##### Table of Contents



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United States Securities and Exchange Commission

Washington, D.C. 20549

Form 10-Q

(Mark One)

|      |  |                                                                                        
|----- |  | ---------------------------------------------------------------------------------------
|X Box |  | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934

| |  |                                                
| |  | -----------------------------------------------
| |  | For the quarterly period ended December 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
incorporation or organization)                    |  | (I.R.S. Employer
Identification Number)
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|305 North 54th Street, Chandler, Arizona
(Address of principal executive offices) |  | 85226
(Zip Code)                       

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

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

| |  |     |  |            |  |    |  | 
| |  | --- |  | ---------- |  | -- |  | 
| |  | Yes |  | Check Mark |  | No |  | 
| |  |     |  |            |  |    |  | 

Indicate the number of shares outstanding of each of the issuers classes
of common stock, as of the latest practicable date (December 31, 2001).

Common Stock, no par value: 30,381,539 shares



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TABLE OF CONTENTS



|                             |                                                                                               |                                                      |  |  |  |  |  | 
|---------------------------- | --------------------------------------------------------------------------------------------- | ---------------------------------------------------- |  |  |  |  |  | 
|PART I FINANCIAL INFORMATION
|                             |                                                                                               | Condensed Consolidated Balance Sheets               
|                             |                                                                                               | Condensed Consolidated Statements of Operations     
|                             |                                                                                               | Condensed Consolidated Statements of Cash Flows     
|                             |                                                                                               | Notes to Condensed Consolidated Financial Statements
|                             | Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
|                             | ITEM 3. Quantitative and Qualitative Disclosures About Market Risk.                          
|PART II  OTHER INFORMATION 
|SIGNATURES                  
|EXHIBIT INDEX               
|Exhibit 10.1                



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##### Table of Contents



SpeedFam-IPEC, Inc.

Index

|                             |                                                                                               |                                                                                                                                   |    |      |   | 
|---------------------------- | --------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------- | -- | ---- | - | 
|                             |                                                                                               |                                                                                                                                   |    | Page
|                             |                                                                                               |                                                                                                                                   |    |     
|PART I FINANCIAL INFORMATION |                                                                                               |                                                                                                                                   |    |     
|                            
|                            
|                            
|                            
|                             | Item 1. Financial Statements                                                                  |                                                                                                                                   |    |      |  
|                            
|                            
|                            
|                            
|                             |                                                                                               | Condensed Consolidated Balance Sheets
December 1, 2001 and June 2, 2001                                                           |    |      | 2 | 
|                            
|                            
|                            
|                            
|                             |                                                                                               | Condensed Consolidated Statements of Operations
Second Quarter Ended and Two Quarters Ended
December 1, 2001 and December 2, 2000 |    |      | 3 | 
|                            
|                            
|                            
|                            
|                             |                                                                                               | Condensed Consolidated Statements of Cash Flows
Two Quarters Ended December 1, 2001 and December 2, 2000                          |    |      | 4 | 
|                            
|                            
|                            
|                            
|                             |                                                                                               | Notes to Condensed Consolidated Financial Statements                                                                              |    |      | 5 | 
|                            
|                            
|                            
|                            
|                             | Item 2. Managements Discussion and Analysis of Financial Condition
and Results of Operations |                                                                                                                                   |    | 11   |  
|                            
|                            
|                            
|                            
|                             | Item 3. Quantitative and Qualitative Disclosures about Market Risk                            |                                                                                                                                   |    | 22   |  
|                            
|                            
|                            
|                            
|PART II OTHER INFORMATION    |                                                                                               |                                                                                                                                   | 22 |     
|                            
|                            
|                            
|                            
|SIGNATURES                   |                                                                                               |                                                                                                                                   | 24 |     
|                            
|                            
|                            
|                            
|EXHIBIT INDEX                |                                                                                               |                                                                                                                                   |    |     

1



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##### Table of Contents









Part I  Financial Information

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

|                                   |                                                                                                                                                          |                             |                                            |          |         |             |        |           |         |         |  | 
|---------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------- | ------------------------------------------ | -------- | ------- | ----------- | ------ | --------- | ------- | ------- |  | 
|                                   |                                                                                                                                                          |                             |                                            |          |         | December 1, |        | June 2,  
|                                   |                                                                                                                                                          |                             |                                            |          |         | 2001        |        | 2001     
|                                   |                                                                                                                                                          |                             |                                            |          |         | (Unaudited) |        | (Audited)
|                                   |                                                                                                                                                          |                             |                                            |          |         |             |        |          
|                                   |                                                                                                                                                          |                             |                                            | Assets   |         |             |        |           |         |         |  | 
|                                  
|                                  
|                                  
|                                  
|Current assets:                    |                                                                                                                                                          |                             |                                            |          |         |             |        |          
|                                  
|                                  
|                                  
|                                  
|                                   | Cash and cash equivalents                                                                                                                                |                             | $                                          | 37,180   |         |             | $      | 47,344    |        
|                                  
|                                  
|                                  
|                                  
|                                   | Short-term investments                                                                                                                                   |                             |                                            | 1,900    |         |             |        | 13,495    |        
|                                  
|                                  
|                                  
|                                  
|                                   | Trade accounts receivable, net                                                                                                                           |                             |                                            | 30,837   |         |             |        | 60,619    |        
|                                  
|                                  
|                                  
|                                  
|                                   | Inventories                                                                                                                                              |                             |                                            | 46,226   |         |             |        | 83,857    |        
|                                  
|                                  
|                                  
|                                  
|                                   | Shipped systems pending acceptance                                                                                                                       |                             |                                            | 7,909    |         |             |        | 13,953    |        
|                                  
|                                  
|                                  
|                                  
|                                   | Prepaid expenses and other current assets                                                                                                                |                             |                                            | 3,438    |         |             |        | 4,549     |        
|                                   |                                                                                                                                                          |                             |                                            |          |         |             |        |           |        
|                                   |                                                                                                                                                          | Total current assets        |                                            |          | 127,490 |             |        |           | 223,817 |        
|                                  
|                                  
|                                  
|                                  
|Property, plant and equipment, net |                                                                                                                                                          |                             | 62,328                                     |          |         |             | 75,241 |          
|                                  
|                                  
|                                  
|                                  
|Other assets                       |                                                                                                                                                          |                             | 14,413                                     |          |         |             | 15,827 |          
|                                   |                                                                                                                                                          |                             |                                            |          |         |             |        |           |        
|                                   |                                                                                                                                                          | Total assets                |                                            | $        | 204,231 |             |        | $         | 314,885 |        
|                                   |                                                                                                                                                          |                             |                                            |          |         |             |        |           |        
|                                   |                                                                                                                                                          |                             | Liabilities and Stockholders Equity       |          |         |             |        |           |         |         | 
|                                  
|                                  
|                                  
|                                  
|Current liabilities:               |                                                                                                                                                          |                             |                                            |          |         |             |        |          
|                                  
|                                  
|                                  
|                                  
|                                   | Current portion of long-term debt                                                                                                                        |                             | $                                          | 127      |         |             | $      | 229       |        
|                                  
|                                  
|                                  
|                                  
|                                   | Accounts payable                                                                                                                                         |                             |                                            | 12,797   |         |             |        | 23,314    |        
|                                  
|                                  
|                                  
|                                  
|                                   | Deferred systems revenue                                                                                                                                 |                             |                                            | 26,571   |         |             |        | 46,281    |        
|                                  
|                                  
|                                  
|                                  
|                                   | Accrued liabilities                                                                                                                                      |                             |                                            | 17,178   |         |             |        | 18,675    |        
|                                   |                                                                                                                                                          |                             |                                            |          |         |             |        |           |        
|                                   |                                                                                                                                                          | Total current liabilities   |                                            |          | 56,673  |             |        |           | 88,499  |        
|                                   |                                                                                                                                                          |                             |                                            |          |         |             |        |           |        
|Long-term liabilities:             |                                                                                                                                                          |                             |                                            |          |         |             |        |          
|                                  
|                                  
|                                  
|                                  
|                                   | Long-term debt                                                                                                                                           |                             |                                            | 115,072  |         |             |        | 115,124   |        
|                                  
|                                  
|                                  
|                                  
|                                   | Other liabilities                                                                                                                                        |                             |                                            | 4,549    |         |             |        | 5,321     |        
|                                   |                                                                                                                                                          |                             |                                            |          |         |             |        |           |        
|                                   |                                                                                                                                                          | Total long-term liabilities |                                            |          | 119,621 |             |        |           | 120,445 |        
|                                   |                                                                                                                                                          |                             |                                            |          |         |             |        |           |        
|Stockholders equity:              |                                                                                                                                                          |                             |                                            |          |         |             |        |          
|                                  
|                                  
|                                  
|                                  
|                                   | Common stock, no par value, 60,000 shares
authorized, 30,318 and 30,116 shares issued
and outstanding at
December 1, 2001 and June 2, 2001, respectively |                             |                                            | 1        |         |             |        | 1         |        
|                                  
|                                  
|                                  
|                                  
|                                   | Additional paid-in capital                                                                                                                               |                             |                                            | 434,831  |         |             |        | 434,090   |        
|                                  
|                                  
|                                  
|                                  
|                                   | Retained earnings (deficit)                                                                                                                              |                             |                                            | (407,639 | )       |             |        | (328,977  | )      
|                                  
|                                  
|                                  
|                                  
|                                   | Accumulated comprehensive income                                                                                                                         |                             |                                            | 744      |         |             |        | 827       |        
|                                   |                                                                                                                                                          |                             |                                            |          |         |             |        |           |        
|                                   |                                                                                                                                                          | Total stockholders equity  |                                            |          | 27,937  |             |        |           | 105,941 |        
|                                   |                                                                                                                                                          |                             |                                            |          |         |             |        |           |        
|                                   |                                                                                                                                                          |                             | Total liabilities and stockholders equity |          | $       | 204,231     |        |           | $       | 314,885 | 
|                                   |                                                                                                                                                          |                             |                                            |          |         |             |        |           |        

See Accompanying Notes to Condensed Consolidated Financial Statements.

2



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##### Table of Contents






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

|                                                                                       |                    |                   |                   |                                                |       |                      |         |                    |       |             |         |             |       |        |         |   |       |        |         |  
|-------------------------------------------------------------------------------------- | ------------------ | ----------------- | ----------------- | ---------------------------------------------- | ----- | -------------------- | ------- | ------------------ | ----- | ----------- | ------- | ----------- | ----- | ------ | ------- | - | ----- | ------ | ------- | -
|                                                                                       |                    |                   |                   |                                                |       | Second Quarter Ended |         | Two Quarters Ended
|                                                                                       |                    |                   |                   |                                                |       |                      |         |                   
|                                                                                       |                    |                   |                   |                                                |       | December 1,          |         | December 2,        |       | December 1, |         | December 2,
|                                                                                       |                    |                   |                   |                                                |       | 2001                 |         | 2000               |       | 2001        |         | 2000       
|                                                                                       |                    |                   |                   |                                                |       |                      |         |                    |       |             |         |            
|Net sales                                                                              |                    | $                 | 25,827            |                                                |       | $                    | 83,911  |                    |       | $           | 66,909  |             |       | $      | 156,930 |  
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                      
|Cost of sales                                                                          |                    |                   | 57,910            |                                                |       |                      | 56,776  |                    |       |             | 89,605  |             |       |        | 113,861 |  
|                                                                                       |                    |                   |                   |                                                |       |                      |         |                    |       |             |         |             |       |        |         |  
|                                                                                       |                    |                   |                   | Gross margin                                   |       |                      | (32,083 | )                  |       |             | 27,135  |             |       |        | (22,696 | ) |       |        | 43,069  |  
|                                                                                       |                    |                   |                   |                                                |       |                      |         |                    |       |             |         |             |       |        |         |  
|Operating expenses:                                                                    |                    |                   |                   |                                                |       |                      |         |                    |       |             |         |             |       |        |         |  
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                       |                    |                   |                   | Research, development and engineering          |       |                      | 17,851  |                    |       |             | 14,412  |             |       |        | 30,239  |   |       |        | 30,969  |  
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                       |                    |                   |                   | Selling, general and administrative            |       |                      | 7,283   |                    |       |             | 15,016  |             |       |        | 15,403  |   |       |        | 31,469  |  
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                       |                    |                   |                   | Litigation settlement costs                    |       |                      |        |                    |       |             |        |             |       |        | 1,800   |   |       |        |        |  
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                       |                    |                   |                   | Restructuring charges                          |       |                      | 3,000   |                    |       |             |        |             |       |        | 3,000   |   |       |        | 5,123   |  
|                                                                                       |                    |                   |                   |                                                |       |                      |         |                    |       |             |         |             |       |        |         |  
|                                                                                       |                    |                   |                   | Total operating expenses                       |       |                      | 28,134  |                    |       |             | 29,428  |             |       |        | 50,442  |   |       |        | 67,561  |  
|                                                                                       |                    |                   |                   |                                                |       |                      |         |                    |       |             |         |             |       |        |         |  
|Operating loss                                                                         |                    |                   | (60,217           | )                                              |       |                      | (2,293  | )                  |       |             | (73,138 | )           |       |        | (24,492 | )
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                       |                    |                   |                   | Other expense, net                             |       |                      | (1,460  | )                  |       |             | (88     | )           |       |        | (2,962  | ) |       |        | (209    | )
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                       |                    |                   |                   | 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 changes                   |                    |                   | (61,677           | )                                              |       |                      | (2,381  | )                  |       |             | (76,100 | )           |       |        | (35,354 | )
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                       |                    |                   |                   | Income taxes                                   |       |                      |        |                    |       |             |        |             |       |        |        |   |       |        |        |  
|                                                                                       |                    |                   |                   |                                                |       |                      |         |                    |       |             |         |             |       |        |         |  
|Loss before cumulative effect of accounting
changes                                    |                    |                   | (61,677           | )                                              |       |                      | (2,381  | )                  |       |             | (76,100 | )           |       |        | (35,354 | )
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                      
|Cumulative effect of accounting changes                                                |                    |                   |                  |                                                |       |                      |        |                    |       |             | (2,582  | )           |       |        | (36,542 | )
|                                                                                       |                    |                   |                   |                                                |       |                      |         |                    |       |             |         |             |       |        |         |  
|Net loss                                                                               |                    | $                 | (61,677           | )                                              |       | $                    | (2,381  | )                  |       | $           | (78,682 | )           |       | $      | (71,896 | )
|                                                                                       |                    |                   |                   |                                                |       |                      |         |                    |       |             |         |             |       |        |         |  
|Net loss per common share:                                                             |                    |                   |                   |                                                |       |                      |         |                    |       |             |         |             |       |        |         |  
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                       | Basic and diluted: |                   |                   |                                                |       |                      |         |                    |       |             |         |             |       |        |         |   |      
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                       |                    |                   |                   | Before cumulative effect of accounting changes |       | $                    | (2.03   | )                  |       | $           | (0.08   | )           |       | $      | (2.51   | ) |       | $      | (1.18   | )
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                       |                    |                   |                   | From cumulative effect of accounting changes   |       |                      |        |                    |       |             |        |             |       |        | (0.09   | ) |       |        | (1.22   | )
|                                                                                       |                    |                   |                   |                                                |       |                      |         |                    |       |             |         |             |       |        |         |  
|                                                                                       |                    |                   |                   | Net loss                                       |       | $                    | (2.03   | )                  |       | $           | (0.08   | )           |       | $      | (2.60   | ) |       | $      | (2.40   | )
|                                                                                       |                    |                   |                   |                                                |       |                      |         |                    |       |             |         |             |       |        |         |  
|Weighted average number of shares:                                                     |                    |                   |                   |                                                |       |                      |         |                    |       |             |         |             |       |        |         |  
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                       |                    |                   | Basic and diluted |                                                |       | 30,318               |         |                    |       | 29,912      |         |             |       | 30,318 |         |   |       | 29,865 |        
|                                                                                       |                    |                   |                   |                                                |       |                      |         |                    |       |             |         |             |       |        |         |  
|Amounts as if the fiscal 2002 accounting change
to goodwill was applied retroactively: |                    |                   |                   |                                                |       |                      |         |                    |       |             |         |             |       |        |         |  
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                      
|Net loss                                                                               |                    | $                 | (61,677           | )                                              |       | $                    | (2,145  | )                  |       | $           | (78,682 | )           |       | $      | (71,439 | )
|                                                                                       |                    |                   |                   |                                                |       |                      |         |                    |       |             |         |             |       |        |         |  
|Net loss per share:                                                                    |                    |                   |                   |                                                |       |                      |         |                    |       |             |         |             |       |        |         |  
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                       |                    | Basic and diluted |                   | $                                              | (2.03 | )                    |         | $                  | (0.07 | )           |         | $           | (2.60 | )      |         | $ | (2.39 | )     
|                                                                                       |                    |                   |                   |                                                |       |                      |         |                    |       |             |         |             |       |        |         |  

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
Two Quarters Ended December 1, 2001 and December 2, 2000
(in thousands)

|                                     |                                                                                              |                                                       |                                                          |         |                    |         |                  |         |        |         |  
|------------------------------------ | -------------------------------------------------------------------------------------------- | ----------------------------------------------------- | -------------------------------------------------------- | ------- | ------------------ | ------- | ---------------- | ------- | ------ | ------- | -
|                                     |                                                                                              |                                                       |                                                          |         | Two Quarters Ended
|                                     |                                                                                              |                                                       |                                                          |         |                   
|                                     |                                                                                              |                                                       |                                                          |         | December 1, 2001   |         | December 2, 2000
|                                     |                                                                                              |                                                       |                                                          |         |                    |         |                 
|Cash flows from operating activities |                                                                                              |                                                       |                                                          |         |                    |         |                  |        
|                                    
|                                    
|                                    
|                                    
|                                     | Net loss                                                                                     |                                                       | $                                                        | (78,682 | )                  |         | $                | (71,896 | )     
|                                    
|                                    
|                                    
|                                    
|                                     | 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                         |                                                          |         | 8,074              |         |                  |         | 8,831  |        
|                                    
|                                    
|                                    
|                                    
|                                     |                                                                                              | Non-cash portion of restructuring and other charges   |                                                          |         | 48,295             |         |                  |         | 19,360 |        
|                                    
|                                    
|                                    
|                                    
|                                     |                                                                                              | Cumulative effect of changes in accounting principles |                                                          |         | 2,582              |         |                  |         | 36,542 |        
|                                    
|                                    
|                                    
|                                    
|                                     |                                                                                              | Changes in assets and liabilities:                    |                                                          |         |                    |         |                  |         |        |        
|                                    
|                                    
|                                    
|                                    
|                                     |                                                                                              |                                                       | Decrease in trade accounts receivable                    |         |                    | 29,615  |                  |         |        | 40,331  |  
|                                    
|                                    
|                                    
|                                    
|                                     |                                                                                              |                                                       | Increase in inventories, excluding restructuring charges |         |                    | (1,855  | )                |         |        | (37,571 | )
|                                    
|                                    
|                                    
|                                    
|                                     |                                                                                              |                                                       | Decrease in shipped systems pending acceptance           |         |                    | 6,044   |                  |         |        | 1,144   |  
|                                    
|                                    
|                                    
|                                    
|                                     |                                                                                              |                                                       | (Increase) decrease in other current assets              |         |                    | 1,103   |                  |         |        | (3,416  | )
|                                    
|                                    
|                                    
|                                    
|                                     |                                                                                              |                                                       | Increase (decrease) in accounts payable                  |         |                    | (10,485 | )                |         |        | 6,149   |  
|                                    
|                                    
|                                    
|                                    
|                                     |                                                                                              |                                                       | Increase (decrease) in deferred systems revenue          |         |                    | (19,926 | )                |         |        | 673     |  
|                                    
|                                    
|                                    
|                                    
|                                     |                                                                                              |                                                       | Increase in accrued liabilities                          |         |                    | (4,554  | )                |         |        | 5,905   |  
|                                     |                                                                                              |                                                       |                                                          |         |                    |         |                  |         |       
|                                     | Net cash provided by (used in) in operating activities                                       |                                                       |                                                          | (19,789 | )                  |         |                  | 5,942   |       
|                                     |                                                                                              |                                                       |                                                          |         |                    |         |                  |         |       
|Cash flows from investing activities |                                                                                              |                                                       |                                                          |         |                    |         |                  |        
|                                    
|                                    
|                                    
|                                    
|                                     | Purchases of short-term investments                                                          |                                                       |                                                          |        |                    |         |                  | (15,700 | )     
|                                    
|                                    
|                                    
|                                    
|                                     | Matured short-term investments                                                               |                                                       |                                                          | 11,596  |                    |         |                  | 15,012  |       
|                                    
|                                    
|                                    
|                                    
|                                     | Capital expenditures                                                                         |                                                       |                                                          | (1,877  | )                  |         |                  | (9,555  | )     
|                                    
|                                    
|                                    
|                                    
|                                     | Other investing activities                                                                   |                                                       |                                                          | (645    | )                  |         |                  | (949    | )     
|                                     |                                                                                              |                                                       |                                                          |         |                    |         |                  |         |       
|                                     | Net cash provided by (used in) investing activities                                          |                                                       |                                                          | 9,074   |                    |         |                  | (11,192 | )     
|                                     |                                                                                              |                                                       |                                                          |         |                    |         |                  |         |       
|Cash flows from financing activities |                                                                                              |                                                       |                                                          |         |                    |         |                  |        
|                                    
|                                    
|                                    
|                                    
|                                     | Proceeds from exercise of stock options and employee stock purchases                         |                                                       |                                                          | 544     |                    |         |                  | 2,703   |       
|                                    
|                                    
|                                    
|                                    
|                                     | Principal payments on long-term debt                                                         |                                                       |                                                          | (20     | )                  |         |                  | (1,356  | )     
|                                     |                                                                                              |                                                       |                                                          |         |                    |         |                  |         |       
|                                     | Net cash provided by financing activities                                                    |                                                       |                                                          | 524     |                    |         |                  | 1,347   |       
|                                     |                                                                                              |                                                       |                                                          |         |                    |         |                  |         |       
|                                     | Effects of foreign currency rate changes on cash                                             |                                                       |                                                          | 27      |                    |         |                  | (271    | )     
|                                     |                                                                                              |                                                       |                                                          |         |                    |         |                  |         |       
|                                     | Net decrease in cash and cash equivalents                                                    |                                                       |                                                          | (10,164 | )                  |         |                  | (4,174  | )     
|                                    
|                                    
|                                    
|                                    
|                                     | Cash and cash equivalents at beginning of year                                               |                                                       |                                                          | 47,344  |                    |         |                  | 72,060  |       
|                                     |                                                                                              |                                                       |                                                          |         |                    |         |                  |         |       
|                                     | Cash and cash equivalents at end of quarter                                                  |                                                       | $                                                        | 37,180  |                    |         | $                | 67,886  |       
|                                     |                                                                                              |                                                       |                                                          |         |                    |         |                  |         |       

See Accompanying Notes to Condensed Consolidated Financial Statements.

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

(1) BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements of
SpeedFam-IPEC, Inc (The Company) have been prepared in accordance with
accounting principles generally accepted in the United States for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required for comprehensive financial statements. The preparation of
financial statements in conformity with accounting principles generally
accepted in the United States requires the Companys management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements as well as the reported amounts of revenues and
expenses during the reporting period. In the opinion of management, all
adjustments (consisting of normal recurring items) considered necessary for a
fair presentation have been included. Actual results may differ from these
estimates. Operating results for the quarter or two quarters ended December 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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(2) INVENTORIES
The components of inventory are as follows:

|                |  |             |        |         |  |   |        | 
|--------------- |  | ----------- | ------ | ------- |  | - | ------ | 
|                |  | December 1, |        | June 2,
|                |  | 2001        |        | 2001   
|                |  |             |        |        
|Raw materials   |  | $           | 18,973 |         |  | $ | 49,081 | 
|               
|               
|               
|               
|Work-in-process |  |             | 17,415 |         |  |   | 19,422 | 
|               
|               
|               
|               
|Finished goods  |  |             | 9,838  |         |  |   | 15,354 | 
|                |  |             |        |         |  |   |        | 
|                |  | $           | 46,226 |         |  | $ | 83,857 | 
|                |  |             |        |         |  |   |        | 

(3) ACCRUED LIABILITIES

Accrued liabilities are as follows:

|                                                     |  |             |        |         |  |   |        | 
|---------------------------------------------------- |  | ----------- | ------ | ------- |  | - | ------ | 
|                                                     |  | December 1, |        | June 2,
|                                                     |  | 2001        |        | 2001   
|                                                     |  |             |        |        
|Accrued warranty and installation costs              |  | $           | 3,223  |         |  | $ | 6,156  | 
|                                                    
|                                                    
|                                                    
|                                                    
|Accrued payroll and benefits                         |  |             | 2,172  |         |  |   | 3,361  | 
|                                                    
|                                                    
|                                                    
|                                                    
|Accrued merger, integration, and
restructuring costs |  |             | 3,908  |         |  |   | 1,719  | 
|                                                    
|                                                    
|                                                    
|                                                    
|Other accrued liabilities                            |  |             | 7,875  |         |  |   | 7,439  | 
|                                                     |  |             |        |         |  |   |        | 
|                                                     |  | $           | 17,178 |         |  | $ | 18,675 | 
|                                                     |  |             |        |         |  |   |        | 

(4) COMPREHENSIVE LOSS

The comprehensive loss is as follows:

|                                   |                                         |   |                      |      |                    |   |             |      |             |   |         |     |   |   |         |      |  
|---------------------------------- | --------------------------------------- | - | -------------------- | ---- | ------------------ | - | ----------- | ---- | ----------- | - | ------- | --- | - | - | ------- | ---- | -
|                                   |                                         |   | Second Quarter Ended |      | Two Quarters Ended
|                                   |                                         |   |                      |      |                   
|                                   |                                         |   | December 1,          |      | December 2,        |   | December 1, |      | December 2,
|                                   |                                         |   | 2001                 |      | 2000               |   | 2001        |      | 2000       
|                                   |                                         |   |                      |      |                    |   |             |      |            
|Net loss                           |                                         | $ | (61,677              | )    |                    | $ | (2,381      | )    |             | $ | (78,682 | )   |   | $ | (71,896 | )   
|                                  
|                                  
|                                  
|                                  
|Other comprehensive income (loss): |                                         |   |                      |      |                    |   |             |      |             |   |         |     |   |   |         |     
|                                  
|                                  
|                                  
|                                  
|                                   | Unrealized gain (loss) on securities    |   |                      | (11  | )                  |   |             | 93   |             |   |         | (23 | ) |   |         | 313  |  
|                                  
|                                  
|                                  
|                                  
|                                   | Foreign currency translation
adjustment |   |                      | (171 | )                  |   |             | (675 | )           |   |         | (60 | ) |   |         | (413 | )
|                                   |                                         |   |                      |      |                    |   |             |      |             |   |         |     |   |   |         |     
|Comprehensive loss                 |                                         | $ | (61,859              | )    |                    | $ | (2,963      | )    |             | $ | (78,765 | )   |   | $ | (71,996 | )   
|                                   |                                         |   |                      |      |                    |   |             |      |             |   |         |     |   |   |         |     

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Accumulated other comprehensive income (loss) is as follows:

|                            |                    |   |                  |      |                      |   |                      |     |   |   |                   |      |  
|--------------------------- | ------------------ | - | ---------------- | ---- | -------------------- | - | -------------------- | --- | - | - | ----------------- | ---- | -
|                            |                    |   |                  |      |                      |   |                      |     |   |   | Accumulated Other
|                            |                    |   | Foreign Currency |      | Unrealized Gain      |   | Comprehensive Income
|                            |                    |   | Translation      |      | (Loss) on Securities |   | (Loss)              
|                            |                    |   |                  |      |                      |   |                     
|Balance at June 2, 2001     |                    | $ | 803              |      |                      | $ | 24                   |     |   | $ | 827               |     
|                           
|                           
|                           
|                           
|                            | Two quarter change |   |                  | (60  | )                    |   |                      | (23 | ) |   |                   | (83  | )
|                            |                    |   |                  |      |                      |   |                      |     |   |   |                   |     
|Balance at December 1, 2001 |                    | $ | 743              |      |                      | $ | 1                    |     |   | $ | 744               |     
|                            |                    |   |                  |      |                      |   |                      |     |   |   |                   |     
|Balance at June 3, 2000     |                    | $ | 1,239            |      |                      | $ | (487                 | )   |   | $ | 752               |     
|                           
|                           
|                           
|                           
|                            | Two quarter change |   |                  | (413 | )                    |   |                      | 313 |   |   |                   | (100 | )
|                            |                    |   |                  |      |                      |   |                      |     |   |   |                   |     
|Balance at December 2, 2000 |                    | $ | 826              |      |                      | $ | (174                 | )   |   | $ | 652               |     
|                            |                    |   |                  |      |                      |   |                      |     |   |   |                   |     

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

During 2001 there was a significant decrease in the worldwide demand for
semiconductor capital equipment. This decline has continued in 2002 and has
resulted in inventory buildups in telecommunications products, slower than
expected personal computer sales and overall slower global economic growth,
causing many semiconductor manufacturers to reevaluate their capital spending
plans. Several of the Companys customers have rescheduled deliveries or
canceled existing orders and the Company has experienced a substantial decline
in new orders. Because the duration of this downturn in demand is longer than
originally anticipated, the Company believes that purchases in the next upturn
will be primarily for the Companys Momentum products. As
a result of the extended downturn, the
Company recorded significant inventory write-downs for obsolete
inventory and inventory in excess of forecasted requirements during the second quarter ended December 1, 2001. In
addition, the Company implemented additional cost cutting measures during the
quarter including the downsizing and consolidation of operations in the
Phoenix, AZ, Portland, OR and Austin, TX areas. During the second quarter ended December 1, 2001, the Company recorded
charges of $48.1 million which included inventory write-downs of $36.3
million; asset impairments of $8.5 million; lease termination costs of $1.1
million; $1.3 million in non-cancelable purchase commitments; and $0.9 million
of other charges. The Company anticipates cash outlays of approximately $1.3
million over the next two quarters related to non-cancelable purchase
commitments and approximately $1.1 million over the next three and a half years
related to non-cancelable leases.

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

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

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

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

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

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

(7) BUSINESS SEGMENT INFORMATION

The Company classifies its products into three core business segments: (i)
the CMP Group, which is comprised of the Companys development and production
of chemical mechanical planarization systems; (ii) the Surface Technology Group
(STG), which is comprised of the distribution of high-throughput precision
surface processing equipment used in thin film memory disk media and silicon
wafer; 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 second quarter and two quarters ended
December 1, 2001 and December 2, 2000 is as follows (in thousands):

|                                          |                               |  |                      |         |                    |  |             |        |             |  |         |         |   |  |         |         |  
|----------------------------------------- | ----------------------------- |  | -------------------- | ------- | ------------------ |  | ----------- | ------ | ----------- |  | ------- | ------- | - |  | ------- | ------- | -
|                                          |                               |  | Second Quarter Ended |         | Two Quarters Ended
|                                          |                               |  |                      |         |                   
|                                          |                               |  | December 1,          |         | December 2,        |  | December 1, |        | December 2,
|                                          |                               |  | 2001                 |         | 2000               |  | 2001        |        | 2000       
|                                          |                               |  |                      |         |                    |  |             |        |            
|Net sales:                                |                               |  |                      |         |                    |  |             |        |             |  |         |         |   |  |         |        
|                                         
|                                         
|                                         
|                                         
|                                          | CMP Group                     |  | $                    | 17,801  |                    |  | $           | 72,208 |             |  | $       | 50,420  |   |  | $       | 135,825 |  
|                                         
|                                         
|                                         
|                                         
|                                          | Surface Technology Group      |  |                      | 4,364   |                    |  |             | 7,203  |             |  |         | 9,379   |   |  |         | 12,737  |  
|                                         
|                                         
|                                         
|                                         
|                                          | Industrial Applications Group |  |                      | 3,662   |                    |  |             | 4,500  |             |  |         | 7,110   |   |  |         | 8,368   |  
|                                          |                               |  |                      |         |                    |  |             |        |             |  |         |         |   |  |         |         |  
|Total net sales to unaffiliated customers |                               |  | 25,827               |         |                    |  | 83,911      |        |             |  | 66,909  |         |   |  | 156,930 |        
|                                          |                               |  |                      |         |                    |  |             |        |             |  |         |         |   |  |         |         |  
|Segment operating profit (loss):          |                               |  |                      |         |                    |  |             |        |             |  |         |         |   |  |         |        
|                                         
|                                         
|                                         
|                                         
|                                          | CMP Group                     |  |                      | (54,285 | )                  |  |             | 1,700  |             |  |         | (62,678 | ) |  |         | (6,881  | )
|                                         
|                                         
|                                         
|                                         
|                                          | Surface Technology Group      |  |                      | (680    | )                  |  |             | 409    |             |  |         | (580    | ) |  |         | (2,703  | )
|                                         
|                                         
|                                         
|                                         
|                                          | Industrial Applications Group |  |                      | 240     |                    |  |             | 584    |             |  |         | 839     |   |  |         | 1,513   |  
|                                          |                               |  |                      |         |                    |  |             |        |             |  |         |         |   |  |         |         |  
|Total segment operating profit (loss)     |                               |  | (54,725              | )       |                    |  | 2,693       |        |             |  | (62,419 | )       |   |  | (8,071  | )      
|                                         
|                                         
|                                         
|                                         
|General corporate expense, net            |                               |  | (5,374               | )       |                    |  | (4,557      | )      |             |  | (10,603 | )       |   |  | (15,769 | )      
|                                         
|                                         
|                                         
|                                         
|Interest expense, net                     |                               |  | (1,578               | )       |                    |  | (517        | )      |             |  | (3,078  | )       |   |  | (861    | )      

8



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|                                                    |  |   |                      |   |                    |   |             |   |             |   |         |   |  |   |         |   | 
|--------------------------------------------------- |  | - | -------------------- | - | ------------------ | - | ----------- | - | ----------- | - | ------- | - |  | - | ------- | - | 
|                                                    |  |   | Second Quarter Ended |   | Two Quarters Ended
|                                                    |  |   |                      |   |                   
|                                                    |  |   | December 1,          |   | December 2,        |   | December 1, |   | December 2,
|                                                    |  |   | 2001                 |   | 2000               |   | 2001        |   | 2000       
|                                                    |  |   |                      |   |                    |   |             |   |            
|                                                   
|                                                   
|                                                   
|                                                   
|Loss on disposal of investment in affiliate         |  |   |                     |   |                    |   |            |   |             |   |        |   |  |   | (10,763 | )
|                                                   
|                                                   
|                                                   
|                                                   
|Equity in net earnings of affiliate                 |  |   |                     |   |                    |   |            |   |             |   |        |   |  |   | 110     |  
|                                                    |  |   |                      |   |                    |   |             |   |             |   |         |   |  |   |         |   | 
|Loss before cumulative effect of accounting changes |  | $ | (61,677              | ) |                    | $ | (2,381      | ) |             | $ | (76,100 | ) |  | $ | (35,354 | )
|                                                    |  |   |                      |   |                    |   |             |   |             |   |         |   |  |   |         |   | 

(8) CHANGES IN ACCOUNTING PRINCIPLES

In July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible
Assets. SFAS No. 142 supercedes prior guidance and requires that goodwill no
longer be amortized to earnings, but instead be annually reviewed for
impairment. In addition, goodwill should be tested for impairment upon
adoption. The Company adopted SFAS No. 142 in the first quarter of 2002 and
recorded a cumulative effect of change in accounting principle for the
write-off of goodwill of ($2.6) million, or ($0.09) per share, as of the
beginning of 2002 (June 3, 2001). The impact of adoption was to reduce the
loss before cumulative effect of accounting change for the second quarter of
2002 by $0.2 million or $0.01 per share and for the first two quarters of 2002
by $0.5 million or $0.02 per share. The circumstances leading to the impairment
of goodwill primarily relate to current operating losses, the absence of
positive cash flows and uncertainties resulting from the duration and severity
of the industry downturn. The fair value of the reporting units, which
correspond to the Companys business segments, were estimated using quoted
market prices. Net loss for the second quarter of 2001 would have been ($2.1)
million or ($0.07) per share and the net loss for the first two quarters of
2001 would have been ($71.4) million or ($2.39) per share, if the accounting
change related to goodwill required by SFAS No. 142 had been applied to those
periods.

The Company generates revenue from the sale of systems, spare parts and
service contracts. In December 1999, the Securities and Exchange Commission
issued Staff Accounting Bulletin No. 101 (SAB 101), Revenue Recognition in
Financial Statements, addressing the timing of revenue recognition for sales
of products that involve contractual customer acceptance provisions and
installation if these events occur following shipment of the product and
transfer of title. The Company adopted SAB 101 in the third quarter of 2001 and
in accordance with SFAS No. 3, Reporting Accounting Changes in Interim
Financial Statements, the Company recorded the cumulative effect of the change
in accounting principle of ($36.5) million, or ($1.22) per share, as of the
beginning of the year (June 4, 2000) as a charge in the first quarter ended
September 2, 2000. The previously reported results for the first and second
quarters of 2001 prior to the adoption of SAB 101 were restated to reflect the
new revenue recognition method. The impact of this restatement on the second
quarter of 2001 was to decrease the loss before cumulative effect of accounting
changes by $1.2 million, or $0.04 per share, and for the first two quarters of
2001 the impact was to increase the loss before cumulative effect of accounting
changes by $2.6 million or $0.09 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 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,

9



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##### Table of Contents



established accounting and reporting standards related to derivative financial
instruments and hedging activities. These statements require that the Company
recognize all derivatives, including foreign currency exchange contracts, as
either assets or liabilities on the balance sheet and measure those instruments
at fair value. Changes in the fair value of derivatives that do not qualify for
hedge treatment, as well as the ineffective portion of any hedges, must be
recognized currently in operations. The Company adopted SFAS 133 and SFAS 138
as of June 3, 2001 and the transition adjustment was not material to the
financial statements.

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

(9) COMMITMENTS AND CONTINGENCIES

MEMC Electronics Materials Litigation

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

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

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 District of
Kansas. In the action, Raytheon alleged damages arising from its purchase of a
wire cutting and laser marking system (System) from Gaard Automation Inc.,
predecessor in interest to the Company. Raytheon sought more than $6.5
million in damages.

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

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

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

In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible
Assets. Under SFAS 142, goodwill and intangible assets with indefinite useful
lives are no longer amortized but are reviewed at least annually for impairment
at the reporting unit level. The impairment test under SFAS 142 is based on a
two-step process involving; 1) comparing the estimated fair value of the
related reporting unit to its net book value, and 2) comparing the estimated
implied fair value of goodwill to its carrying value. The Company elected
early adoption of SFAS 142 in the first quarter of 2002. Based on the
implementation of the non-amortization, impairment-only accounting approach, it
was determined that an impairment charge of $2.6 million representing the
carrying value of goodwill as of June 3, 2001 should be recorded. Accordingly,
the Company recorded the cumulative effect of the change in accounting
principle of ($2.6) million, or ($0.09) per share, as of the beginning of 2002
(June 3, 2001) as a charge in the first quarter of 2002. Net loss for the
second quarter of 2001 would have been ($2.1) million or ($0.07) per share and
for the first two quarters of 2001 the net loss would have been ($71.4) million
or ($2.39) per share, if the accounting change related to goodwill required by
SFAS No. 142 had been applied to those periods.

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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 second quarter of 2001 was to decrease the loss before
cumulative effect of accounting changes by $1.2 million, or $0.04 per share,
and for the first two quarters of 2001 the impact was to increase the loss
before cumulative effect of accounting changes by $2.6 million or $0.09 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.

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Results of Operations

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

|                                                   |              |  |                      |        |                    |  |             |      |             |  |        |       |   |  |       |      | 
|-------------------------------------------------- | ------------ |  | -------------------- | ------ | ------------------ |  | ----------- | ---- | ----------- |  | ------ | ----- | - |  | ----- | ---- | 
|                                                   |              |  | Second Quarter Ended |        | Two Quarters Ended
|                                                   |              |  |                      |        |                   
|                                                   |              |  | December 1,          |        | December 2,        |  | December 1, |      | December 2,
|                                                   |              |  | 2001                 |        | 2000               |  | 2001        |      | 2000       
|                                                   |              |  |                      |        |                    |  |             |      |            
|Net sales                                          |              |  | 100.0                | %      |                    |  | 100.0       | %    |             |  | 100.0  | %     |   |  | 100.0 | %   
|                                                  
|                                                  
|                                                  
|                                                  
|Cost of sales                                      |              |  | 224.2                |        |                    |  | 67.7        |      |             |  | 133.9  |       |   |  | 72.6  |     
|                                                   |              |  |                      |        |                    |  |             |      |             |  |        |       |   |  |       |     
|                                                   | Gross margin |  |                      | (124.2 | )                  |  |             | 32.3 |             |  |        | (33.9 | ) |  |       | 27.4 | 
|                                                  
|                                                  
|                                                  
|                                                  
|Research, development and engineering              |              |  | 69.1                 |        |                    |  | 17.2        |      |             |  | 45.2   |       |   |  | 19.7  |     
|                                                  
|                                                  
|                                                  
|                                                  
|Selling, general and administrative                |              |  | 28.2                 |        |                    |  | 17.9        |      |             |  | 23.0   |       |   |  | 20.1  |     
|                                                  
|                                                  
|                                                  
|                                                  
|Litigation settlement costs                        |              |  |                     |        |                    |  |            |      |             |  | 2.7    |       |   |  |      |     
|                                                  
|                                                  
|                                                  
|                                                  
|Restructuring charges                              |              |  | 11.6                 |        |                    |  |            |      |             |  | 4.5    |       |   |  | 3.3   |     
|                                                   |              |  |                      |        |                    |  |             |      |             |  |        |       |   |  |       |     
|Operating loss                                     |              |  | (233.2               | )      |                    |  | (2.7        | )    |             |  | (109.3 | )     |   |  | (15.6 | )   
|                                                  
|                                                  
|                                                  
|                                                  
|Other expense, net                                 |              |  | (5.7                 | )      |                    |  | (0.1        | )    |             |  | (4.4   | )     |   |  | (0.1  | )   
|                                                  
|                                                  
|                                                  
|                                                  
|Loss on sale of joint venture interest             |              |  |                     |        |                    |  |            |      |             |  |       |       |   |  | (6.9  | )   
|                                                  
|                                                  
|                                                  
|                                                  
|Equity in net earnings of affiliates               |              |  |                     |        |                    |  |            |      |             |  |       |       |   |  | 0.1   |     
|                                                   |              |  |                      |        |                    |  |             |      |             |  |        |       |   |  |       |     
|Loss before cumulative effect of
accounting change |              |  | (238.8               | )      |                    |  | (2.8        | )    |             |  | (113.7 | )     |   |  | (22.5 | )   
|                                                  
|                                                  
|                                                  
|                                                  
|Cumulative effect of accounting change             |              |  |                     |        |                    |  |            |      |             |  | (3.9   | )     |   |  | (23.3 | )   
|                                                   |              |  |                      |        |                    |  |             |      |             |  |        |       |   |  |       |     
|Net loss                                           |              |  | (238.8               | )%     |                    |  | (2.8        | )%   |             |  | (117.6 | )%    |   |  | (45.8 | )%  
|                                                   |              |  |                      |        |                    |  |             |      |             |  |        |       |   |  |       |     

Net Sales.Net sales for the second quarter of 2002 were $25.8 million,
down 69% from net sales of $83.9 million in the second quarter of 2001. Net
sales of CMP products for the second quarter of 2002 totaled $17.8 million, or
69% of net sales, compared to $72.2 million, or 86% of net sales, in the second
quarter of 2001. Net sales for the first two quarters of 2002 were $66.9
million, down 57% from net sales of $156.9 million for the first two quarters
of 2001. Net sales of CMP products for the first two quarters of 2002 totaled
$50.4 million, or 75% of net sales, compared to $135.8 million, or 87% of net
sales, in the first two quarters of 2001. Sales of CMP systems products
decreased in 2002 due to the slowing of worldwide demand for semiconductor
manufacturing equipment caused by a rapid decline in demand for semiconductor
devices. Inventory buildups in telecommunication products, slower than expected
personal computer sales and slower global economic growth have caused
semiconductor companies to reevaluate their capital spending plans. A number of
the Companys customers revised the timing of their capital spending and
rescheduled deliveries of or canceled existing orders, resulting in the
postponement of equipment deliveries and a decline in new orders and net sales.

Net sales of the Surface Technology Group (STG) in the second quarter of
2002 accounted for $4.4 million, or 17% of net sales, compared to $7.2 million,
or 9% of net sales, in the second quarter of 2001. Net sales in the first two
quarters of 2002 accounted for $9.4 million, or 14% of net sales, compared to
$12.7 million, or 8% of net sales, in the first two quarters 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.

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Net sales of the Industrial Applications Group (IAG) in the second quarter
of 2002 totaled $3.6 million, or 14% of net sales, compared to $4.5 million or
5% of net sales, in the second quarter of 2001. Net sales in the first two
quarters of 2002 totaled $7.1 million, or 11% of net sales, compared to $8.4
million or 5% of net sales, in the first two quarters of 2001.

Gross Margin.In the second quarter of 2002, gross margin was ($32.1)
million, or (124%) of net sales, compared to $27.1 million, or 32% of net
sales, in the second quarter of 2001. In the first two quarters of 2002, gross
margin was ($22.7) million, or (34%) of net sales, compared to $43.1 million,
or 27% of net sales, in the first two quarters of 2001. Because the length and
severity of the industry downturn is longer that originally anticipated, the
Company believes that purchases in the next upturn will be primarily for the
Momentum products. As a result of the extended downturn, the Company recorded a one-time charge of
$37.6 million to cost of goods sold during the quarter for the
write-down of obsolete inventory and inventory in excess of
forecasted requirements and the recognition of liabilities related to outstanding purchase
commitments. Excluding this write-down, gross
margin was $5.5 million, or 21% of sales, during the second quarter of 2002,
and was $14.9 million, or 22% of net sales for the first two quarters of 2002.
The Companys gross margins are below historical levels due primarily to
decreased production volume resulting in lower overhead absorption on a reduced
revenue base. During the industry downturn, the Company expects this trend of
reduced gross margins to continue. The Companys gross margin has fluctuated
significantly in the past and will continue to fluctuate based on several
factors including the severity and duration of the current industry downturn,
revenue recognition under SAB 101, product mix, overhead absorption levels,
inventory write-downs, and costs associated with the introduction of new
products.

Research, Development and Engineering.In the second quarter of 2002,
research, development and engineering expenses increased to $17.9 million, or
69% of net sales, compared to $14.4 million, or 17% of net sales, in the second
quarter of 2001. In the first two quarters of 2002, research, development and
engineering expenses were $30.2 million, or 45% of net sales, compared to $30.9
million, or 20% of net sales, in the first two quarters of 2001. Research,
development and engineering expense in the second quarter of 2002 included $7.4
million in one-time charges related to the asset impairment of certain legacy
tools located in our labs which will no longer be used for ongoing research and
development programs, as well as capitalized costs associated with certain
patents. During the first quarter of 2001, research, development and
engineering expenses included an asset impairment charge of $2.4 million for
equipment that was designed by the Far East Joint Venture. The Company expects
to continue investing substantial resources in research, development and
engineering programs.

Selling, General and Administrative.In the second quarter of 2002,
selling, general and administrative expenses decreased to $7.3 million, or 28%
of net sales, compared to $15.0 million, or 18% of net sales, in the second
quarter of 2001. In the first two quarters of 2002, selling, general and
administrative expenses decreased to $15.4 million, or 23% of net sales,
compared to $31.5 million, or 20% of net sales, in the first two quarters of
2001. During the first two quarters of 2002, selling, general and
administrative expense decreased by $16.1 million or 51%, from the first two
quarters of 2001, as a result of certain cost cutting measures which were
implemented by the Company in response to the industry wide downturn. These
cost cutting measures were partially offset by increased legal fees incurred
related to the settlement of two outstanding litigation cases. In addition,
during 2001, significant marketing and promotional costs were incurred in
connection with product launch activities related to the introduction of the
Companys new products, the Momentum and the Auriga Vision.

Litigation settlement costs.On October 5, 2001, the Company settled its
outstanding litigation with MEMC. In connection with this settlement the
Company agreed to pay MEMC $1.8 million, which was expensed in the second
quarter of 2002.

Restructuring Charges.During 2001 there was a significant decrease in the
worldwide demand for semiconductor capital equipment. This decline has
continued in 2002 and has resulted in inventory buildups in telecommunications
products, slower than expected personal computer sales and overall slower
global economic growth, causing many semiconductor manufacturers to reevaluate
their capital spending plans. Several of the Companys customers have
rescheduled deliveries or canceled existing orders and the Company has
experienced a substantial decline in new orders. Because the duration of this
downturn in demand is longer than originally anticipated, the Company recorded
a restructuring charge in the second quarter of 2002 of $3.0 million for the
downsizing and consolidation of operations in the Phoenix, AZ, Portland, OR and
Austin, TX areas.

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

Other Expense, net.Other expense, net increased to $1.4 million during
the second quarter of 2002 from $0.1 million during the same period a year ago.
Other expense, net for the first two quarters of 2002 increased to $3.0 million
compared to $0.2 million for the same period a year ago. This increase
primarily resulted from lower average balances in cash, cash equivalents and
short-term investments as well as a reduction in interest rates yielding lower
interest income to offset interest expense on the Companys long-term debt.

Provision for Income Taxes.At the end of the second 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 second 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 two quarters of 2001, equity in net earnings of affiliates
was $0.1 million.

Liquidity and Capital Resources

As of December 1, 2001, the Company had $39.1 million in cash, cash
equivalents and short-term investments, compared to $60.8 million at June 2,
2001. During the first two quarters of 2002, the Company had $19.8 million of
cash used in operating activities compared to cash provided of $5.9 million
from operating activities during the same period in 2001. The net loss of $78.7
million included non-cash items totaling $59.0 million: the cumulative effect
of change in accounting principle of $2.6 million, depreciation and
amortization expense of $8.1 million, 401(k) stock match of $0.2 million and
one-time charges of $48.1 million.

Net cash provided by investing activities totaled $9.1 million during the
first two quarters of 2002 compared with net cash used of $11.2 million during
the same period in 2001. Cash was provided from the maturity of short-term
investments of $11.6 million and offset by capital expenditures and other
investing activities of $2.5 million during the first two quarters of 2002.

Financing activities provided cash of $0.5 million during the first two
quarters of 2002 compared with approximately $1.3 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 first two quarters of
2002.

The Company has incurred operating losses of $73.1 million in the first
two quarters of 2002, and $86.5 million in 2001. Coinciding with these
operating losses, the Company has incurred a decrease in its cash and
investment balances of $21.7 million and $39.4 million in 2002 and 2001.

Due to the continuation and severity of the industry-wide downturn, the
Company has implemented additional cost-cutting measures during the first two
quarters of 2002, which include further decreases in discretionary spending and
reductions in worldwide headcount. Despite the expected continuation of the
industry-wide downturn and uncertainty associated with the introduction of new
products, and taking into account the Companys actions to restructure and
downsize the Company, management believes that the Companys current cash

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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 and overall economic conditions, the Company is
currently evaluating additional sources of funds and reduction in expenses in
order to strengthen its working capital position. The Company is also reviewing
various ways of improving its balance sheet. Based on discussions with various
lenders, the Company believes that the sources of funds available include, but
are not limited to, a line of credit facility and term debt. If the Company
were to raise additional funds, or restructure its balance sheet through the
issuance of equity. Company shareholders would be diluted. In addition, these
equity securities may have rights, preferences or privileges senior to the
Companys common stock.

Subsequent to the end of the December 2, 2001 quarter, the Company entered
into a sale/leaseback transaction with respect to its corporate headquarters.
If the transaction closes, it would yield approximately $31.5 million in net
proceeds to the Company, and the Company would enter into a 15 year lease with
monthly payments of approximately $383,000. The transaction is subject to
customary closing conditions (including due diligence).

Impact of Recently Issued Accounting Standards

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

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

This report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. SpeedFam-IPEC claims the protection of the safe-harbor
for forward-looking statements contained in those Sections. These
forward-looking statements are often characterized by the terms may,
believes, projects, expects, or anticipates, and do not reflect
historical facts. Specific forward-looking statements contained in this report
relate to, but are not limited to: (i) the continuing softness in demand for
thin film memory disk equipment; (ii) continuing fluctuation and reduction in
gross margins; (iii) continuing investment in research, development, and
engineering programs; and (iv) managements belief that current cash and
investment balances along with cash generated through operations will be
sufficient to meet the Companys cash needs. Forward-looking statements involve
risks, uncertainties and other factors that may cause actual results,
performance or achievements of SpeedFam-IPEC to be materially different from
those expressed or implied by such forward-looking statements. Factors that
could affect SpeedFam-IPECs results and cause them to materially differ from
those contained in the forward-looking statements include those listed below
under the heading Certain Factors Affecting SpeedFam-IPECs Business.
Forward-looking statements speak only as of the date the statement was made.
SpeedFam-IPEC does not undertake and specifically declines any obligation to
update any forward-looking statements.

CERTAIN FACTORS AFFECTING SPEEDFAM-IPECS BUSINESS

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

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We are using substantial cash reserves to fund operations during the
industry downturn, and there can be no assurance we will be able to achieve
positive cash flow in the foreseeable future.As of December 1, 2001, we had
$39.1 million in cash, cash equivalents and short-term investments, compared to
$60.8 million at June 2, 2001. During the first two quarters of 2002, we used
$19.8 million in operating activities compared to generating cash from
operations of $5.9 million during the same period of the prior year. We are
currently exploring options to restructure our balance sheet and generate
positive cash flow, including a reduction in operating expenses and a
sale-leaseback transaction involving our Chandler facility. However, we have
experienced a significant decrease in revenues and orders. We can provide no
assurances that we will achieve a positive cash flow position in the future.

Our current capital structure includes a substantial amount of
subordinated debt that may contribute to the erosion of the equity value of our
outstanding common stock.We currently have $115 million in subordinated debt
that is senior to our common stock. Interest payments on this debt amount to
approximately $7 million per year. We are evaluating various ways to
restructure our balance sheet, which could include restructuring the debt,
issuing additional common stock, or other alternatives. We can provide no
assurances that we will be able to accomplish a restructuring or that any
restructuring will benefit shareholders.

Our current business model is predicated on closing and fulfilling the
successful launch and market acceptance of our Momentum and Momentum300
products. Our failure to win qualification contests and obtain volume orders
for our 300 millimeter and/or copper-based wafers would materially adversely
affect our revenues and operations.A significant portion of our projected
revenue depends on sales of our Momentum product. Although initial customer
reaction to Momentum has been positive, this response may not translate into
sales of Momentum on the scale or in the time frame we anticipate. For
instance, market conditions in the semiconductor industry have caused and may
continue to cause potential purchasers of Momentum to delay investment in new
equipment, which could reduce demand for Momentum. If we are unable to close
anticipated orders or fulfill orders for the Momentum product, our revenues,
cash flow and profitability will be adversely affected.

In particular, we must succeed in selling CMP equipment for 300 millimeter
and/or copper-based wafers in order to increase our revenue and maintain market
share. If we fail to win qualification contests for 300 millimeter and/or
copper-based wafers, we may experience difficulty achieving volume sales of the
next-generation equipment to semiconductor manufacturers, which could result in
declining revenues. In addition, rollout of Momentum 300 may be slowed due
to manufacturing problems, unforeseen technical problems with the Momentum
300 product itself or changes in the CMP marketplace that differ from our
expectations.

Our dependence on selling a small number of high-priced machines to a
small number of major customers may lead to reduced revenues and profits should
our customers delay or cancel delivery orders.We derive a significant portion
of our revenue from the sale of a relatively small number of high-priced CMP
systems to a select group of CMP customers. The loss of a significant customer
or a substantial reduction in orders by any significant customer, including
reductions due to customer departures from recent buying patterns, market,
economic or competitive conditions in the semiconductor industry, would damage
our business and results of operations.

Orders in backlog may not result in future revenue if customers cancel or
reschedule orders.We include in backlog only those customer orders for which
we have accepted purchase orders. Expected revenue may be lower if customers
cancel or reschedule orders, which they can generally do without penalty. For
instance, during the first two quarters of 2002, we adjusted approximately $17
million out of our backlog for orders that were canceled or had shipment dates
that were not scheduled within the next twelve months.

The downturn in the semiconductor industry has led and may continue to
lead to decreased revenue.During 2001 and the first two quarters of 2002,
slowing worldwide demand for semiconductors resulted in significant inventory
buildups for semiconductor companies and a rapid decline in demand for
semiconductor manufacturing equipment. Presently, we have little visibility
regarding how long the semiconductor industry downturn will last or how severe
the downturn will be. During the first two quarters of 2002, we experienced
certain cancellations and pushouts of orders for our products. If the downturn
continues or worsens, we may experience greater levels of cancellations and/or
pushouts of orders for our products in the future.

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Our quarterly results of operations could fluctuate due to factors outside
of our control, which may cause fluctuations and a corresponding decrease to
the price of our common stock.Our quarterly operating results may fluctuate
for reasons that are not within our control, 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;                                                                                             
|
| |  |  | 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; and                                                                                                           
|
| |  |  | announcements regarding restructuring, technological
innovations, departures of key officers or employees, or the
introduction of new products.

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



| |  |  | the announcement of new customers or the loss of significant
customers;                                                             
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | changes in earnings estimates or recommendations by
securities analysts, or our failure to achieve analysts earnings
estimates; and
|
| |  |  | general market conditions and other factors, including
factors unrelated to our operating performance or that of our
competitors.   

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

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

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



| |  |  | Some competitors may have greater financial resources and be
in better financial condition than us. 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 we may. As a result, these competitors may
have better relationships with semiconductor manufacturers,
including our current and potential customers.
|
| |  |  | We expect competitors to continue to improve their existing
technology and introduce new products.                                                                                                                                       

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| |  |  | Other capital equipment manufacturers not currently involved
in the development of CMP systems may enter the market or develop
technology that reduces the need for our products.                                                                     
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | 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
our products, which may damage our business. There can be no assurance that we
will be able to compete successfully in the future.

Lost revenue from the semiconductor industry downturn, the general
economic slowdown and/or increased competition could continue to lead to a
reduction in revenues and gross margins.If we experience continued reductions
in revenue from lost sales or price reductions for our products for any reason,
including a continued downturn in the semiconductor industry, a general
economic slowdown in the United States or increased competition, our gross
margins will continue to be reduced and could lead to further operating losses.
For instance, net sales for the first two quarters of 2002 were $66.9 million,
down 57.6% from net sales of $156.9 million in the first two quarters of 2001. Gross margin for the first two quarters of 2002, excluding one-time charges,
were similarly down from $43.1 million to $14.9 million.

We may not develop products in time to meet changing technologies, which
could lead to reduced revenue and market share.Semiconductor manufacturing
equipment and processes are subject to rapid technological changes and product
obsolescence. 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; and                                       
|
| |  |  | effective sales and marketing.                                              

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

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



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

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

Our business is highly cyclical and industry downturns are likely to
damage our operating results.Our 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 continue to experience softening
demand for their products, which has caused companies to delay or

19



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cancel the acquisition of capital equipment and other products used in the
manufacturing process, including the products we offer. These industry
downturns have in the past and are expected in the future to damage our
business and operating results.

Our dependence on international sales, particularly in Asia and Europe,
subject us to a risk of decreased revenues.International sales accounted for
62% of our total revenue for the first two quarters of 2002, 61% for 2001, and
70% for 2000. We expect that international sales will continue to account for a
significant portion of total revenue in future periods.

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; and                                            
|
| |  |  | intense price competition.                                                                  

Failure of critical suppliers to deliver sufficient quantities of parts in
a timely and cost-effective manner could negatively affect our business.We use
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 we do
not receive a sufficient quantity of parts in a timely and cost-effective
manner to meet our production requirements, the results of our operations may
be damaged.

If we are unable to protect our intellectual property, our business could
suffer.Our intellectual property portfolio is very important to our success.
We may not be able to protect our 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; and
|
| |  |  | competitors may independently develop similar technology or
design around our intellectual property.    

Third parties may prevent us from selling products that allegedly infringe
on those third parties intellectual property rights. We 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 us to license
or cross-license technology; and
|
| |  |  | bring costly, time consuming lawsuits.                                                                                                                        

Third parties hold many patents relating to CMP machines and processes,
which expose us to the possibility that we may be forced to cease production of
our products.In the event we lose any of its intellectual property rights or
otherwise determine that we need to obtain licenses to third party intellectual
property, there is no assurance that we will be able to obtain such licenses on
reasonable terms, if at all. If we are unable to secure the necessary licenses,
we may be forced to cease at least a portion of our operations.

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Our dependence on key management and technical personnel subjects us to
the risk that we lose or will be unable to hire people with the necessary
qualifications.Our performance and ability to execute is substantially
dependent on the performance of our executive officers and key technical and
engineering employees. Losing the services of any of these executive officers
or key employees could damage our business.

Our future success also depends on our ability to identify, hire, train
and retain other highly qualified managerial and technical personnel.
Competition for such personnel is intense. If we are not successful in
identifying, hiring, training and retaining such personnel, it could damage our
business.

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

We use financial instruments that potentially subject us to concentrations
of credit risk.We enter into foreign exchange contracts to hedge certain firm
commitments denominated in foreign currencies, primarily Japanese yen. We also
invest our cash in deposits in banks, money market funds, government and
corporate debt securities. These investments expose us to possible losses that
could damage our business.

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##### Table of Contents






ITEM 3. Quantitative and Qualitative Disclosures About Market Risk.

For financial market risks related to changes in interest rates and foreign
currency exchange rates, refer to Part II, Item 7A, Quantitative and
Qualitative Disclosures About Market Risk, in the Companys Annual Report on
Form 10-K for the year ended June 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
dismissed 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 District of
Kansas. In the action, Raytheon alleged damages arising from its purchase of a
wire cutting and laser marking system (System) from Gaard Automation Inc.,
predecessor in interest to the Company. Raytheon sought more than $6.5
million in damages.

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

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

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

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##### Table of Contents



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

On October 12, 2001, the Company held its 2001 Annual Meeting of
Stockholders. At the Annual Meeting, the stockholders (i) elected to the Board
of Directors Peter J. Simone, Richard J. Faubert, Neil R. Bonke, Richard S.
Hill, Kenneth Levy, and Carl Neun; and (ii) and ratified the re-appointment of
KPMG LLP as the Companys independent auditors.

The following table sets forth, with respect to each matter voted upon at
the annual meeting, the number of votes cast for, the number of votes cast
against, and the number of votes abstaining (or, with respect to the election
of Directors, the number of votes withheld) with respect to such matter:

|                       |                    |  |           |            |                |  |  |           | 
|---------------------- | ------------------ |  | --------- | ---------- | -------------- |  |  | --------- | 
|                       |                    |  | Votes For |            | Votes Withheld
|                       |                    |  |           |            |               
|Election of Directors: |                    |  |           |            |                |  |  |          
|                      
|                      
|                      
|                      
|                       | Peter J. Simone    |  |           | 28,210,717 |                |  |  | 282,988   | 
|                      
|                      
|                      
|                      
|                       | Richard J. Faubert |  |           | 24,786,398 |                |  |  | 3,707,307 | 
|                      
|                      
|                      
|                      
|                       | Neil R. Bonke      |  |           | 27,744,473 |                |  |  | 749,232   | 
|                      
|                      
|                      
|                      
|                       | Richard S. Hill    |  |           | 25,037,555 |                |  |  | 3,456,150 | 
|                      
|                      
|                      
|                      
|                       | Kenneth Levy       |  |           | 26,034,929 |                |  |  | 2,458,776 | 
|                      
|                      
|                      
|                      
|                       | Carl Neun          |  |           | 28,196,890 |                |  |  | 296,815   | 

|                         |  |           |            |               |  |             |        |                  |  |  |        |  |  |  |   | 
|------------------------ |  | --------- | ---------- | ------------- |  | ----------- | ------ | ---------------- |  |  | ------ |  |  |  | - | 
|                         |  | Votes For |            | Votes Against |  | Abstentions |        | Broker Non-Votes
|                         |  |           |            |               |  |             |        |                 
|Ratification of Auditors |  |           | 24,412,308 |               |  |             | 59,720 |                  |  |  | 21,677 |  |  |  | 0 | 

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

(a)  Exhibits.

|        |  |                                                                                     
|------- |  | ------------------------------------------------------------------------------------
|Exhibit |  | Description                                                                         
|        |  |                                                                                     
|3.1*(1) |  | Articles of Incorporation of SpeedFam International, Inc.                           
|       
|       
|       
|       
|3.2*(2) |  | Bylaws                                                                              
|       
|       
|       
|       
|10.1    |  | Employment Agreement between the Registrant and Robert Carey date
September 11, 2001



---

|*   |  | Previously filed                                                                                                                                 
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------
|   
|   
|   
|   
|(1) |  | Incorporated by reference to Exhibit 3 to the
Registrants Form 10-Q for the quarter ended November 30, 1997
(Exchange Act File No. 0-26784)     
|   
|   
|   
|   
|(2) |  | Incorporated by reference to Exhibit 3.4 to the
Registrants Form 10-K for the fiscal year ended December 1, 2001
(Exchange Act File No. 0-26784)

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##### Table of Contents



(b)  Reports on Form 8-K.



| |  | Registrant filed the following reports on Form 8-K during the period
of September 2, 2001 to December 1, 2001:                                                                              
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Current Report on Form 8-K dated October 10, 2001 filing a press
release and reporting under Item 5 the settlement of litigation
between the Registrant and MEMC Electronics Materials, Inc.

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: |  | January 11, 2002 |  | /s/  J. Michael DodsonBy J. Michael Dodson
Secretary and Chief Financial Officer
(Principal Financial Officer)
|     
|Date: |  | January 11, 2002 |  | /s/  G. Michael LattaBy G. Michael Latta
Corporate Controller
(Principal Accounting Officer)                  

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EXHIBIT INDEX

|        |  |                                                                                    
|------- |  | -----------------------------------------------------------------------------------
|EXHIBIT |  |                                                                                    
|NUMBER  |  | DESCRIPTION                                                                        
|        |  |                                                                                    
|3.1*(1) |  | Articles of Incorporation of SpeedFam International, Inc.                          
|       
|       
|       
|       
|3.2*(2) |  | Bylaws                                                                             
|       
|       
|       
|       
|10.1    |  | Employment Agreement between the Registrant and Robert Carey date
September 11,2001



---

|*   |  | Previously filed                                                                                                                                 
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------
|   
|   
|   
|   
|(1) |  | Incorporated by reference to Exhibit 3 to the Registrants Form 10-Q for
the quarter ended November 30, 1997 (Exchange Act File No. 0-26784)     
|   
|   
|   
|   
|(2) |  | Incorporated by reference to Exhibit 3.4 to the Registrants Form 10-K
for the fiscal year ended December 1, 2001 (Exchange Act File No. 0-26784)

25