications Group |   |                     | (6     | )                    |   |          | 916     |          |   |         | 833     |   |   |         | 2,429   |  
|                                                    |                               |   |                     |        |                      |   |          |         |          |   |         |         |   |   |         |         |  
|Total segment operating profit (loss)               |                               |   | (5,506              | )      |                      |   | (46,182  | )       |          |   | (67,925 | )       |   |   | (54,251 | )      
|                                                   
|                                                   
|                                                   
|                                                   
|General corporate expense, net                      |                               |   | (3,131              | )      |                      |   | (3,891   | )       |          |   | (13,734 | )       |   |   | (19,660 | )      
|                                                   
|                                                   
|                                                   
|                                                   
|Interest expense, net                               |                               |   | (1,797              | )      |                      |   | (856     | )       |          |   | (4,875  | )       |   |   | (1,719  | )      
|                                                   
|                                                   
|                                                   
|                                                   
|Loss on disposal of investment in affiliate         |                               |   |                    |        |                      |   |         |         |          |   |        |         |   |   | (10,653 | )      
|                                                    |                               |   |                     |        |                      |   |          |         |          |   |         |         |   |   |         |         |  
|Loss before cumulative effect of accounting changes |                               | $ | (10,434             | )      |                      | $ | (50,929  | )       |          | $ | (86,534 | )       |   | $ | (86,283 | )      
|                                                    |                               |   |                     |        |                      |   |          |         |          |   |         |         |   |   |         |         |  

(8) 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 ($0.09) per share, as of the
beginning of 2002 (June 3, 2001). The impact of adoption was to reduce the
loss before cumulative effect of accounting change for the third quarter of
2002 by $0.2 million or $0.01 per share and for the first three quarters of
2002 by $0.7 million or $0.02 per share. 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. Net loss for the third quarter of 2001 would have been
($50.7) million or ($1.69) per share and the net loss for the first three
quarters of 2001 would have been ($122.1) million or ($4.08) per share, if the
accounting change related to goodwill required by SFAS No. 142 had been applied
to those periods.

The Company generates revenue from the sale of systems, spare parts and
service contracts. In December 1999, the Securities and Exchange Commission
issued Staff Accounting Bulletin No. 101 (SAB 101), Revenue Recognition in
Financial Statements, addressing the timing of revenue recognition for sales
of products that involve contractual customer acceptance provisions and
installation if these events occur following shipment of the product and
transfer of title. The Company adopted SAB 101 in the third quarter of 2001 and
in accordance with SFAS No. 3, Reporting Accounting Changes in Interim
Financial Statements, the Company recorded the cumulative effect of the change
in accounting principle of ($36.5) million, or ($1.22) per share, as of the
beginning of the year (June 4, 2000) as a charge in the first quarter ended
September 2, 2000. The previously reported results for the first and second
quarters of 2001 prior to the adoption of SAB 101 were restated to reflect the
new revenue recognition method.

Prior to the implementation of SAB 101, the Company recognized revenue
from the sales of its products generally upon shipment. Effective June 4, 2000,
the Company changed its method of recognizing revenue for sales of CMP systems
to reflect the following approach: 1) for CMP system sales to a new customer,
or CMP system sales of existing products with new specifications or acceptance
criteria, and for all new CMP products, revenue is

10



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deferred until customer acceptance, at which time the revenue is recognized.
The related costs for systems for which this approach is used are recorded as
shipped systems pending acceptance until customer acceptance, at which time
cost of goods sold is recorded; and 2) for CMP system sales to existing
customers that have previously purchased the same system with the same
customer-specified acceptance provisions, revenue is recognized under a
multiple-element arrangement. Accordingly, upon shipment, the contractual
amount payable by the customer is recorded as revenue and title is transferred.
The remainder is recorded as deferred revenue and recognized as revenue upon
customer acceptance. Revenue related to non-CMP systems and spare parts for all
segments continues to be recognized upon transfer of title, which is generally
upon shipment. Revenue related to service contracts is recognized ratably over
the duration of the contracts. In all cases, revenue is only recognized when
persuasive evidence of an arrangement exists, delivery has occurred or services
have been rendered, the sellers price is fixed or determinable and
collectibility is reasonably assured. The cumulative effect of the change in
accounting principle discussed above includes system revenue, cost of sales and
certain expenses that will be recognized when the conditions for revenue
recognition have been met.

Statement of Financial Accounting Standards (SFAS) No. 133, Accounting
for Derivative Instruments and Hedging Activities and No. 138, Accounting for
Certain Derivative Instruments and Certain Hedging Activities, established
accounting and reporting standards related to derivative financial instruments
and hedging activities. These statements require that the Company recognize all
derivatives, including foreign currency exchange contracts, as either assets or
liabilities on the balance sheet and measure those instruments at fair value.
Changes in the fair value of derivatives that do not qualify for hedge
treatment, as well as the ineffective portion of any hedges, must be recognized
currently in operations. The Company adopted SFAS 133 and SFAS 138 as of June
3, 2001 and the transition adjustment was not material to the financial
statements.

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.

(9) COMMITMENTS AND CONTINGENCIES

MEMC Electronics Materials Litigation

On December 20, 1999, MEMC Electronics Materials, Inc. (MEMC) filed an
action against IPEC Precision, Inc. (IPI), Integrated Process Equipment Corp.
(IPEC), predecessor in interest to SpeedFam-IPEC Corporation (SFC), and
SpeedFam-IPEC, Inc. (SFI) in the Circuit Court for St. Charles County, State
of Missouri. An amended petition was filed on or about May 3, 2001. The
amended petition alleged causes of action for breach of contract and quantum
meruit/unjust enrichment arising out of a joint development agreement between
MEMC and IPI. Plaintiff alleged that defendants failed to fulfill their
obligations required by the parties joint development agreement and was
seeking damages of approximately $7.4 million plus interest and attorneys
fees.

A settlement was reached with MEMC on October 5, 2001. The settlement
agreement called for a payment of $1.8 million to MEMC. In addition, the
parties executed mutual releases of all claims relating to the joint
development program existing as of September 27, 2001. SFI, SFC, IPEC, and IPI
also agreed to transfer to MEMC all of their ownership or other interests,
shares, or equity in Plasmasil, L.L.C for which no carrying values had been
recorded in the Companys consolidated financial statements. Pursuant to the
settlement, MEMC dismissed this litigation with prejudice.

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Raytheon Aircraft Company Litigation

On October 4, 2000, Raytheon Aircraft Company (Raytheon) filed an action
against IPEC, IPEC Planar, Inc. and SpeedFam-IPEC, Inc. in the United States
District Court for the District of Kansas. In the action, Raytheon alleged
damages arising from its purchase of a wire cutting and laser marking system
(System) from Gaard Automation Inc., predecessor in interest to the Company.
Raytheon sought more than $6.5 million in damages.

The Company answered Raytheons claims on behalf of all defendants on
February 5, 2001, asserting that the System performed properly under the terms
of the contract. Alternatively, the Company contended that the problems
experienced by Raytheon, if any, were caused by failure of a major component of
the System not manufactured by the Company (i.e., the laser marker). As a
result, on June 4, 2001, the Company brought a Third Party Complaint against
Spectrum Technologies PLC (Spectrum), the United Kingdom-based manufacturer of
this major component.

After discovery of key witnesses and documents was conducted, the parties
agreed to mediation in November, 2001. The mediation was successful and a
settlement was reached. As a result, the matter has been dismissed.

The Company is subject to various other legal proceedings and claims,
either asserted or unasserted, that arise in the ordinary course of business.
Management believes that these matters will be resolved without a material
effect on the Companys financial position or results of operations.

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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 2001, 2000 and 1999, the CMP Group accounted for 82%, 84% and 74% of
revenues, respectively.

The Companys fiscal year consists of 52 or 53 weeks ending on the
Saturday nearest May 31. Accordingly, the 2002 fiscal year ends on June 1, 2002
and the 2001 fiscal year ended on June 2, 2001. All references to quarters and
years relate to fiscal quarters and fiscal years unless otherwise noted.

On August 30, 2000, the Company and Obara Corporation (Obara) effectively
dissolved the Far East Joint Venture. Under the terms of the Master
Reorganization Agreement with Obara, ownership of the CMP sales and service
operations of the Far East Joint Venture was transferred to the Company and
specific personnel involved in CMP efforts became employees of the Company.
Obara continues the non-CMP activities of the former Far East Joint Venture,
which include the manufacturing of silicon wafer and thin film memory disk
polishing products. The Company will not compete with the non-CMP business and
Obara will not compete with the CMP business for an initial period of five
years. The Company has indemnified Obara for any claims relating to the CMP
business and Obara has indemnified the Company for any claims relating to the
non-CMP business. Under the terms of a distributor agreement signed on August
31, 2000, the Company continues to act as a direct distributor in the United
States and Europe for the wafer and disk polishing products manufactured by
Obara, under a five-year agreement, and is prohibited from manufacturing these
products.

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During 2001 there was a significant decrease in the worldwide demand for
semiconductor capital equipment. This decline has continued in 2002 and has
resulted in inventory buildups in telecommunications products, slower than
expected personal computer sales and overall slower global economic growth,
causing many semiconductor manufacturers to reevaluate their capital spending
plans. Several of the Companys customers have rescheduled deliveries or
canceled existing orders and the Company has experienced a substantial decline
in new orders. Because the duration of this downturn in demand has been longer
than originally anticipated, the Company believes that purchases in the next
upturn will be primarily for the Companys Momentum products. As a result,
the Company has recorded significant inventory write-downs related to its older
generation products, charges related to asset impairments, charges related to
the downsizing and consolidation of operations and severance costs in
connection with across-the-board headcount reductions. Furthermore, the
Company implemented measures to reduce discretionary spending.

Changes in Accounting Principles

In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 (SAB 101), Revenue Recognition in Financial
Statements, addressing the timing of revenue recognition for sales of products
that involve contractual customer acceptance provisions and installation if
these events occur following shipment of the product and transfer of title.
The Company adopted SAB 101 in the third quarter of 2001, retroactive to the
beginning of 2001. As a result of the adoption of SAB 101, the Company changed
its revenue recognition policy and recorded the cumulative effect of the change
in accounting principle of ($36.5) million, or ($1.22) per share, as of the
beginning of 2001 as a charge in the first quarter of 2001. The previously
reported results for the first quarter of 2001 prior to the adoption of SAB 101
were restated to reflect the new revenue recognition method.

Prior to the implementation of SAB 101, the Company recognized revenue
from the sale of its products generally upon shipment. Effective June 4, 2000,
the Company changed its method of recognizing revenue for sales of CMP systems
to one in which revenue may be deferred in whole or in part based on customer
acceptance and other factors (see Notes to Condensed Consolidated Financial
Statements for a description of the Companys revenue recognition policy).
Due to the cyclical nature of the semiconductor capital equipment industry, and
the Companys dependence on a relatively small number of large sales, the
change in the Companys revenue recognition practices could have a material
affect on recorded revenue in any particular reporting period. In periods of
declining business, such as the current environment, revenues would exceed
shipments, and in periods of increasing revenues, shipments would exceed
revenues.

In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible
Assets. Under SFAS 142, goodwill and intangible assets with indefinite useful
lives are no longer amortized but are reviewed at least annually for impairment
at the reporting unit level. The impairment test under SFAS 142 is based on a
two-step process involving; 1) comparing the estimated fair value of the
related reporting unit to its net book value, and 2) comparing the estimated
implied fair value of goodwill to its carrying value. The Company elected
early adoption of SFAS 142 in the first quarter of 2002. Based on the
implementation of the non-amortization, impairment-only accounting approach, it
was determined that an impairment charge of $2.6 million representing the
carrying value of goodwill as of June 3, 2001 should be recorded. Accordingly,
the Company recorded the cumulative effect of the change in accounting
principle of ($2.6) million, or ($0.09) per share, as of the beginning of 2002
(June 3, 2001) as a charge in the first quarter of 2002. Net loss for the third
quarter of 2001 would have been ($50.7) million or ($1.69) per share and for
the first three quarters of 2001 the net loss would have been ($122.1) million
or ($4.08) per share, if the accounting change related to goodwill required by
SFAS No. 142 had been applied to those periods.

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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:

|                                                   |              |  |                     |      |                      |  |          |       |          |  |       |       |   |  |       |      | 
|-------------------------------------------------- | ------------ |  | ------------------- | ---- | -------------------- |  | -------- | ----- | -------- |  | ----- | ----- | - |  | ----- | ---- | 
|                                                   |              |  | Third Quarter Ended |      | Three Quarters Ended
|                                                   |              |  |                     |      |                     
|                                                   |              |  | March 2,            |      | March 3,             |  | March 2, |       | March 3,
|                                                   |              |  | 2002                |      | 2001                 |  | 2002     |       | 2001    
|                                                   |              |  |                     |      |                      |  |          |       |         
|Net sales                                          |              |  | 100.0               | %    |                      |  | 100.0    | %     |          |  | 100.0 | %     |   |  | 100.0 | %   
|                                                  
|                                                  
|                                                  
|                                                  
|Cost of sales                                      |              |  | 74.8                |      |                      |  | 126.0    |       |          |  | 117.8 |       |   |  | 87.1  |     
|                                                   |              |  |                     |      |                      |  |          |       |          |  |       |       |   |  |       |     
|                                                   | Gross margin |  |                     | 25.2 |                      |  |          | (26.0 | )        |  |       | (17.8 | ) |  |       | 12.9 | 
|                                                  
|                                                  
|                                                  
|                                                  
|Research, development and engineering              |              |  | 29.5                |      |                      |  | 31.4     |       |          |  | 40.9  |       |   |  | 23.0  |     
|                                                  
|                                                  
|                                                  
|                                                  
|Selling, general and administrative                |              |  | 28.5                |      |                      |  | 21.5     |       |          |  | 24.5  |       |   |  | 20.4  |     
|                                                  
|                                                  
|                                                  
|                                                  
|Litigation settlement costs                        |              |  |                    |      |                      |  |         |       |          |  | 1.9   |       |   |  |      |     
|                                                  
|                                                  
|                                                  
|                                                  
|Restructuring charges                              |              |  |                    |      |                      |  | 5.9      |       |          |  | 3.3   |       |   |  | 4.0   |     
|                                                   |              |  |                     |      |                      |  |          |       |          |  |       |       |   |  |       |     
|Operating loss                                     |              |  | (32.8               | )    |                      |  | (84.8    | )     |          |  | (88.4 | )     |   |  | (34.5 | )   
|                                                  
|                                                  
|                                                  
|                                                  
|Other expense, net                                 |              |  | (8.7                | )    |                      |  | (1.8     | )     |          |  | (5.6  | )     |   |  | (0.6  | )   
|                                                  
|                                                  
|                                                  
|                                                  
|Loss on sale of joint venture interest             |              |  |                    |      |                      |  |         |       |          |  |      |       |   |  | (4.9  | )   
|                                                   |              |  |                     |      |                      |  |          |       |          |  |       |       |   |  |       |     
|Loss before cumulative effect of
accounting change |              |  | (41.5               | )    |                      |  | (86.6    | )     |          |  | (94.0 | )     |   |  | (40.0 | )   
|                                                  
|                                                  
|                                                  
|                                                  
|Cumulative effect of accounting change             |              |  |                    |      |                      |  |         |       |          |  | (2.8  | )     |   |  | (16.9 | )   
|                                                   |              |  |                     |      |                      |  |          |       |          |  |       |       |   |  |       |     
|Net loss                                           |              |  | (41.5               | )%   |                      |  | (86.6    | )%    |          |  | (96.8 | )%    |   |  | (56.9 | )%  
|                                                   |              |  |                     |      |                      |  |          |       |          |  |       |       |   |  |       |     

Net Sales.Net sales for the third quarter of 2002 were $25.1 million,
down 57% from net sales of $58.8 million in the third quarter of 2001. Net
sales of CMP products for the third quarter of 2002 totaled $18.2 million, or
73% of net sales, compared to $47.7 million, or 81% of net sales, in the third
quarter of 2001. Net sales for the first three quarters of 2002 were $92.0
million, down 57% from net sales of $215.7 million for the first three quarters
of 2001. Net sales of CMP products for the first three quarters of 2002 totaled
$68.7 million, or 75% of net sales, compared to $183.5 million, or 85% of net
sales, in the first three quarters of 2001. Sales of CMP systems products
decreased in 2002 due to the 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 and
rescheduled deliveries of or canceled existing orders, resulting in the
postponement of equipment deliveries and a decline in new orders and net sales.

Net sales of the Surface Technology Group (STG) in the third quarter of
2002 accounted for $4.1 million, or 16% of net sales, compared to $5.2 million,
or 9% of net sales, in the third quarter of 2001. Net sales of STG products in
the first three quarters of 2002 accounted for $13.4 million, or 15% of net
sales, compared to $17.9 million, or 8% of net sales, in the first three
quarters of 2001. During 2002, 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 third quarter
of 2002 totaled $2.8 million, or 11% of net sales, compared to $5.9 million or
10% of net sales, in the third quarter of 2001. Net sales of IAG products in
the first three quarters of 2002 totaled $9.9 million, or 11% of net sales,
compared to $14.3 million or 7% of net sales, in the first three quarters of
2001. The decrease in net sales for both the third quarter and first three
quarters of 2002 is a result of the general economic slowdown.

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Gross Margin.In the third quarter of 2002, gross margin was $6.3 million,
or 25% of net sales, compared to ($15.3) million, or (26%) of net sales, in the
third quarter of 2001. In the first three quarters of 2002, gross margin was
($16.4) million, or (18%) of net sales, compared to $27.8 million, or 13% of
net sales, in the first three quarters of 2001. Because the length and severity
of the industry downturn is longer that originally anticipated, the Company
believes that purchases in the next upturn will be primarily for the
Momentum
products. As a result, the Company recorded a one-time charge of $37.6 million
to cost of goods sold during the second quarter of 2002 for the write-down of
inventory and recognition of liabilities related to outstanding purchase
commitments for the Companys legacy tools. Excluding this write-down, gross
margin was $21.2 million, or 23% of net sales for the first three quarters of
2002. During the first three quarters of fiscal 2001, the Company recorded a
one-time charge of $31.7 million to cost of goods sold related to the industry
downturn, and $3.4 million related to the exit from the manufacturing of wafer
and disk polishing equipment. Excluding these charges, gross margin was $62.9
million or 29% of net sales in the first three quarters of fiscal 2001. 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 fluctuated
significantly in the past and will continue to fluctuate based on several
factors including the severity and duration of the current industry downturn,
revenue recognition under SAB 101, product mix, overhead absorption levels,
and costs associated with the introduction of new products.

Research, Development and Engineering.In the third quarter of 2002,
research, development and engineering expenses decreased to $7.4 million, or
30% of net sales, compared to $18.5 million, or 31% of net sales, in the third
quarter of 2001. In the first three quarters of 2002, research, development
and engineering expenses were $37.6 million, or 41% of net sales, compared to
$49.4 million, or 23% of net sales, in the first three quarters of 2001.
Research, development and engineering expenses in the second quarter of 2002
included $7.3 million in one-time charges related to the asset impairment of
certain legacy tools located in our labs which will no longer be used for
ongoing research and development programs, as well as capitalized costs
associated with certain patents. During the first quarter of 2001, research,
development and engineering expenses included an asset impairment charge of
$2.4 million for equipment that was designed by the Far East Joint Venture.
During the third quarter of 2001, research development and engineering expenses
included an asset impairment charge of $3.6 million related to the asset
impairment of certain tools used in our labs as a result of the industry
slowdown. Excluding charges, research, development and engineering expenses in
the first three quarters of fiscal 2002 decreased by $13.1 million or 30%,
from the first three quarters of 2001, as a result of certain cost cutting
measures 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 third quarter of 2002,
selling, general and administrative expenses decreased to $7.2 million, or 29%
of net sales, compared to $12.6 million, or 22% of net sales, in the third
quarter of 2001. In the first three quarters of 2002, selling, general and
administrative expenses decreased to $22.6 million, or 25% of net sales,
compared to $44.1 million, or 20% of net sales, in the first three quarters of
2001. During the first three quarters of 2002, selling, general and
administrative expenses decreased by $21.5 million or 49%, from the first three
quarters of 2001, as a result of certain cost cutting measures which were
implemented by the Company in response to the industry wide downturn. These
cost cutting measures were partially offset by increased legal fees incurred
related to the settlement of two outstanding litigation cases. In addition,
during 2001, significant marketing and promotional costs were incurred in
connection with product launch activities related to the introduction of the
Companys new products, the Momentum and the Auriga
Vision.

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, which was expensed in the first
quarter of 2002.

Restructuring Charges.During 2001 there was a significant decrease in the
worldwide demand for semiconductor capital equipment. This decline has
continued in 2002 and has resulted in inventory buildups in telecommunications
products, slower than expected personal computer sales and overall slower
global economic growth, causing many semiconductor manufacturers to reevaluate
their capital spending plans. Several of the Companys customers have
rescheduled deliveries or canceled existing orders and the Company has
experienced a substantial decline in new orders. Because the duration of this
downturn in demand is longer than originally

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anticipated, the Company recorded a restructuring charge in the second quarter
of 2002 of $3.0 million for the downsizing and consolidation of operations in
the Phoenix, AZ, Portland, OR and Austin, TX areas.

During the third quarter of 2001, the Company recorded $3.5 million of
restructuring and other special charges as a result of cost cutting actions
implemented by the Company in response to the industry wide downturn. Included
in these charges was $1.7 million of lease termination costs, $1.0 million of
severance costs, and $0.8 million of other charges.

During the first quarter of 2001, the Company recorded charges of $5.1
million that primarily related to restructuring associated with the Companys
plan to exit from the manufacturing of silicon wafer and thin film memory disk
polishing equipment, as required by the distribution agreement with Obara.
Approximately $2.7 million related to the impairment of fixed assets of the
exited operations; $1.2 million related to severance costs for three employees
including a former executive of the Far East Joint Venture; and $1.2 million
related to other restructuring charges associated with the Companys exit from
the manufacturing of wafer and disk polishing products.

Other Expense, net.Other expense, net increased to $2.2 million during
the third quarter of 2002 from $1.1 million during the same period a year ago.
Other expense, net for the first three quarters of 2002 increased to $5.1
million compared to $1.3 million for the same period a year ago. This increase
primarily resulted from lower average balances in cash, cash equivalents and
short-term investments as well as a reduction in interest rates yielding lower
interest income to offset interest expense on the Companys long-term debt.

Provision for Income Taxes.At the end of the third quarter of 2002 and
2001, 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 third quarter of 2002 and
2001 was zero.

In March, 2002 Congress passed the Job Creation and Worker Assistance Act
of 2002 (The Act) which temporarily extended the general net operating loss
carryback period to five years. As a result, the Company expects to record a
net tax benefit of approximately $2 million for a refund of taxes previously
paid. This net income tax benefit will be recorded in the fourth quarter, the
period in which the Act was passed, and will not impact future periods. While
the Company will reassess its tax situation each quarter, the Company expects
that its effective tax rate, exclusive of this net tax benefit, will
approximate zero throughout 2002.

Loss on Disposal of Investment in Affiliates.At the end of the first
quarter of 2001, the Company reported a $10.7 million loss on disposal of
investment in affiliate in connection with the dissolution of the Far East
Joint Venture. The 30-year-old Far East Joint Venture between the Company and
Obara Corporation was officially dissolved on August 30, 2000.

Liquidity and Capital Resources

As of March 2, 2002, the Company had $36.2 million in cash, cash
equivalents and short-term investments, compared to $60.8 million at June 2,
2001. During the first three quarters of 2002, the Company used $22.1 million
of cash in operating activities compared to $11.0 million used in operating
activities during the same period in 2001. The net loss of $89.1 million
included non-cash items totaling $62.0 million: the cumulative effect of change
in accounting principle of $2.6 million, depreciation and amortization expense
of $11.1 million, 401(k) stock match of $0.2 million and one-time charges of
$48.1 million. Partially offsetting this decrease in cash was the reduction in
working capital in the first three quarters of 2002 which provided cash of $5.0
million.

Net cash provided by investing activities totaled $10.1 million during the
first three quarters of 2002 compared with net cash used of $4.4 million during
the same period in 2001. Cash was provided from the maturity of short-term
investments of $13.5 million and offset by capital expenditures and other
investing activities of $3.4 million during the first three quarters of 2002.

Financing activities provided cash of $1.1 million during the first three
quarters of 2002 compared with approximately $2.0 million during the same
period of 2001. The sale of stock to employees and the exercise of stock
options generated proceeds of $1.1 million during the first three quarters of
2002.

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The Company has incurred operating losses of $81.4 million in the first
three quarters of 2002, and $74.4 million in 2001. The Company has incurred a
decrease in its cash and investment balances of $24.6 million in the first
three quarters of 2002.

Due to the continuation and severity of the industry-wide downturn, the
Company has implemented additional cost-cutting measures during the first three
quarters of 2002, which include 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 along with net cash generated through operations will be
sufficient to meet the Companys anticipated cash needs for working capital and
capital expenditures for the foreseeable future. However, due to significant
uncertainties related to the duration and severity of the semiconductor
industry downturn and overall economic conditions, the Company is currently
evaluating additional sources of funds and reduction in expenses in order to
strengthen its working capital position. Specifically, the Company is actively
pursuing a sale/leaseback transaction of its Corporate headquarters in
Chandler, Arizona. The Company is also reviewing various other ways of
improving its balance sheet. Based on discussions with various lenders, the
Company believes that the sources of funds available include, but are not
limited to, a line of credit facility, term debt, and the issuance of
additional equity. If the Company were to raise additional funds, or
restructure its balance sheet through the issuance of equity, Company
shareholders would be diluted and the dilution could be substantial. In
addition, these equity securities may have rights, preferences or privileges
senior to the Companys common stock. There can be no assurance that the
Company will be able to complete a sale/leaseback or other financing on terms
acceptable to it, or at all. In such an event, and if the Company continues to
suffer from negative cash flows, it could have insufficient liquidity to
conduct its operations in the ordinary course of business.

Critical Accounting Policies

Managements Discussion and Analysis of Financial Condition and Results
of Operations discusses our consolidated financial statements which have been
prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of these financial statements
requires us to make estimates and assumptions that affect the reported amount
of assets and liabilities at the date of the financial statements, the
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period.

On an on-going basis, we evaluate our estimates and judgments, including
those related to revenue recognition, impairment of long-lived assets,
valuation allowances for inventory and accounts receivable, and warranty. We
base our estimates and judgments on historical experience and on various other
factors that are believed to be reasonable under the circumstances. The result
of these estimates and judgements form the basis for making judgments about the
carrying value of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates under different
assumptions or conditions.

On December 20, 2001, the Securities and Exchange Commission (SEC)
requested that all registrants list their most critical accounting policies
in Managements Discussion and Analysis. The SEC indicated that a critical
accounting policy is one which is both important to the portrayal of the
Companys financial condition and results and requires managements most
difficult, subjective or complex judgments, often as a result of the need to
make estimates about the effect of matters that are inherently uncertain.
Management believes the following critical accounting policies affect its more
significant judgments and estimates in the preparation of its consolidated
financial statements.

Revenue Recognition

Prior to the implementation of SAB 101, we recognized revenue from the
sale of our products generally upon shipment. Effective June 4, 2000, we
changed our method of recognizing revenue for sales of CMP systems to reflect
the following approach:



| |  |  | For CMP system sales to a new customer, or CMP system sales
of existing products with new specifications or acceptance criteria,
and for all new CMP products, revenue is deferred until customer
acceptance, at which time the revenue is recognized. The related
costs for systems for which this
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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| |   |  | approach is used are recorded as shipped systems pending acceptance
until customer acceptance, at which time cost of goods sold is
recorded.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | For CMP system sales to existing customers who have
previously purchased the same system with the same
customer-specified acceptance provisions, revenue is recognized
under a multiple-element arrangement. Accordingly, upon shipment,
the contractual amount payable by the customer is recorded as
revenue and title is transferred. The remainder is recorded as
deferred revenue and recognized as revenue upon customer acceptance.
Ordinarily, 80% to 90% of the system sales price is payable by the
customer upon shipment, while 10% to 20% (a holdback) is due upon
acceptance. As a result, customer acceptance may also have an
impact on the timing of cash receipts associated with deferred
revenue.

Revenue related to non-CMP systems and spare parts for all segments
continue to be recognized upon transfer of title, which is generally upon
shipment. Revenue related to service contracts is recognized ratably over the
duration of the contracts. In all cases, revenue is only recognized when
persuasive evidence of an arrangement exists, delivery has occurred or services
have been rendered, the sellers price is fixed or determinable and
collectibility is reasonably assured. Normally, we do not incur returns of CMP
or non-CMP systems.

Impairment of Long-lived Assets

We continually evaluate whether events and circumstances have occurred
that indicate the estimated useful lives of long-lived assets or intangible
assets may warrant revision or that the remaining balance may not be
recoverable. When factors indicate that an asset should be evaluated for
possible impairment, then we use an estimate of the related undiscounted net
cash flows generated by the asset over the remaining estimated life of the
asset in measuring whether the asset is recoverable. If an asset is considered
to be impaired, the impairment to be recognized is measured as the amount by
which the carrying amount of the asset exceeds its fair value. We make
judgments and estimates used in establishing the carrying value of long-lived
or intangible assets. These judgments and estimates could be modified if
adverse changes were to occur in the future resulting in an inability to
recover the carrying value of these assets. We have recently experienced
impairments to long-lived assets due to the unexpected duration of the
semiconductor industry downturn and its impact on our forecasted product
demand. Future adverse changes could be caused by, among other factors, a
continued downturn in the semiconductor industry, a general economic slowdown,
reduced demand of our products in the market place, poor operating results,
inability to protect intellectual property, or changing technologies and
product obsolescence.

Inventory Valuation

We value our inventory at the lower of cost or the current estimated
market value. We regularly review inventory quantities on hand and record a
provision for excess and obsolete inventory. The provision is primarily based
on our estimated forecast of product demand and production requirements.
However, our industry is characterized by customers in highly cyclical
industries, rapid technological changes, frequent new product developments, and
rapid product obsolescence. During 2001, there was a significant decrease in
the worldwide demand for semiconductor capital equipment, and this decline has
continued in 2002. As a result, we recorded significant inventory write-downs
for obsolete inventory and inventory in excess of forecasted requirements
during the second quarter ended December 1, 2001. As demonstrated in the past,
demand for our products has fluctuated significantly, and may do so in the
future, which could result in an increase in the cost of inventory purchases or
an increase in the amount of excess inventory quantities on hand. This could
result in an increase in the amount of excess and obsolete inventory quantities
on hand.

Valuation Allowance for Accounts Receivable

We maintain allowances for doubtful accounts for estimated losses
resulting from the inability of our customers to make required payments. These
allowances are established based upon historical experience, credit evaluations
and specific customer collection issues we have identified. Since our accounts
receivable are concentrated in a relatively few number of customers, a
significant change in the liquidity or financial position of any one of these
customers could have a material adverse impact on the collectibility of our
accounts receivable and our future operating results. Collection of
holdbacks is conditioned upon system acceptance. We have, on occasion,
experienced longer than expected delays in receiving cash from certain
customers until CMP system

19



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##### Table of Contents



acceptance was completed. If some of our customers refuse to pay the remaining
holdbacks, the deferred revenue will not be recognized and future operating
results may be adversely affected.

Warranty

We generally warrant our systems for a period of up to 12 months from
shipment for material and labor to repair and service the system. A provision
for the estimated cost of warranty is recorded upon shipment for non-CMP
systems and for CMP systems in which revenue is recorded as a multiple-element
arrangement. A provision for the estimated costs of warranty is recorded upon
acceptance for systems as to which revenue is recorded upon acceptance. On
occasion, we have been required and may be required in the future to provide
additional warranty coverage to ensure that the systems are ultimately
accepted. While our warranty costs have historically been within our
expectations and provisions established, we cannot guarantee that we will
continue to experience the same warranty costs we have in the past. In
addition, new technological changes and frequent product development may result
in products requiring more extensive and frequent warranty service, which may
have a material adverse impact on our operating results for the periods in
which such additional costs materialize.

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:

|                         |  |                |         |            |  |             |       |            |  |   |       | 
|------------------------ |  | -------------- | ------- | ---------- |  | ----------- | ----- | ---------- |  | - | ----- | 
|                         |  |                |         |            |  | Operating   |       | Commercial
|                         |  | Debt           |         | Leases (1) |  | Commitments
|                         |  |                |         |            |  |            
|                         |  | (in thousands) |         |            |  |             |       |            |  |  
|Through March 2003       |  | $              | 81      |            |  | $           | 2,463 |            |  | $ | 4,020 | 
|                        
|                        
|                        
|                        
|April 2003 to March 2006 |  |                | 115,065 |            |  |             | 2,798 |            |  |   |      | 
|                        
|                        
|                        
|                        
|April 2006 to March 2008 |  |                |        |            |  |             | 170   |            |  |   |      | 
|                        
|                        
|                        
|                        
|Thereafter               |  |                |        |            |  |             | 734   |            |  |   |      | 
|                         |  |                |         |            |  |             |       |            |  |   |       | 
|Total                    |  | $              | 115,146 |            |  | $           | 6,165 |            |  | $ | 4,020 | 
|                         |  |                |         |            |  |             |       |            |  |   |       | 



---

|(1) |  | Reported amounts for operating leases have been reduced for income
from subleases. Sublease income is as follows: $1,820 through March 2003,
$7,493 April 2003 to March 2006; $5,100 April 2006 to March 2008; $10,677
thereafter.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Impact of Recently Issued Accounting Standards

In October 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard (SFAS) No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets. SFAS 144, which replaces SFAS 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 144 also broadens
disposal transactions reporting related to discontinued operations. SFAS 144 is
effective for financial statements issued for fiscal years beginning after
December 15, 2001. The Company has not yet determined the effects SFAS 144 will
have on its financial position, results of operations or cash flows but does
not anticipate that the impact will be significant.

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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) continuing fluctuation in gross
margins; (ii) continuing investment in research, development, and engineering
programs; and (iii) 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 SpeedFam-IPEC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 SPEEDFAM-IPEC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 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. As of March 2, 2002, we had $36.2
million in cash, cash equivalents and short-term investments, compared to $60.8
million at June 2, 2001. During the first three quarters of 2002, we used $22.1
million in operating activities compared to $10.9 million during the same
period of the prior year. We are currently exploring options to restructure our
balance sheet and generate positive cash flow, including a reduction in
operating expenses and a sale-leaseback transaction involving our headquarters
in Chandler, Arizona. However, we have experienced a significant decrease in
revenues and orders and we are unable to determine when 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 operations.

Our future operating performance must generate cash flows sufficient to
meet our payment obligations on our debt.As of March 2, 2002, we had
aggregate indebtedness in the principal amount of approximately $115 million.
We incurred a $10.4 million net loss in the third quarter of fiscal 2002 and
net losses of $134 million in fiscal 2001 and $14 million in fiscal 2000. We
expect the losses will continue for the foreseeable future. Our ability to
make scheduled debt payments will depend on our future operating performance
and cash flow. Our operating performance and cash flow are subject, in part,
to economic factors beyond our control, primarily the market for semiconductor
capital equipment, which in turn depends in part on demand for semiconductor
chips. If we cannot generate sufficient cash flow from operations to service
our debt, we may need to further refinance our debt, dispose of assets, issue
equity, or undertake other actions to obtain the necessary funds. We do not
know whether we will be able to accomplish any of such transactions on a timely
basis or on terms satisfactory to us, or at all.

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 for 30
consecutive days and if our stockholders equity falls below $10 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 March 2, 2002 our stockholders equity was $18.1 million and
our stock price as quoted on Nasdaq was $3.02 per share. As of March 31, 2002
our stock price as quoted on Nasdaq was $4.28.

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. Although initial customer response to

21



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MomentumTM through evaluation testing has been positive, this response may not
translate into sales of MomentumTM 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 MomentumTM 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, .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. If we fail to win qualification contests for 300 millimeter, .13
micron and below processing, and copper applications, we may experience
difficulty achieving volume sales of next-generation equipment to semiconductor
manufacturers, which would adversely affect revenues and cash flows.

The rollout of MomentumTM and Momentum300TM may be slowed due to:



| |  |  | manufacturing problems;                                                           
| | - |  | ----------------------------------------------------------------------------------
|
| |  |  | unforeseen technical problems with the MomentumTM or Momentum300TM 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 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
next-generation 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 the first three quarters of 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.

22



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The downturn in the semiconductor industry has led and may continue to
lead to decreased revenues.During 2001 and the first three quarters of 2002,
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 the first three quarters of 2002, we experienced
cancellations and suspensions of orders for our products. If the downturn
continues or worsens, we will continue to experience cancellations and/or
suspensions of orders for our products.

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, memory disk 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 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;                                                     
|
| |  |  | 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.

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.

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| |  |  | 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:



| |  |  | 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,
subject 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.                                                                                                                                                

24



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##### Table of Contents



International sales accounted for 62% of our total revenue for the first
three quarters of 2002, 61% for 2001, and 70% for 2000. 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.                                                                                                                                      
|
| |  |  | 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. 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 merchandise, may impact our
operations, including, among other things, causing delays or losses in the
delivery of wafer 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.




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 2, 2001.




PART II  OTHER INFORMATION




Item 1. Legal Proceedings

For a discussion of recent legal proceedings, see Footnote 9 of the Notes
to Condensed Consolidated Financial Statements.

25



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##### Table of Contents






Item 6. Exhibits and Reports on Form 8-K

(a)  Exhibits

|        |  |                                                 
|------- |  | ------------------------------------------------
|Exhibit |  | Description                                     
|        |  |                                                 
|3.1*    |  | Articles of Incorporation of SpeedFam-IPEC, Inc.
|       
|       
|       
|       
|3.2*    |  | Bylaws of SpeedFam-IPEC, Inc.                   



---

|* |  | Filed herewith
|- |  | --------------

(b)  Reports on Form 8-K

None

26



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##### Table of Contents






SpeedFam-IPec, Inc.

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: April 10, 2002 |  | By J. Michael Dodson
Secretary and Chief Financial Officer
(Principal Financial Officer)
|                     |  |                                                                                         
|                     |  |                                                                                         
|                    
|                    
|                    
|                    
|                     |  | /s/ G. Michael Latta                                                                    
|                     |  |                                                                                         
|Date: April 10, 2002 |  | By G. Michael Latta
Corporate Controller
(Principal Accounting Officer)                 

27



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EXHIBIT INDEX

|        |  |                                                 
|------- |  | ------------------------------------------------
|Exhibit |  | Description                                     
|        |  |                                                 
|3.1*    |  | Articles of Incorporation of SpeedFam-IPEC, Inc.
|       
|       
|       
|       
|3.2*    |  | Bylaws of SpeedFam-IPEC, Inc.                   



---

|* |  | Filed herewith
|- |  | --------------

28