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

Form 10-Q

(Mark One)

(XBOX)                Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934



| |                                                 
| | ------------------------------------------------
| | For the quarterly period ended September 1, 2001

(BOX)                Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from to

Commission File Number 0-26784

SpeedFam-IPEC, Inc.

(Exact name of registrant as specified in its charter)

|                                |  |                       
|------------------------------- |  | ----------------------
|Illinois                        |  | 36-2421613            
|                                |  |                       
|(State or other jurisdiction of |  | (I.R.S. Employer      
|                               
|                               
|                               
|                               
|incorporation or organization)  |  | Identification Number)

|                                         |  |           
|---------------------------------------- |  | ----------
|305 North 54th Street, Chandler, Arizona |  | 85226     
|                                         |  |           
|(Address of principal executive offices) |  | (Zip Code)

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

Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.

| |  |                        |  |                 
| |  | ---------------------- |  | ----------------
| |  | Yes         (CHECKBOX) |  | No         (BOX)

Indicate the number of shares outstanding of each of the issuers classes
of common stock, as of the latest practicable date (September 30, 2001).

Common Stock, no par value: 30,317,616 shares



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SpeedFam-IPEC, Inc.


TABLE OF CONTENTS



|                               |                                                                                                            |                                                                                                                                  |  |  |  |  |  | 
|------------------------------ | ---------------------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------- |  |  |  |  |  | 
|PART I  FINANCIAL INFORMATION
|                               |                                                                                                            | Condensed Consolidated Balance Sheets                                                                                           
|                               |                                                                                                            | Condensed Consolidated Statements of Operations                      First Quarter Ended September 1, 2001 and September 2, 2000
|                               |                                                                                                            | Condensed Consolidated Statements of Cash Flows                      First Quarter Ended September 1, 2001 and September 2, 2000
|                               |                                                                                                            | 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   
|SIGNATURE                     



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##### Table of Contents



Index

|                             |                                                                                               |                                                                                                             |    |      |   | 
|---------------------------- | --------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------- | -- | ---- | - | 
|                             |                                                                                               |                                                                                                             |    | Page
|Part I Financial Information |                                                                                               |                                                                                                             |    |     
|                            
|                            
|                            
|                            
|                             | Item 1. Financial Statements                                                                  |                                                                                                             |    |      |  
|                            
|                            
|                            
|                            
|                             |                                                                                               | Condensed Consolidated Balance Sheets
September 1, 2001 and June 2, 2001                                    |    |      | 2 | 
|                            
|                            
|                            
|                            
|                             |                                                                                               | Condensed Consolidated Statements of Operations
First Quarter Ended September 1, 2001 and September 2, 2000 |    |      | 3 | 
|                            
|                            
|                            
|                            
|                             |                                                                                               | Condensed Consolidated Statements of Cash Flows
First Quarter Ended September 1, 2001 and September 2, 2000 |    |      | 4 | 
|                            
|                            
|                            
|                            
|                             |                                                                                               | Notes to Condensed Consolidated Financial Statements                                                        |    |      | 5 | 
|                            
|                            
|                            
|                            
|                             | Item 2. Managements Discussion and Analysis of Financial Condition
and Results of Operations |                                                                                                             |    | 10   |  
|                            
|                            
|                            
|                            
|                             | Item 3. Quantitative and Qualitative Disclosures about Market Risk                            |                                                                                                             |    | 20   |  
|                            
|                            
|                            
|                            
|Part II Other Information    |                                                                                               |                                                                                                             | 20 |     
|                            
|                            
|                            
|                            
|Signatures                   |                                                                                               |                                                                                                             | 21 |     
|                            
|                            
|                            
|                            
|Exhibit index                |                                                                                               |                                                                                                             |    |     

1



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##### Table of Contents






Part I  Financial Information




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

|                                   |                                                                                                                                                           |                             |                                            |                                      |         |              |        |          |         |         |  | 
|---------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------- | ------------------------------------------ | ------------------------------------ | ------- | ------------ | ------ | -------- | ------- | ------- |  | 
|                                   |                                                                                                                                                           |                             |                                            |                                      |         | September 1, |        | June 2, 
|                                   |                                                                                                                                                           |                             |                                            |                                      |         | 2001         |        | 2001    
|                                   |                                                                                                                                                           |                             |                                            |                                      |         |              |        |         
|                                   |                                                                                                                                                           |                             |                                            | Assets                               |         |              |        |          |         |         |  | 
|                                  
|                                  
|                                  
|                                  
|Current assets:                    |                                                                                                                                                           |                             |                                            |                                      |         |              |        |         
|                                  
|                                  
|                                  
|                                  
|                                   | Cash and cash equivalents                                                                                                                                 |                             | $                                          | 43,813                               |         |              | $      | 47,344   |        
|                                  
|                                  
|                                  
|                                  
|                                   | Short-term investments                                                                                                                                    |                             |                                            | 6,380                                |         |              |        | 13,495   |        
|                                  
|                                  
|                                  
|                                  
|                                   | Trade accounts receivable, net                                                                                                                            |                             |                                            | 46,592                               |         |              |        | 60,619   |        
|                                  
|                                  
|                                  
|                                  
|                                   | Inventories                                                                                                                                               |                             |                                            | 86,564                               |         |              |        | 83,857   |        
|                                  
|                                  
|                                  
|                                  
|                                   | Shipped systems pending acceptance                                                                                                                        |                             |                                            | 8,735                                |         |              |        | 13,953   |        
|                                  
|                                  
|                                  
|                                  
|                                   | Prepaid expenses and other current assets                                                                                                                 |                             |                                            | 3,504                                |         |              |        | 4,549    |        
|                                   |                                                                                                                                                           |                             |                                            |                                      |         |              |        |          |        
|                                   |                                                                                                                                                           | Total current assets        |                                            |                                      | 195,588 |              |        |          | 223,817 |        
|                                  
|                                  
|                                  
|                                  
|Property, plant and equipment, net |                                                                                                                                                           |                             | 73,248                                     |                                      |         |              | 75,241 |         
|                                  
|                                  
|                                  
|                                  
|Other assets                       |                                                                                                                                                           |                             | 15,614                                     |                                      |         |              | 15,827 |         
|                                   |                                                                                                                                                           |                             |                                            |                                      |         |              |        |          |        
|                                   |                                                                                                                                                           | Total assets                |                                            | $                                    | 284,450 |              |        | $        | 314,885 |        
|                                   |                                                                                                                                                           |                             |                                            |                                      |         |              |        |          |        
|                                   |                                                                                                                                                           |                             |                                            | Liabilities and Stockholders Equity |         |              |        |          |         |         |  | 
|                                  
|                                  
|                                  
|                                  
|Current liabilities:               |                                                                                                                                                           |                             |                                            |                                      |         |              |        |         
|                                  
|                                  
|                                  
|                                  
|                                   | Current portion of long-term debt                                                                                                                         |                             | $                                          | 173                                  |         |              | $      | 229      |        
|                                  
|                                  
|                                  
|                                  
|                                   | Accounts payable                                                                                                                                          |                             |                                            | 18,257                               |         |              |        | 23,314   |        
|                                  
|                                  
|                                  
|                                  
|                                   | Deferred systems revenue                                                                                                                                  |                             |                                            | 34,443                               |         |              |        | 46,281   |        
|                                  
|                                  
|                                  
|                                  
|                                   | Accrued liabilities                                                                                                                                       |                             |                                            | 21,853                               |         |              |        | 18,675   |        
|                                   |                                                                                                                                                           |                             |                                            |                                      |         |              |        |          |        
|                                   |                                                                                                                                                           | Total current liabilities   |                                            |                                      | 74,726  |              |        |          | 88,499  |        
|                                   |                                                                                                                                                           |                             |                                            |                                      |         |              |        |          |        
|Long-term liabilities:             |                                                                                                                                                           |                             |                                            |                                      |         |              |        |         
|                                  
|                                  
|                                  
|                                  
|                                   | Long-term debt                                                                                                                                            |                             |                                            | 115,105                              |         |              |        | 115,124  |        
|                                  
|                                  
|                                  
|                                  
|                                   | Other liabilities                                                                                                                                         |                             |                                            | 5,037                                |         |              |        | 5,321    |        
|                                   |                                                                                                                                                           |                             |                                            |                                      |         |              |        |          |        
|                                   |                                                                                                                                                           | Total long-term liabilities |                                            |                                      | 120,142 |              |        |          | 120,445 |        
|                                   |                                                                                                                                                           |                             |                                            |                                      |         |              |        |          |        
|Stockholders equity:              |                                                                                                                                                           |                             |                                            |                                      |         |              |        |         
|                                  
|                                  
|                                  
|                                  
|                                   | Common stock, no par value, 60,000 shares
authorized, 30,223 and 30,116 shares issued and
outstanding
at September 1, 2001 and June 2, 2001, respectively |                             |                                            | 1                                    |         |              |        | 1        |        
|                                  
|                                  
|                                  
|                                  
|                                   | Additional paid-in capital                                                                                                                                |                             |                                            | 434,635                              |         |              |        | 434,090  |        
|                                  
|                                  
|                                  
|                                  
|                                   | Retained earnings (deficit)                                                                                                                               |                             |                                            | (345,981                             | )       |              |        | (328,977 | )      
|                                  
|                                  
|                                  
|                                  
|                                   | Accumulated comprehensive income                                                                                                                          |                             |                                            | 927                                  |         |              |        | 827      |        
|                                   |                                                                                                                                                           |                             |                                            |                                      |         |              |        |          |        
|                                   |                                                                                                                                                           | Total stockholders equity  |                                            |                                      | 89,582  |              |        |          | 105,941 |        
|                                   |                                                                                                                                                           |                             |                                            |                                      |         |              |        |          |        
|                                   |                                                                                                                                                           |                             | Total liabilities and stockholders equity |                                      | $       | 284,450      |        |          | $       | 314,885 | 
|                                   |                                                                                                                                                           |                             |                                            |                                      |         |              |        |          |        

See Accompanying Notes to Condensed Consolidated Financial Statements.

2



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SpeedFam-IPEC, Inc.
Condensed Consolidated Statements of Operations
First Quarter Ended September 1, 2001 and September 2, 2000
(in thousands, except per share data)

|                                                                                               |                    |                                                |              |   |                     |       |              |   |         |        | 
|---------------------------------------------------------------------------------------------- | ------------------ | ---------------------------------------------- | ------------ | - | ------------------- | ----- | ------------ | - | ------- | ------ | 
|                                                                                               |                    |                                                |              |   | First Quarter Ended
|                                                                                               |                    |                                                |              |   |                    
|                                                                                               |                    |                                                |              |   | September 1,        |       | September 2,
|                                                                                               |                    |                                                |              |   | 2001                |       | 2000        
|                                                                                               |                    |                                                |              |   |                     |       |             
|Net sales                                                                                      |                    | $                                              | 41,082       |   |                     | $     | 73,019       |  
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|Cost of sales                                                                                  |                    |                                                | 31,695       |   |                     |       | 57,085       |  
|                                                                                               |                    |                                                |              |   |                     |       |              |  
|                                                                                               |                    |                                                | Gross margin |   |                     | 9,387 |              |   |         | 15,934 | 
|                                                                                               |                    |                                                |              |   |                     |       |              |  
|Operating expenses:                                                                            |                    |                                                |              |   |                     |       |              |  
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                               |                    | Research, development and engineering          |              |   | 12,388              |       |              |   | 16,557  |       
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                               |                    | Selling, general and administrative            |              |   | 8,120               |       |              |   | 16,453  |       
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                               |                    | Litigation settlement costs                    |              |   | 1,800               |       |              |   |        |       
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                               |                    | Restructuring charges                          |              |   |                    |       |              |   | 5,123   |       
|                                                                                               |                    |                                                |              |   |                     |       |              |  
|                                                                                               |                    | Total operating expenses                       |              |   | 22,308              |       |              |   | 38,133  |       
|                                                                                               |                    |                                                |              |   |                     |       |              |  
|Operating loss                                                                                 |                    |                                                | (12,921      | ) |                     |       | (22,199      | )
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                               |                    | Other expense, net                             |              |   | (1,502              | )     |              |   | (121    | )     
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                               |                    | Loss on disposal of investment in affiliate    |              |   |                    |       |              |   | (10,763 | )     
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                               |                    | Equity in net earnings of affiliates           |              |   |                    |       |              |   | 110     |       
|                                                                                               |                    |                                                |              |   |                     |       |              |  
|Loss before income taxes and cumulative effect of
accounting change                            |                    |                                                | (14,423      | ) |                     |       | (32,973      | )
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                               |                    | Income tax                                     |              |   |                    |       |              |   |        |       
|                                                                                               |                    |                                                |              |   |                     |       |              |  
|Loss before cumulative effect of accounting change                                             |                    |                                                | (14,423      | ) |                     |       | (32,973      | )
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|Cumulative effect of accounting changes                                                        |                    |                                                | (2,582       | ) |                     |       | (36,542      | )
|                                                                                               |                    |                                                |              |   |                     |       |              |  
|Net loss                                                                                       |                    | $                                              | (17,005      | ) |                     | $     | (69,515      | )
|                                                                                               |                    |                                                |              |   |                     |       |              |  
|Net loss per common share:                                                                     |                    |                                                |              |   |                     |       |              |  
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                               | Basic and diluted: |                                                |              |   |                     |       |              |   |        
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                               |                    | Before cumulative effect of accounting changes |              | $ | (0.48               | )     |              | $ | (1.11   | )     
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                               |                    | From cumulative effect of accounting changes   |              |   | (0.08               | )     |              |   | (1.22   | )     
|                                                                                               |                    |                                                |              |   |                     |       |              |  
|                                                                                               |                    | Net loss                                       |              | $ | (0.56               | )     |              | $ | (2.33   | )     
|                                                                                               |                    |                                                |              |   |                     |       |              |  
|Weighted average number of shares:                                                             |                    |                                                |              |   |                     |       |              |  
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                               |                    | Basic and diluted                              |              |   | 30,223              |       |              |   | 29,818  |       
|                                                                                               |                    |                                                |              |   |                     |       |              |  
|Amounts as if the fiscal 2002 accounting change
related to goodwill was applied retroactively: |                    |                                                |              |   |                     |       |              |  
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|Net loss                                                                                       |                    | $                                              | (14,423      | ) |                     | $     | (69,294      | )
|                                                                                               |                    |                                                |              |   |                     |       |              |  
|Net loss per share:                                                                            |                    |                                                |              |   |                     |       |              |  
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                               |                    | Basic and diluted                              |              | $ | (0.48               | )     |              | $ | (2.32   | )     
|                                                                                               |                    |                                                |              |   |                     |       |              |  

See Accompanying Notes to Condensed Consolidated Financial Statements.

3



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##### Table of Contents






SpeedFam-IPEC, Inc.
Condensed Consolidated Statements of Cash Flows
First Quarter Ended September 1, 2001 and September 2, 2000
(in thousands)

|                                     |                                                                                              |                                                     |                                                 |         |                     |         |                   |         |        |         |  
|------------------------------------ | -------------------------------------------------------------------------------------------- | --------------------------------------------------- | ----------------------------------------------- | ------- | ------------------- | ------- | ----------------- | ------- | ------ | ------- | -
|                                     |                                                                                              |                                                     |                                                 |         | First Quarter Ended
|                                     |                                                                                              |                                                     |                                                 |         |                    
|                                     |                                                                                              |                                                     |                                                 |         | September 1, 2001   |         | September 2, 2000
|                                     |                                                                                              |                                                     |                                                 |         |                     |         |                  
|Cash flows from operating activities |                                                                                              |                                                     |                                                 |         |                     |         |                   |        
|                                    
|                                    
|                                    
|                                    
|                                     | Net loss                                                                                     |                                                     | $                                               | (17,005 | )                   |         | $                 | (69,515 | )     
|                                    
|                                    
|                                    
|                                    
|                                     | Adjustments to reconcile net loss
to net cash provided by (used in) in operating activities: |                                                     |                                                 |         |                     |         |                   |         |       
|                                    
|                                    
|                                    
|                                    
|                                     |                                                                                              | Equity in net earnings of affiliates                |                                                 |         |                    |         |                   |         | (110   | )      
|                                    
|                                    
|                                    
|                                    
|                                     |                                                                                              | Depreciation and amortization                       |                                                 |         | 4,557               |         |                   |         | 4,523  |        
|                                    
|                                    
|                                    
|                                    
|                                     |                                                                                              | Loss on disposal of investment of affiliate         |                                                 |         |                    |         |                   |         | 10,763 |        
|                                    
|                                    
|                                    
|                                    
|                                     |                                                                                              | Fixed asset impairments-loss on disposal            |                                                 |         |                    |         |                   |         | 2,391  |        
|                                    
|                                    
|                                    
|                                    
|                                     |                                                                                              | Cumulative effect of change in accounting principle |                                                 |         | 2,582               |         |                   |         | 36,542 |        
|                                    
|                                    
|                                    
|                                    
|                                     |                                                                                              | Restructuring charges                               |                                                 |         |                    |         |                   |         | 8,474  |        
|                                    
|                                    
|                                    
|                                    
|                                     |                                                                                              | Changes in assets and liabilities:                  |                                                 |         |                     |         |                   |         |        |        
|                                    
|                                    
|                                    
|                                    
|                                     |                                                                                              |                                                     | Decrease in trade accounts receivable           |         |                     | 14,156  |                   |         |        | 28,699  |  
|                                    
|                                    
|                                    
|                                    
|                                     |                                                                                              |                                                     | Increase in inventories                         |         |                     | (5,806  | )                 |         |        | (21,614 | )
|                                    
|                                    
|                                    
|                                    
|                                     |                                                                                              |                                                     | Decrease in shipped systems pending acceptance  |         |                     | 5,218   |                   |         |        | 1,629   |  
|                                    
|                                    
|                                    
|                                    
|                                     |                                                                                              |                                                     | (Increase) decrease in other current assets     |         |                     | 1,030   |                   |         |        | (1,843  | )
|                                    
|                                    
|                                    
|                                    
|                                     |                                                                                              |                                                     | Increase (decrease) in accounts payable         |         |                     | (5,275  | )                 |         |        | 8,493   |  
|                                    
|                                    
|                                    
|                                    
|                                     |                                                                                              |                                                     | Increase (decrease) in deferred systems revenue |         |                     | (11,838 | )                 |         |        | 1,688   |  
|                                    
|                                    
|                                    
|                                    
|                                     |                                                                                              |                                                     | Increase in accrued liabilities                 |         |                     | 2,856   |                   |         |        | 9,710   |  
|                                     |                                                                                              |                                                     |                                                 |         |                     |         |                   |         |       
|                                     | Net cash provided by (used in) in operating activities                                       |                                                     |                                                 | (9,525  | )                   |         |                   | 19,830  |       
|                                     |                                                                                              |                                                     |                                                 |         |                     |         |                   |         |       
|Cash flows from investing activities |                                                                                              |                                                     |                                                 |         |                     |         |                   |        
|                                    
|                                    
|                                    
|                                    
|                                     | Purchases of short-term investments                                                          |                                                     |                                                 |        |                     |         |                   | (7,268  | )     
|                                    
|                                    
|                                    
|                                    
|                                     | Maturities of short-term investments                                                         |                                                     |                                                 | 7,115   |                     |         |                   |        |       
|                                    
|                                    
|                                    
|                                    
|                                     | Capital expenditures                                                                         |                                                     |                                                 | (1,169  | )                   |         |                   | (3,596  | )     
|                                    
|                                    
|                                    
|                                    
|                                     | Other investing activities                                                                   |                                                     |                                                 | (548    | )                   |         |                   | (1,497  | )     
|                                     |                                                                                              |                                                     |                                                 |         |                     |         |                   |         |       
|                                     | Net cash provided by (used in) in investing activities                                       |                                                     |                                                 | 5,398   |                     |         |                   | (12,361 | )     
|                                     |                                                                                              |                                                     |                                                 |         |                     |         |                   |         |       
|Cash flows from financing activities |                                                                                              |                                                     |                                                 |         |                     |         |                   |        
|                                    
|                                    
|                                    
|                                    
|                                     | Proceeds from exercise of stock options and employee stock purchases                         |                                                     |                                                 | 544     |                     |         |                   | 2,710   |       
|                                    
|                                    
|                                    
|                                    
|                                     | Principal payments on long-term debt                                                         |                                                     |                                                 | (19     | )                   |         |                   | (285    | )     
|                                     |                                                                                              |                                                     |                                                 |         |                     |         |                   |         |       
|                                     | Net cash provided by financing activities                                                    |                                                     |                                                 | 525     |                     |         |                   | 2,425   |       
|                                     |                                                                                              |                                                     |                                                 |         |                     |         |                   |         |       
|                                     | Effects of foreign currency rate changes on cash                                             |                                                     |                                                 | 71      |                     |         |                   | (154    | )     
|                                     |                                                                                              |                                                     |                                                 |         |                     |         |                   |         |       
|                                     | Net increase (decrease) in cash and cash equivalents                                         |                                                     |                                                 | (3,531  | )                   |         |                   | 9,740   |       
|                                    
|                                    
|                                    
|                                    
|                                     | Cash and cash equivalents at beginning of year                                               |                                                     |                                                 | 47,344  |                     |         |                   | 72,060  |       
|                                     |                                                                                              |                                                     |                                                 |         |                     |         |                   |         |       
|                                     | Cash and cash equivalents at end of quarter                                                  |                                                     | $                                               | 43,813  |                     |         | $                 | 81,800  |       
|                                     |                                                                                              |                                                     |                                                 |         |                     |         |                   |         |       

See Accompanying Notes to Condensed Consolidated Financial Statements.

4



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##### Table of Contents






SpeedFam-IPEC, Inc.
Notes to Condensed Consolidated Financial Statements
(in thousands, except per share amounts)



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

The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with accounting principles generally accepted
in the United States for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they
do not include all of the information and footnotes required for comprehensive
financial statements. The preparation of financial statements in conformity
with accounting principles generally accepted in the United States requires the
Companys management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements as well as the reported
amounts of revenues and expenses during the reporting period. In the opinion
of management, all adjustments (consisting of normal recurring items)
considered necessary for a fair presentation have been included. Actual results
may differ from these estimates. Operating results for the quarter ended
September 1, 2001 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 contains 52 weeks whereas the 2001 fiscal year ended on June 2, 2001 and
also contained 52 weeks. 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.

5



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##### Table of Contents





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

The components of inventory were:

|                |  |              |        |         |  |   |        | 
|--------------- |  | ------------ | ------ | ------- |  | - | ------ | 
|                |  | September 1, |        | June 2,
|                |  | 2001         |        | 2001   
|                |  |              |        |        
|Raw materials   |  | $            | 51,768 |         |  | $ | 49,081 | 
|               
|               
|               
|               
|Work-in-process |  |              | 17,383 |         |  |   | 19,422 | 
|               
|               
|               
|               
|Finished goods  |  |              | 17,413 |         |  |   | 15,354 | 
|                |  |              |        |         |  |   |        | 
|                |  | $            | 86,564 |         |  | $ | 83,857 | 
|                |  |              |        |         |  |   |        | 



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

Accrued liabilities are as follows:

|                                                     |  |              |        |         |  |   |        | 
|---------------------------------------------------- |  | ------------ | ------ | ------- |  | - | ------ | 
|                                                     |  | September 1, |        | June 2,
|                                                     |  | 2001         |        | 2001   
|                                                     |  |              |        |        
|Accrued warranty and installation costs              |  | $            | 4,589  |         |  | $ | 6,156  | 
|                                                    
|                                                    
|                                                    
|                                                    
|Accrued payroll and benefits                         |  |              | 2,673  |         |  |   | 3,361  | 
|                                                    
|                                                    
|                                                    
|                                                    
|Accrued legal settlement                             |  |              | 1,800  |         |  |   |       | 
|                                                    
|                                                    
|                                                    
|                                                    
|Accrued merger, integration, and restructuring
costs |  |              | 1,700  |         |  |   | 1,719  | 
|                                                    
|                                                    
|                                                    
|                                                    
|Other accrued liabilities                            |  |              | 11,091 |         |  |   | 7,439  | 
|                                                     |  |              |        |         |  |   |        | 
|                                                     |  | $            | 21,853 |         |  | $ | 18,675 | 
|                                                     |  |              |        |         |  |   |        | 



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

The Companys comprehensive loss was as follows:

|                                   |                                         |   |                     |     |              |   |         |     | 
|---------------------------------- | --------------------------------------- | - | ------------------- | --- | ------------ | - | ------- | --- | 
|                                   |                                         |   | First Quarter Ended
|                                   |                                         |   |                    
|                                   |                                         |   | September 1,        |     | September 2,
|                                   |                                         |   | 2001                |     | 2000        
|                                   |                                         |   |                     |     |             
|Net loss                           |                                         | $ | (17,005             | )   |              | $ | (69,515 | )  
|                                  
|                                  
|                                  
|                                  
|Other comprehensive income (loss): |                                         |   |                     |     |              |   |         |    
|                                  
|                                  
|                                  
|                                  
|                                   | Unrealized gain (loss) on securities    |   |                     | (12 | )            |   |         | 220 | 
|                                  
|                                  
|                                  
|                                  
|                                   | Foreign currency translation adjustment |   |                     | 112 |              |   |         | 262 | 
|                                   |                                         |   |                     |     |              |   |         |    
|Comprehensive loss                 |                                         | $ | (16,905             | )   |              | $ | (69,033 | )  
|                                   |                                         |   |                     |     |              |   |         |    

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Accumulated other comprehensive income (loss) was as follows:

|                             |                    |   |                  |     |            |   |                 |     |                   |   |       |     | 
|---------------------------- | ------------------ | - | ---------------- | --- | ---------- | - | --------------- | --- | ----------------- | - | ----- | --- | 
|                             |                    |   |                  |     |            |   | Unrealized Gain |     | Accumulated Other
|                             |                    |   | Foreign Currency |     | (Loss) on  |   | Comprehensive  
|                             |                    |   | Translation      |     | Securities |   | Income (Loss)  
|                             |                    |   |                  |     |            |   |                
|Balance at June 2, 2001      |                    | $ | 803              |     |            | $ | 24              |     |                   | $ | 827   |    
|                            
|                            
|                            
|                            
|                             | One quarter change |   |                  | 112 |            |   |                 | (12 | )                 |   |       | 100 | 
|                             |                    |   |                  |     |            |   |                 |     |                   |   |       |    
|Balance at September 1, 2001 |                    | $ | 915              |     |            | $ | 12              |     |                   | $ | 927   |    
|                             |                    |   |                  |     |            |   |                 |     |                   |   |       |    
|Balance at June 3, 2000      |                    | $ | 1,239            |     |            | $ | (487            | )   |                   | $ | 752   |    
|                            
|                            
|                            
|                            
|                             | One quarter change |   |                  | 262 |            |   |                 | 220 |                   |   |       | 482 | 
|                             |                    |   |                  |     |            |   |                 |     |                   |   |       |    
|Balance at September 2, 2000 |                    | $ | 1,501            |     |            | $ | (267            | )   |                   | $ | 1,234 |    
|                             |                    |   |                  |     |            |   |                 |     |                   |   |       |    



|(5) |  | 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
is comprised of $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 are classified as restructuring charges.



|(6) |  | BUSINESS SEGMENT INFORMATION
|--- |  | ----------------------------

The Company classifies its products into three core business segments: (i)
the CMP Group, which is comprised of the Companys development and production
of chemical mechanical planarization systems; (ii) the Surface Technology Group
(STG), which is comprised of the distribution of high-throughput precision
surface processing equipment used in thin film memory disk media and silicon
wafer industries and the manufacture of polyvinyl alcohol products; and (iii)
the Industrial Applications Group (IAG), which is comprised of the development
and production of high-throughput precision surface processing equipment used
in general industrial applications. Information concerning the Companys
business segments during the first quarter ended September 1, 2001 and
September 2, 2000 is as follows (in thousands):

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##### Table of Contents



|                                            |                               |   |                     |        |              |   |         |        |   | 
|------------------------------------------- | ----------------------------- | - | ------------------- | ------ | ------------ | - | ------- | ------ | - | 
|                                            |                               |   | First Quarter Ended
|                                            |                               |   |                    
|                                            |                               |   | September 1,        |        | September 2,
|                                            |                               |   | 2001                |        | 2000        
|                                            |                               |   |                     |        |             
|Net sales:                                  |                               |   |                     |        |              |   |         |       
|                                           
|                                           
|                                           
|                                           
|                                            | CMP Group                     |   | $                   | 32,619 |              |   | $       | 63,617 |  
|                                           
|                                           
|                                           
|                                           
|                                            | Surface Technology Group      |   |                     | 5,015  |              |   |         | 5,534  |  
|                                           
|                                           
|                                           
|                                           
|                                            | Industrial Applications Group |   |                     | 3,448  |              |   |         | 3,868  |  
|                                            |                               |   |                     |        |              |   |         |        |  
|Total net sales to unaffiliated customers   |                               |   | 41,082              |        |              |   | 73,019  |       
|                                            |                               |   |                     |        |              |   |         |        |  
|Segment operating profit (loss):            |                               |   |                     |        |              |   |         |       
|                                           
|                                           
|                                           
|                                           
|                                            | CMP Group                     |   |                     | (8,393 | )            |   |         | (8,237 | )
|                                           
|                                           
|                                           
|                                           
|                                            | Surface Technology Group      |   |                     | 100    |              |   |         | (3,112 | )
|                                           
|                                           
|                                           
|                                           
|                                            | Industrial Applications Group |   |                     | 599    |              |   |         | 929    |  
|                                            |                               |   |                     |        |              |   |         |        |  
|Total segment operating profit (loss)       |                               |   | (7,694              | )      |              |   | (10,420 | )     
|                                           
|                                           
|                                           
|                                           
|General corporate expense, net              |                               |   | (5,227              | )      |              |   | (11,779 | )     
|                                           
|                                           
|                                           
|                                           
|Interest expense, net                       |                               |   | (1,502              | )      |              |   | (121    | )     
|                                           
|                                           
|                                           
|                                           
|Loss on disposal of investment in affiliate |                               |   |                    |        |              |   | (10,763 | )     
|                                           
|                                           
|                                           
|                                           
|Equity in net earnings of affiliate         |                               |   |                    |        |              |   | 110     |       
|                                            |                               |   |                     |        |              |   |         |        |  
|Loss from consolidated companies            |                               | $ | (14,423             | )      |              | $ | (32,973 | )     
|                                            |                               |   |                     |        |              |   |         |        |  



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

In July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible
Assets. SFAS No. 142 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 adopted SFAS No. 142 in the first quarter of 2002 and
recorded a cumulative effect of change in accounting principle for the
write-off of goodwill of ($2.6) million, or ($0.08) per share, as of the
beginning of 2002 (June 3, 2001). The impact of adoption was to reduce the
loss before cumulative effect of accounting change for the first quarter of
2002 by $0.2 million or $0.01 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. Earnings for the quarter ended September 2, 2000 would
have been ($69.3) million or ($2.32) per share if the accounting change related
to goodwill required by SFAS No. 142 had been applied to that quarter.

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 quarter of
2001 prior to the adoption of SAB 101 were restated to reflect the new revenue
recognition method. The impact of this restatement on the first quarter of 2001
was to increase the loss before cumulative effect of accounting changes by $3.8
million, or $0.13 per share.

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

8



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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 approach is used are recorded as shipped systems pending acceptance until
customer acceptance, at which time cost of goods sold is recorded; 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 billable 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.



|(8) |  | 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 alleges 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 calls 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 have been
recorded in the financial statements. Pursuant to the settlement, MEMC will
dismiss this litigation with prejudice.

Raytheon Aircraft Company Litigation

On October 4, 2000, Raytheon Aircraft Company (Raytheon) filed an action
against Integrated Process Equipment Corporation, IPEC Planar, Inc. and
SpeedFam-IPEC, Inc. in the United States District Court for the

9



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##### Table of Contents



District of Kansas. In the action, Raytheon alleges damages arising from its
purchase of a wire cutting and laser marking system (System) from Gaard
Automation Inc., predecessor in interest to the Company and is seeking
approximately $6.5 million. 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 contends
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. Spectrum responded to the
Complaint on July 6, 2001, generally denying the Companys claims.

Discovery has commenced, with documents produced by all parties, written
discovery responses obtained from all parties, and depositions of two key
witnesses taken. With the addition of Spectrum as a third party, the
previously-issued Court Scheduling Order has been continued. At present, there
are no firm dates for the close of discovery or trial. The parties have agreed
to mediation before a private mediator in Wichita, Kansas, on November 13,
2001. If the mediation is unsuccessful, it is anticipated that the Court will
issue a new Scheduling Order which will include firm pre-trial and trial dates.

The Company disputes these damages alleged by Raytheon and believes it has
meritorious defenses to the action. The Company has been and intends to
continue pursuing these defenses vigorously, as well as its third-party
complaint against Spectrum.

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.




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

Overview

SpeedFam-IPEC, Inc. (the Company) is a leading global supplier of chemical
mechanical planarization (CMP) systems. The Company designs, develops,
manufactures, markets and supports CMP systems which are used in the
fabrication of semiconductor devices. In addition to CMP systems, the Company
markets high-throughput precision surface processing equipment, manufactures
and markets systems for the general industrial applications markets, and
markets and distributes parts and consumables used in surface processing. 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, and related
costs to import this equipment are recorded as cost of goods sold.

The Company sells its products and services to three market segments: (1)
semiconductor device manufacturers (CMP Group), (2) thin film memory disk media
and silicon wafer manufacturers (Surface Technology Group or STG Group), and
(3) manufacturers of general industrial components (Industrial Applications
Group or IAG Group). Over the last three years, the majority of the Companys
total revenue has been derived from the sales of products and services by the
CMP Group.

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.

During 2001 and continuing in 2002, there has been a significant decrease
in the worldwide demand for semiconductor capital equipment. As a result of a
rapid decline in the demand for semiconductor devices, inventory buildups in
telecommunications products, slower than expected personal computer sales and
overall slower global

10



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##### Table of Contents



economic growth, many semiconductor manufacturers reevaluated their
capital spending plans. Accordingly, several of the Companys customers
rescheduled delivery or canceled existing orders. Furthermore, the Company has
experienced a substantial decline in new orders. In response to industry
conditions, the Company has recorded significant inventory write-downs, charges
related to asset impairments and severance costs in connection with
across-the-board headcount reductions. Furthermore, the Company implemented
measures to reduce discretionary spending. Due to the continuation and
severity of the industry-wide downturn, the Company implemented additional
cost-cutting measures during the first quarter of 2002 which included further
decreases in discretionary spending and reductions in worldwide headcount.

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 ($0.08) per share, as of the beginning of 2002
as a charge in the first quarter of 2002.

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. The impact of this
restatement on the first quarter of 2001 was to increase the loss before
cumulative effect of accounting changes by $3.8 million, or $0.13 per share.

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.

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 and is prohibited from manufacturing these products.

11



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##### Table of Contents



Results of Operations

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

|                                                   |              |  |                     |      |              |  |       |      |  | 
|-------------------------------------------------- | ------------ |  | ------------------- | ---- | ------------ |  | ----- | ---- |  | 
|                                                   |              |  | First Quarter Ended
|                                                   |              |  |                    
|                                                   |              |  | September 1,        |      | September 2,
|                                                   |              |  | 2001                |      | 2000        
|                                                   |              |  |                     |      |             
|Net sales                                          |              |  | 100.0               | %    |              |  | 100.0 | %   
|                                                  
|                                                  
|                                                  
|                                                  
|Cost of sales                                      |              |  | 77.2                |      |              |  | 78.2  |     
|                                                   |              |  |                     |      |              |  |       |     
|                                                   | Gross margin |  |                     | 22.8 |              |  |       | 21.8 | 
|                                                  
|                                                  
|                                                  
|                                                  
|Research, development and engineering              |              |  | 30.2                |      |              |  | 22.7  |     
|                                                  
|                                                  
|                                                  
|                                                  
|Selling, general and administrative                |              |  | 19.8                |      |              |  | 22.5  |     
|                                                  
|                                                  
|                                                  
|                                                  
|Litigation settlement costs                        |              |  | 4.3                 |      |              |  | 0.0   |     
|                                                  
|                                                  
|                                                  
|                                                  
|Restructuring charges                              |              |  |                    |      |              |  | 7.0   |     
|                                                   |              |  |                     |      |              |  |       |     
|Operating loss                                     |              |  | (31.5               | )    |              |  | (30.4 | )   
|                                                  
|                                                  
|                                                  
|                                                  
|Other expense, net                                 |              |  | (3.7                | )    |              |  | (0.2  | )   
|                                                  
|                                                  
|                                                  
|                                                  
|Loss on sale of joint venture interest             |              |  |                    |      |              |  | (14.7 | )   
|                                                  
|                                                  
|                                                  
|                                                  
|Equity in net earnings of affiliates               |              |  |                    |      |              |  | 0.2   |     
|                                                   |              |  |                     |      |              |  |       |     
|Loss before cumulative effect of
accounting change |              |  | (35.1               | )    |              |  | (45.2 | )   
|                                                  
|                                                  
|                                                  
|                                                  
|Cumulative effect of accounting change             |              |  | (6.3                | )    |              |  | (50.0 | )   
|                                                   |              |  |                     |      |              |  |       |     
|Net loss                                           |              |  | (41.4               | )%   |              |  | (95.2 | )%  
|                                                   |              |  |                     |      |              |  |       |     

Net Sales.Net sales for the first quarter of 2002 were $41.1 million,
down 43.7% from net sales of $73.0 million in the first quarter of 2001. Net
sales of CMP products for the first quarter of 2002 totaled $32.6 million, or
79.4% of net sales, compared to $63.6 million, or 87.1% of net sales, in the
first quarter 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 delivery or
canceled existing orders, resulting in the postponement of equipment delivery
and a decline in new orders and net sales.

Net sales of the Surface Technology Group (STG) in the first quarter of
2002 accounted for $5.0 million, or 12.2% of net sales, compared to $5.5
million, or 7.6% of net sales, in the first quarter of 2001. During 2002, thin
film memory disk manufacturers continued to experience manufacturing
over-capacity which in turn reduced capital spending. In addition, this
over-capacity situation has created a larger market for used equipment making
it even more difficult to sell new equipment. While the Company continues to
actively pursue sales of consumable products, the Company does not foresee a
return of high volume equipment sales to this market. The silicon wafer market
has also experienced continued softness in demand due to ongoing manufacturing
over-capacity caused by various factors including available capacity and
increased production efficiencies due to the fact that more chips can be
produced on a given wafer.

Net sales of the Industrial Applications Group (IAG) in the first quarter
of 2002 totaled $3.5 million, or 8.4% of net sales, compared to $3.9 million or
5.3% of net sales, in the first quarter of 2001.

12



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Gross Margin.In the first quarter of 2002, gross margin was $9.4 million,
or 22.8% of net sales, compared to $15.9 million, or 21.8% of net sales, in the
first quarter of 2001. The increase in gross margin as a percentage of net
sales was primarily due to the product mix of systems shipped. The companys
gross margins are below historical levels due primarily to decreased production
volume resulting in lower overhead absorption on a reduced revenue base.
During the industry downturn, the Company expects this trend of reduced gross
margins to continue. The Companys gross margin has significantly fluctuated in
the past and will continue to fluctuate based on several factors including the
severity and duration of the current industry downturn, 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 first quarter of 2002,
research, development and engineering expenses decreased to $12.4 million, or
30.2% of net sales, compared to $16.6 million, or 22.7% of net sales, in the
first quarter of 2001. Research, development and engineering expense decreased
by $4.2 million or 25% as a result of certain cost cutting measures which were
implemented by the Company in response to the industry wide downturn. In
addition, 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. The Company expects
to continue investing substantial resources in research, development and
engineering programs.

Selling, General and Administrative.In the first quarter of 2002,
selling, general and administrative expenses decreased to $8.1 million, or
19.8% of net sales, compared $16.5 million, or 22.5% of net sales, in the first
quarter of 2001. Selling, general and administrative expense decreased by $8.3
million or 51% as a result of certain cost cutting measures which were
implemented by the Company in response to the industry wide downturn. 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
VisionTM.

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.

Restructuring 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 Corporation. 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 plan to exit the
manufacturing of wafer and disk polishing products.

Other Expense, net.Other expense, net increased to ($1.5) million during
the first quarter of 2002 from ($0.1) million during 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 first 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 first quarter of 2002 and
2001 was zero. While the Company will reassess its tax situation each quarter,
the Company expects that its effective tax rate will approximate zero
throughout 2002.

Loss on Disposal of Investment in Affiliate and Equity in Net Earnings of
Affiliates.At the end of the first quarter of 2001, the Company reported a
$10.8 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.

For the first quarter of 2001, equity in net earnings of affiliates was
$0.1 million.

13



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Liquidity and Capital Resources

As of September 1, 2001, the Company had $50.2 million in cash, cash
equivalents and short-term investments, compared to $60.8 million at June 2,
2001. During the first quarter of 2002, the Company had $9.5 million of cash
used in operating activities compared to cash provided of $19.8 million from
operating activities during the same period in 2001. Approximately $0.3
million of cash was provided due to a decrease in working capital. The net loss
of $17.0 million included non-cash items totaling $7.2 million: the cumulative
effect of change in accounting principle of $2.6 million and depreciation and
amortization expense of $4.6 million.

Net cash provided by investing activities totaled $5.4 million during the
first quarter of 2002 compared with net cash used of $12.4 million during the
same period in 2001. Cash was primarily used for capital expenditures of $1.2
million during the first quarter of 2002 and was provided by proceeds of
maturing investments totaling $7.1 million.

Financing activities provided cash of $0.5 million during the first
quarter of 2002 compared with approximately $2.4 million during the same period
of 2001. The sale of stock to employees and the exercise of stock options
generated proceeds of $0.5 million during the quarter ended September 1, 2001.

The Company has incurred operating losses of $12.9 million in the first
quarter of 2002, and $86.5 million and $16.5 million in fiscal years 2001 and
2000, respectively. Coinciding with these operating losses, the Company has
incurred a decrease in its cash and investment balances of $10.6 million, $39.4
million, and $46.7 million in 2002, 2001 and 2000, respectively.

Due to the continuation and severity of the industry-wide downturn, the
Company has implemented additional cost-cutting measures during the first
quarter 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 at least the remainder of fiscal 2002. However, due to
significant uncertainties related to the duration and severity of the
semiconductor industry downturn, overall economic conditions and potential
litigation costs, the Company is currently evaluating additional sources of
funds in order to strengthen its working capital position. Based on discussions
with various lenders, the Company believes that the sources of funds available
include, but are not limited to, sale/lease back of its corporate headquarters
or mortgage loan financing, a line of credit facility and term debt. If the
Company were to raise additional funds through the issuance of equity
securities, the percentage ownership of the Companys shareholders would be
reduced. In addition, these equity securities may have rights, preferences or
privileges senior to the Companys common stock.

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. Actual results could differ materially from those
projected in the forward-looking statements because of a number of factors,
risks and uncertainties, including the risk factors described in this
discussion and elsewhere in this report. Such forward-looking statements
include, but are not limited to, statements that relate to the Companys future
revenue, product development, product backlog, customers, demand, acceptance,
market share, competitiveness, gross margins, levels of research and
development and operating expenses, intellectual property, managements plans
and objectives for current and future operations of the Company, the effects of
the Companys reorganization of the Far East Joint Venture, and the markets in
which the Company does business. In addition, the words anticipate, expect,
intend, believe and similar expressions generally identify forward-looking
statements. The information included in this report is as of the filing

14



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##### Table of Contents



date with the Securities and Exchange Commission and future events or
circumstances could differ significantly from the forward-looking statements
included herein.

CERTAIN FACTORS AFFECTING THE COMPANYS BUSINESS

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

The Company depends on selling a small number of high-priced machines.
The Company derives a significant portion of its revenue from the sale of a
relatively small number of CMP systems. Thus, order, delivery, and customer
acceptance delays and cancellations, even of one or two systems, have caused
and may continue to cause the Company to miss quarterly revenue and profit
expectations.

Downturn in the semiconductor industry has led and may continue to lead to
decreased revenue for the Company.During 2001 and the first quarter 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, the Company has little
visibility regarding how long the semiconductor industry downturn will last or
how severe the downturn will be. During the first quarter of 2002, the Company
experienced certain cancellations and pushouts of orders for its products. If
the downturn continues or worsens, the Company may experience greater levels of
cancellations and/or pushouts of orders for its products in the future.

The Companys current business model is predicated on closing and
fulfilling expected orders for its MomentumTM and Momentum300TM products.A
significant portion of the Companys projected revenue depends on sales of its
MomentumTM product. Although initial customer reaction to MomentumTM has been
positive, this response may not translate into sales of MomentumTM on the scale
or in the time frame the Company anticipates. For instance, market conditions
in the semiconductor industry have caused and may continue to cause potential
purchasers of MomentumTM to delay investment in new equipment, which could
reduce demand for MomentumTM. If the Company is unable to close anticipated
orders or fulfill orders for the MomentumTM product, the Companys revenue will
be adversely affected.

The Company must succeed in selling CMP equipment for 300 millimeter in
order to increase its revenue and maintain market share. Semiconductor
manufacturers currently purchase CMP equipment predominantly to manufacture 200
millimeter wafers, using CMP to polish the tungsten and oxide layers of these
wafers at .18 micron and above. Many of those same manufacturers are now
beginning to develop the ability to make 300 millimeter wafers and to process
copper layers for both 200 millimeter and 300 millimeter wafers at .13 micron
and below. Many of these manufacturers are currently qualifying CMP equipment
for 300 millimeter tungsten, 300 millimeter oxide and for copper layers for
both the 200 millimeter and 300 millimeter wafers. In the future, it is
anticipated that semiconductor manufacturers will purchase CMP equipment for
volume production of 300 millimeter and/or copper-based wafers. If the Company
does not win qualification contests for 300 millimeter and/or copper-based
wafers, it may experience difficulty achieving volume sales of this
next-generation equipment to semiconductor manufacturers, which could result in
declining revenues. In addition, rollout of Momentum 300TM may be slowed due
to manufacturing problems, unforeseen technical problems with the Momentum
300TM product itself or changes in the CMP marketplace that differ from our
expectations.

The Companys quarterly operating results may fluctuate for reasons not
within its control, which may affect the Companys stock price.The Companys
quarterly operating results may fluctuate due to a variety of factors,
including:



| |  |  | industry demand for capital equipment, which depends on
economic conditions in the semiconductor, memory disk and silicon
wafer markets
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | timing of new product introductions                                                                                                    
|
| |  |  | ability to develop and implement new technologies                                                                                      

15



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| |  |  | 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                                                                                                               
|
| |  |  | announcements regarding restructuring, technological
innovations, departures of key officers or employees, or the
introduction of new products

Accordingly, results of operations in any period are not an indication of
future results.Fluctuations in the Companys operating results may also
result in fluctuations in the Companys common stock price. The Companys stock
price may also fluctuate due to factors specific to the semiconductor industry,
which has experienced significant price fluctuations in recent periods.
Investors in the Companys stock should be willing to incur the risk of such
price fluctuations.

If the market price of the Companys stock is adversely affected, the
Company may experience difficulty in raising capital. In addition, the Company
may become the object of securities class action litigation. If the Company is
sued in a securities class action, the Company may incur substantial costs and
managements attention and resources may be diverted.

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



| |  |  | Some competitors may have greater financial resources than
the Company. They also may have more extensive engineering,
manufacturing, marketing and customer service and support
capabilities.                                                           
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Some competitors may supply a broader range of semiconductor
capital equipment than the Company. As a result, these competitors
may have better relationships with semiconductor manufacturers,
including current and potential customers of the Company.
|
| |  |  | The Company expects competitors to continue to improve their
existing technology and introduce new products.                                                                                                                                             
|
| |  |  | Other capital equipment manufacturers not currently involved
in the development of CMP systems may enter the market or develop
technology that reduces the need for the Companys products.                                                              
|
| |  |  | Once a semiconductor manufacturer commits to purchase a
competitors equipment, the manufacturer generally relies on that
equipment for an entire production line and continues to purchase
that equipment exclusively for an extended period of time.   

Increased competitive pressure could lead to lost revenue from sales for
the Companys products, thereby damaging the Companys business. There can be
no assurance that the Company will be able to compete successfully in the
future.

Lost revenue from semiconductor industry downturn, general economic
slowdown and/or increased competition could continue to lead to operating
losses.If the Company experiences continued reductions in revenue from lost
sales or price reductions for its products for any reason, including a
continued downturn in the semiconductor industry, a general economic slowdown
in the United States or increased competition, the Companys gross margins will
continue to be reduced and could lead to further operating losses. For
instance, net sales for the first quarter of 2002 were $41.1 million, down
43.7% from net sales of $73.0 million in the first quarter of 2001. Gross
margins for the first quarter of 2002 were similarly down, from $15.9 million
to $9.4 million.

16



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##### Table of Contents



The Company may not develop products in time to meet changing
technologies.Semiconductor manufacturing equipment and processes are subject
to rapid technological changes and product obsolescence. The success of the
Company in developing, introducing and selling new and enhanced systems depends
upon a variety of factors including:



| |  |  | product selection                                                          
| | - |  | ---------------------------------------------------------------------------
|
| |  |  | timely and efficient completion of product design and development          
|
| |  |  | timely and efficient implementation of manufacturing and assembly
processes
|
| |  |  | product performance in the field                                           
|
| |  |  | effective sales and marketing                                              

If the Company is not able to timely develop new products, the Company
will experience reduced revenue.

The Companys business is highly cyclical.The Companys business depends
substantially on the capital expenditures of semiconductor manufacturers and,
to a lesser extent, thin film memory disk and silicon wafer manufacturers.
These industries are highly cyclical. Semiconductor manufacturers are currently
experiencing a downturn, which has caused companies to delay or cancel the
acquisition of capital equipment and other products used in the manufacturing
process, including products offered by the Company. These downturns have in the
past and are expected in the future to damage the business and operating
results of the Company.

The Company depends on a small number of major customers.Currently, and
for the foreseeable future, the Company expects that it will sell machines to a
limited number of major customers. To date, the CMP process has been used
primarily to fabricate advanced semiconductors, which accounts for only a
portion of the overall semiconductor market. The loss of a significant customer
or a substantial reduction in orders by any significant customer, including
reductions due to customer departures from recent buying patterns, market,
economic or competitive conditions in the semiconductor industry, could damage
the Companys business.

Orders in backlog may not result in future revenue if customers cancel or
reschedule orders.The Company includes in backlog only those customer orders
for which it has accepted purchase orders. Expected revenue may be lower if
customers cancel or reschedule orders, which they can generally do without
penalty. For instance, during the first quarter of 2002, the Company adjusted
approximately $6 million out of its backlog for orders with shipment dates not
scheduled within the next twelve months.

The Companys success depends on international sales, particularly in Asia
and Europe.International sales accounted for 64% of the Companys total
revenue for the first quarter of 2002, 61% for 2001, and 70% for 2000. The
Company expects that international sales will continue to account for a
significant portion of total revenue in future periods.

International sales are subject to risks, including:



| |  |  | foreign exchange issues                                                                    
| | - |  | -------------------------------------------------------------------------------------------
|
| |  |  | political, economic and regulatory environment of the countries where
customers are located
|
| |  |  | collection of accounts receivable                                                          
|
| |  |  | inadequate intellectual property protection                                                
|
| |  |  | intense price competition                                                                  

The Company derives a substantial portion of its revenues from customers
in Asian countries, particularly Taiwan and Korea.Economic developments in
late 1997 and early 1998 resulted in decreased capital investments

17



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##### Table of Contents



by Asian customers. Although the economies of Taiwan, Korea and other Asian
countries have recovered somewhat from 1997 and 1998 levels, these countries
have historically not had stable economies. Any negative economic developments
these Asian countries could result in the cancellation or delay of orders for
the Companys products from Asian customers, thus damaging the Companys
business.

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



| |  |  | The Company incurs substantial costs to ensure the
functionality and reliability of products earlier in their life
cycle. This can reduce orders, increase manufacturing costs,
adversely impact working capital and increase service and warranty
expenses.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | The Company requires significant lead-times between product
introduction and commercial shipment. As a result, the Company may
have to write off inventory and other assets related to products and
could lose customers and revenue.                       

There can be no assurance that the Company will be successful in
preventing product and process development problems that could potentially harm
the Companys results of operations.

Failure of critical suppliers to deliver sufficient quantities of parts in
a timely and cost-effective manner could negatively affect the Companys
business.The Company uses numerous suppliers to supply parts, components and
subassemblies for the manufacture and support of its products. In addition,
some key parts may be obtained only from a single supplier or a limited group
of suppliers. If the Company does not receive a sufficient quantity of parts in
a timely and cost-effective manner to meet its production requirements, the
results of operations may be damaged.

If the Company is unable to protect its intellectual property, its
business could suffer.The Companys intellectual property portfolio is very
important to its success. The Company currently holds 182 United States patents
and 179 foreign patents in Japan and several Asian and European countries. In
addition, the Company has 133 United States patent applications pending and 215
foreign patent applications pending. The Company may not be able to protect
its technology because:



| |  |  | pending and new patent applications may not be approved in a timely
manner or approved at all                       
| | - |  | --------------------------------------------------------------------------------------------------------------------
|
| |  |  | third parties may try to challenge or invalidate existing patents and
new patents                                   
|
| |  |  | policing unauthorized use of intellectual property is difficult and
expensive                                       
|
| |  |  | the laws of some foreign countries do not protect intellectual property
rights as much as U.S. laws                 
|
| |  |  | competitors may independently develop similar technology or
design around intellectual property owned by the Company

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



| |  |  | bring claims of patent, copyright or trademark infringement                                                                                                       
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | obtain patents or other intellectual property rights that
limit the Companys ability to do business or require the Company to
license or cross-license technology
|
| |  |  | bring costly, time consuming lawsuits                                                                                                                             

Third parties hold many patents relating to CMP machines and processes.
In the event the Company loses any of its intellectual property rights or
otherwise determines that it needs to obtain licenses to third party

18



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##### Table of Contents



intellectual property, there is no assurance that the Company will be able to
obtain such licenses on reasonable terms, if at all. The Company currently
licenses the right to manufacture CMP machines employing an orbital motion in
its 676, 776, 876, MomentumTM and Momentum 300TM from a semiconductor
manufacturer.

The Company is dependent on key management and technical personnel.The
Companys performance and ability to execute is substantially dependent on the
performance of the Companys executive officers and key technical and
engineering employees. Losing the services of any of these executive officers
or key employees could damage the Companys business.

The Companys future success also depends on its ability to identify,
hire, train and retain other highly qualified managerial and technical
personnel. Competition for such personnel is intense. If the Company is not
successful in identifying, hiring, training and retaining such personnel, it
could damage the Companys business.

The Company is subject to risks of non-compliance with environmental
regulations.The Company is subject to environmental regulations in connection
with its business operations, including but not limited to regulations related
to the development, manufacturing and use of its products. From time to time,
the Company receives notices alleging violations of these regulations. It is
the Companys 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 its products, each of which could damage the
Companys financial condition and results of operations.

The Company uses financial instruments that potentially subject it to
concentrations of credit risk.The Company enters into foreign exchange
contracts to hedge certain firm commitments denominated in foreign currencies,
primarily Japanese yen. The Company also invests its cash in deposits in banks,
money market funds, government and corporate debt securities. The Company does
not use derivative financial instruments in its investment portfolio. The
Company places its investments with high credit quality issuers and by policy,
limits the amount of credit exposure to any one issuer. The Company mitigates
default risk by investing in only the safest and highest credit quality
securities and by monitoring the credit rating of investment issuers. The
portfolio includes only marketable securities with active secondary or resale
markets to ensure portfolio liquidity. To date, the Company has not experienced
material losses on these investments. However, there can be no assurance that
the Company will not in the future experience losses that could damage the
Companys business.

19



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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

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 alleges 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 calls 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. Pursuant to the settlement, MEMC will
dismiss this litigation with prejudice.

Item 2. Changes in Securities



| |     
| | ----
| | None

Item 3. Defaults upon Senior Securities



| |     
| | ----
| | None

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



| |     
| | ----
| | None

Item 5. Other Information



| |     
| | ----
| | None

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



| |              
| | -------------
| | (a) Exhibits.



| |     
| | ----
| | None



| |                         
| | ------------------------
| | (b) Reports on Form 8-K.



| |                              
| | -----------------------------
| | 8-K filed on October 10, 2001

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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.

|                       |  |                                                                                                                |  |  |  | 
|---------------------- |  | -------------------------------------------------------------------------------------------------------------- |  |  |  | 
|Date: October 11, 2001 |  | /s/  J. Michael DodsonBy J. Michael Dodson
Secretary and Chief Financial Officer
(Principal Financial Officer)
|                      
|Date: October 11, 2001 |  | /s/  G. Michael LattaBy G. Michael Latta
Corporate Controller
(Principal Accounting Officer)                  

21