##### Table of Contents









UNITED STATES SECURITIES AND EXCHANGE
COMMISSION

Washington, D.C. 20549


Form 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR
15(d)

OF THE SECURITIES EXCHANGE ACT OF
1934


For the fiscal year ended June 1,
2002

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 No.)
|305 North 54th Street
    Chandler, Arizona                        |  | 85226                                   
|(Address of principal executive
    offices)                       |  | (Zip Code)                              

Registrants telephone number:
(480) 705-2100

Securities registered pursuant to
Section 12(b) of the Act: None

Securities registered pursuant to
Section 12(g) of the Act:

Common Stock, No Par Value

(Title of Class)


Indicate by check mark whether the registrant
(1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports) and
(2) has been subject to such filing requirements for the
past
90 days.     Yes þ     No o

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

The aggregate market value of the voting stock
held by non-affiliates of the registrant was approximately
$56 million based on the closing price of $2.85 per share
of common stock as reported on the Nasdaq Stock Market on July
31, 2002. For purposes of this determination, shares of common
stock held by each officer and director and by each person who
owns 5% or more of the outstanding common stock have been
excluded in that such persons may be deemed to be affiliates of
the registrant. This determination of affiliate status is not
necessarily a conclusive determination for other purposes. The
number of outstanding shares of the registrants common
stock as of the close of business on July 31, 2002 was
31,058,793.



---






---

TABLE OF CONTENTS



|                              |                                                                                               |  |  |  |  |  |  | 
|----------------------------- | --------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|                              | Item 1. Business                                                                             
|                              | Item 2. Properties                                                                           
|                              | Item 3. Legal Proceedings                                                                    
|                              | Item 4. Submission of Matters to a Vote of Security Holders                                  
|PART II                      
|                              | Item 5. Market for Common Equity and Related Stockholder Matters                             
|                              | Item 6. Selected Financial Data                                                              
|                              | Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
|                              | Item 7A. Quantitative and Qualitative Disclosures about Market Risk.                         
|                              | Item 8. Financial Statements and Supplementary Data.                                         
|                              | Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
|PART III                     
|                              | Item 10. Directors, Executive Officers And Key Employees                                     
|                              | Item 11. Executive Compensation                                                              
|STOCK PRICE PERFORMANCE GRAPH
|                              | Item 12. Security Ownership of Certain Beneficial Owners and Management                      
|                              | Item 13. Certain Relationships and Related Transactions                                      
|PART IV                      
|                              | Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.                   
|SIGNATURES                   
|EXHIBIT INDEX                
|EX-10.5                      
|EX-10.6                      
|EX-10.9                      
|EX-21.1                      
|EX-23.1                      
|EX-99.1                      



---



##### Table of Contents



TABLE OF CONTENTS

|         |     |         |  |                                                                                           |  |  |    | 
|-------- | --- | ------- |  | ----------------------------------------------------------------------------------------- |  |  | -- | 
|Item     |     |         |  |                                                                                          
|No.      |     | Caption |  | Page                                                                                     
|         |     |         |  |                                                                                          
|Part I  
|         | 1.  |         |  | Business                                                                                  |  |  | 1  | 
|         | 2.  |         |  | Properties                                                                                |  |  | 9  | 
|         | 3.  |         |  | Legal Proceedings                                                                         |  |  | 9  | 
|         | 4.  |         |  | Submission of Matters to a Vote of Security
    Holders                                   |  |  | 9  | 
|Part II 
|         | 5.  |         |  | Market for Common Equity and Related Stockholder
    Matters                              |  |  | 9  | 
|         | 6.  |         |  | Selected Financial Data                                                                   |  |  | 10 | 
|         | 7.  |         |  | Managements Discussion and Analysis of
    Financial Condition and Results of Operations |  |  | 12 | 
|         | 7A. |         |  | Quantitative and Qualitative Disclosures about
    Market Risk                            |  |  | 29 | 
|         | 8.  |         |  | Financial Statements and Supplementary Data                                               |  |  | 31 | 
|         | 9.  |         |  | Changes in and Disagreements with Accountants on
    Accounting and Financial Disclosure  |  |  | 59 | 
|Part III
|         | 10. |         |  | Directors and Executive Officers of the Company                                           |  |  | 59 | 
|         | 11. |         |  | Executive Compensation                                                                    |  |  | 61 | 
|         | 12. |         |  | Security Ownership of Certain Beneficial Owners
    and Management                        |  |  | 67 | 
|         | 13. |         |  | Certain Relationships and Related Transactions                                            |  |  | 70 | 
|Part IV 
|         | 14. |         |  | Exhibits, Financial Statement Schedules, and
    Reports on Form 8-K                      |  |  | 70 | 
|         |     |         |  | Signatures                                                                                |  |  | 71 | 
|         |     |         |  | List of Exhibits   EXHIBIT INDEX                                                         

i



---



##### Table of Contents






Item 1.     Business

SpeedFam-IPEC, Inc. (the Company) is a leading
global supplier of chemical mechanical planarization
(CMP) systems, with more than 1,300 systems installed
worldwide. The Company designs, develops, manufactures, markets
and supports CMP systems for use in the fabrication of advanced
semiconductor devices.

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

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

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

In addition to CMP systems, we market
high-throughput precision surface processing equipment for the
silicon wafer market and consumables used in surface processing.
We also manufacture and market polishing systems for general
industrial applications. Our CMP segment has provided the
substantial majority of our revenues during the last several
years.

The Company was incorporated in Illinois in 1959
as SpeedLap Corporation. Effective April 6, 1999,
Integrated Process Equipment Corp. (IPEC), a supplier of CMP
systems, merged into a wholly owned subsidiary of SpeedFam
International, Inc. Following the merger, SpeedFam
International, Inc. changed its name to SpeedFam-IPEC, Inc.

On August 30, 2000, the Company and Obara
Corporation (Obara) restructured SpeedFam-IPEC Co., Ltd.
(together with its subsidiaries and joint ventures, the Far East
Joint Venture), effectively dissolving their joint venture.
Prior to the dissolution, the Company and Obara each owned a 50%
interest in 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 allowing the Company to have direct
control over CMP operations in Asia. Obara continues the non-CMP
activities of the former Far East Joint Venture, which include
the manufacture of silicon wafer 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 polishing products
manufactured by Obara.

Unless the context otherwise requires, the
Company and SpeedFam-IPEC refer to
SpeedFam-IPEC, Inc., an Illinois corporation, and its wholly
owned subsidiaries. The Companys principal executive
offices are located at 305 North 54th Street, Chandler,
Arizona 85226 and its telephone number is (480) 705-2100.
Additional information about the Company is available on the
Companys website at www.sfamipec.com.

Recent Events

On August 11, 2002, the Company entered into
an Agreement and Plan of Reorganization with Novellus Systems,
Inc. (Novellus), a Delaware corporation and the leader in thin
film deposition technology for the semiconductor industry.
Novellus will acquire all outstanding shares of SpeedFam-IPEC in
a stock-for-stock

1



---



##### Table of Contents



merger transaction. If the merger is completed,
the Company would become a wholly-owned subsidiary of Novellus.
Each share of SpeedFam-IPEC common stock outstanding as of the
closing date will be converted into 0.1818 shares of Novellus
common stock on a fixed exchange ratio basis. The merger is
intended to qualify as a tax-free reorganization under IRS
regulations. The transaction has been approved by the board of
directors of both companies and is expected to close in the
second quarter of fiscal 2003.


Industry Background

The semiconductor industry experienced
significant growth throughout the 1990s due to increased demand
for electronic products, increased semiconductor content in
electronics products, and the preparation for the year 2000
systems conversion. The popularity of personal computers; the
expansion of the telecommunications industry (especially
wireless communications); and the emergence of new applications
within consumer electronics continue to drive the demand for
faster, smaller and cheaper integrated circuit devices.

The semiconductor industry is highly cyclical. In
recent periods, the industry has experienced a severe downturn.
According to IC Insights, an industry research and analysis
firm, total integrated circuits revenues from semiconductor
manufacturers declined by 33% in calendar year 2001 to an
estimated $118.5 billion, from the $176.9 billion
estimated in 2000. As a result, the semiconductor equipment
industry has undergone a significant down cycle. Dataquest,
another industry research and analysis firm, estimates that,
between the years 2000 and 2001, overall semiconductor equipment
sales declined from $33.1 billion in shipments to an
estimated $23.7 billion in revenues (generally accounted
for under the Securities and Exchange Commissions Staff
Accounting Bulletin No. 101 (SAB 101), Revenue
Recognition in Financial Statements), or 28.6%. Dataquest
added that CMP sales declined from $1.5 billion in
shipments to $1.0 billion in revenues (generally accounted
for under SAB 101), or 29.3%. The downturn has been
characterized by a dramatic reduction in new orders, cancelled
or suspended existing purchase orders, and the scaled-back
purchase of parts and consumables in limited amounts necessary
to maintain device manufacturers reduced production levels.

Semiconductor manufacturers continually strive to
produce faster, more complex devices at a lower cost.
Historically, this has been accomplished by producing devices on
larger wafers, utilizing smaller design feature sizes and more
layers of interconnect material. During the downturn, device
manufacturers have aggressively been evaluating next-generation
production equipment that will prepare them for a fast ramp when
the industry rebounds. Prior to the current industry downturn,
most semiconductor equipment sales were for systems capable of
producing devices on 200-millimeter wafers with device feature
sizes down to 0.18-micron. Semiconductor manufacturers are
currently designing devices with feature sizes of 0.13-micron
and below, utilizing copper interconnect and oxide insulation.
These devices may be manufactured on either 200- or
300-millimeter wafers. Analysts anticipate that 300-millimeter
wafers with device feature sizes of 0.13-micron and below will
reach significant commercial production when the industry
rebounds. Similarly, Dataquest projects that new fabrication
facilities coming on line will use primarily 300-millimeter
equipment and that this market is expected to dominate the new
equipment purchases by 2004. In addition, Dataquest anticipates
that the use of copper will continue to grow faster relative to
other metal interconnect materials, and that silicon dioxide
will continue to command a significant share of the
dielectric  or insulator  market.

Company Solution

We recently developed two CMP
systems  marketed under the Momentum
trademark  that are specifically designed to process
200- and 300-millimeter wafers with device feature sizes of
0.13-micron and below. We believe MomentumTM is on
course to meet the coming demand for next-generation equipment
and offers a number of advantages over competitive products for
all CMP applications  and particularly for advanced
applications such as copper. Momentum differentiators include
tight process control parameters enabled by our unique
through-the-pad slurry distribution, broadband endpoint
detection and our patented HexazoneTM carrier. We
believe that the Momentum technology is differentiated from our
competition as it has been specifically designed to meet the
stringent processing requirements for the 0.13-micron node.
Additionally, it is already meeting and exceeding certain
processing requirements at the 0.10-micron processing node. In
contrast, many of the competitive systems available on the
market today were designed for process requirements at the 0.25
and 0.18-micron processing nodes. While these systems may be
adapted for

2



---



##### Table of Contents



0.13-micron processing, we do not believe they
are able to consistently meet the more stringent requirements of
advanced applications. Momentums productivity advantages
include:




| |   |                                                                                                                                                                                                                                  
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | yield-enhancing performance metrics that enable
    the consistent production of devices with advanced feature sizes
    of 0.13-micron and below;                                                                               
|
| |  | lower cost of ownership and environmental impact
    through a proprietary design that significantly reduces the use
    of consumables (such as pads, slurries and deionized water), as
    well as waste to be disposed of; and
|
| |  | more robust and flexible processing features,
    which increase wafer throughput by up to 30%.                                                                                                                                  

Currently, there are more than 30 Momentum-based
systems (both 200- and 300-millimeter) on order or installed at
fabrication facilities and foundries in the United States,
Europe, and Asia. We have installed Momentum-based technology at
numerous 200- and 300-millimeter evaluation sites, some of which
have multiple units. Installed units are in varying stages of
product testing, and in most cases in competitive situations.

Although we have achieved limited sales for our
Momentum products, numerous integrated circuit manufacturers
have selected Momentum as the CMP tool of record for
200-millimeter processing. Selection as a tool of record is a
precedent to a manufacturer making equipment orders in volume.
We believe we are achieving success in other evaluations, which
will lead to additional tool of record designations. In this
regard, our future success is highly dependent upon our ability
to win current and future evaluations, and to become the tool of
record to several top semiconductor manufacturers, for both our
200-millimeter and 300-millimeter Momentum systems. We
anticipate that numerous tool of record decisions will be made
over the next several quarters, paving the way for significant
equipment sales when the semiconductor market rebounds and new
fabrication facilities are built.

We are generally able to produce and ship our
tools within 90 to 120 days of receipt of a written order
from a customer. Customers are generally obligated to pay up to
90% of the purchase price of a tool within 30 days of
shipment. The balance of the purchase price is due upon final
acceptance of the tool.

Products

We offer the broadest range of CMP systems
currently available to the semiconductor industry. CMP is a
complex science, often involving multiple steps, each at a
specified set of process parameters. Parameters include
polishing speed, pressure, time and temperature, as well as
polishing liquid or slurry pH and particle size, hardness and
shape to achieve the desired flatness (planarity), smoothness
and optical properties of a surface. One typical polishing
system consists of a moving platen that is covered with a
polishing pad, in combination with a slurry typically containing
abrasive particles that impinge on the surface, thereby creating
the desired surface qualities. This liquid slurry can be
chemically active such that the surface of the component being
polished is chemically modified, thus accelerating and improving
the polishing process.



| |                    
| | -------------------
| | Orbital CMP Systems

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

3



---



##### Table of Contents





| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The 676TM orbital CMP system features
    four independent heads, allowing simultaneous polishing of four
    150-millimeter or 200-millimeter wafers and offers one of the
    industrys smallest footprints or base surface area.
    Introduced in 1995, the 676 was initially designed solely to
    planarize tungsten plugs and has been adopted for this purpose
    in volume production by a majority of the customers that have
    purchased the system.                                                                                                                                                                                                                                   
|
| |  | The 776TM orbital CMP system, which
    also processes 150-millimeter and 200-millimeter wafers, is
    based on the same four-head orbital polishing technology as the
    676. The 776 integrates CMP, metrology and wafer cleaning in a
    single unit that requires less clean room space than separate
    CMP and post-CMP cleaning equipment. The 776 has primarily been
    used for the planarization of tungsten plugs.                                                                                                                                                                                                                                                                     
|
| |  | The MomentumTM orbital, hard-platen
    CMP system is a highly flexible, universal tool that processes
    copper/ low k structures, shallow trench isolation (STI),
    tungsten and silicon oxide on 200-millimeter wafers. Momentum
    was developed to address the industrys growing need for
    advanced process capability for feature sizes at and below
    0.13-micron. The tool features a polishing system that combines
    our rotational and orbital technologies. Momentum was named
    Grand Award winner in Semiconductor International
    magazines 2000 Editors Choice Best Product
    Competition. The system enables productivity and yield
    management by integrating:



| |   |                                                                                                                   
| | - | ------------------------------------------------------------------------------------------------------------------
| |  | a tunable/ adaptive carrier design;                                                                               
|
| |  | a stable, highly flexible polishing technique,
    which combines an advanced hard platen with orbital motion; and
|
| |  | closed-loop control metrology for maximum
    effective throughput and reduced cost of ownership                  



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Momentum300TM, announced in July 2001,
    is a fourth-generation CMP tool, which flexibly delivers
    0.13-micron and below process metrics for copper/ low k
    structures, direct STI, tungsten, and silicon dioxide on
    300-millimeter wafers. Momentum300 offers uniform velocity with
    solid polish support through an orbital hard platen. Our
    pressure-controlled HexazoneTM multi-channel carrier
    is the industrys most advanced polish carrier for
    optimized removal rate and total wafer metrics control. The
    tools multizone in-situ process monitor and broadband
    optical end-point detection system enable precise and reliable
    endpoint and process-quality control. Other Momentum300 features
    include one of the smallest 300-millimeter tool footprints, six
    independent process modules for flexible process flow and high
    throughput, as well as through-the-pad slurry delivery for
    economical slurry consumption and reduced cost of ownership. In
    addition, the Momentum300TM offers ease of process
    transfer from 200-millimeter to 300-millimeter wafer sizes.



| |                       
| | ----------------------
| | Rotational CMP Systems

The conventional CMP process consists of a
rotating upper wafer carrier, that holds the wafer against a
rotating polishing platen that has a polishing pad attached to
its surface. On a rotating system, slurry is deposited on the
pad surface during polishing, and pressure is placed against the
wafer until the desired surface features are achieved. Our line
of rotational CMP equipment utilizes this technology.



| |   |                                                                                                                                                                                                                                                                                                                                   
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Our 472TM CMP system, introduced in
    1994, is a fully automated, single-wafer planarization system
    for polishing oxide or metal layers on silicon wafers which are
    either 150-millimeter or 200-millimeter in diameter.                                                                                                
|
| |  | Our AurigaTM system is a five-head,
    two-polishing table CMP tool capable of processing
    50  60 wafers per hour. Auriga, which began
    shipping commercially in November 1996, is used primarily for
    oxide applications. The Auriga product line is used for
    processing 150-millimeter and 200-millimeter wafers.
|
| |  | In 1998, we introduced the Auriga-CTM,
    which integrates cleaning and drying technology into one CMP
    system, thereby providing a complete dry-in/ dry-out system.                                                                                                                                                          

4



---



##### Table of Contents





| |   |                                                                                                                                                                                                                                                                                                                                                                                       
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Auriga VisionTM, introduced in 2000,
    is the latest tool derived from the industry proven
    AurigaTM platform and provides complete dry-in/
    dry-out CMP processing in a high throughput tool. This systems
    integrates five OlympianTM carriers with advanced
    cleaning capability, computer integrated manufacturing
    automation and in- line metrology capability.



| |                                           
| | ------------------------------------------
| | Semiconductor Wafer Polishing
    Products

We supply chemical mechanical planarization,
double-sided lapping and edge polishing systems to the
semiconductor substrates or silicon wafer market.

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

We also sell chemical mechanical planarization
equipment to semiconductor wafer manufacturers that remove the
shallow damage layer remaining from previous process steps to
attain the specified flatness and surface finish. The edge
polishing technology was developed and introduced for the
purpose of making the wafers edge easier to clean, thereby
increasing semiconductor device manufacturing yields. We market
and distribute edge-polishing systems manufactured by Obara
Corporation in Japan, our former Far East Joint Venture partner.



| |                            
| | ---------------------------
| | General Industrial Products

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

Customers

We sell our products to leading manufacturers of
semiconductor devices, silicon wafers and various general
industrial applications. During the last three years, the
majority of our total revenue has been derived from the sale of
CMP products and services. In 2002, 2001 and 2000, sales to
semiconductor device manufacturers were 75%, 81%, and 84% of
total revenue, respectively. In 2002, 2001 and 2000, sales to
silicon wafer manufacturers were 13%, 11% and 11% of total
revenue, respectively. In 2002, 2001 and 2000, sales to
manufacturers of general industrial components were 12%, 8% and
5% of total revenue, respectively. In 2002, sales to two
customers accounted for 14% and 11% of our total revenue. In
2001, sales to three customers accounted for 15%, 11% and 10% of
our total revenue and in 2000, sales to two customers accounted
for 12% and 11% of our total revenue. No other customer
accounted for 10% or more of our total revenue during these
periods. Our ten largest customers accounted for 56%, 60% and
65% of our total revenue in 2002, 2001 and 2000, respectively.

Sales and Marketing

We market and sell our products worldwide
directly to all the industries we serve due to the highly
technical nature of our products. We use distributors in Europe
and China for our CMP product lines and a network of regional
distributors for our general industrial product lines.

Our sales strategy emphasizes direct interaction
with customers focusing on building long-term relationships,
particularly in the semiconductor device and silicon wafer
industries, where ongoing customer support and service are
critical. Our direct sales force is divided into focused units
for each of the industries we serve.

5



---



##### Table of Contents



Our business is not seasonal but is cyclical in
nature because it is based on the capital equipment investment
patterns of major semiconductor manufacturers. These expenditure
patterns are based on many factors, including:



| |   |                                                                        
| | - | -----------------------------------------------------------------------
| |  | the anticipated market demand for integrated
    circuits; and         
|
| |  | the development of new technologies and global
    economic conditions.

Our sales offices are in Chandler, Arizona; Des
Plaines, Illinois; the United Kingdom; Germany; Taiwan; Korea;
Singapore; Malaysia and Japan.

Our marketing strategy includes collaboration
with International SEMATECH, a consortium of major semiconductor
manufacturers, as well as a similar Japan-based consortium;
partnership in the Damascus Alliancea collaborative group
of semiconductor equipment suppliers dedicated to accelerating
chipmakers transition to copper/ low k dielectric;
participation in Semicon; and other trade shows worldwide; and
involvement in a wide range of technical conferences, including
presentations of technical papers written by our senior
technologists. We believe these initiatives serve to promote
acceptance of our products and process technologies in the
semiconductor, silicon wafer and other industries.

Service and Support

We believe a highly responsive support
infrastructure with standard and customized support programs is
an essential factor in providing customers a competitive
operational advantage in the marketplace. We have structured our
service operations into distinct service units responsible for
each of the semiconductor device, semiconductor wafer and
general industrial products industries staffed with experienced
service and support personnel. Elements of our service and
support program include system installation and process
certification, process support, machine repair, maintaining
spare parts inventories, internal training programs, external
customer training, a monthly customer newsletter, multimedia
documentation and coordination of customer user groups.

We generally provide a one-year warranty on all
equipment we sell and in certain instances provide a warranty
period in excess of one year. An extensive network of field and
technical service personnel in place throughout the United
States, Europe, and Asia provide warranty service, post-warranty
service and equipment installations. In addition, dedicated
site-specific engineers are also in place at certain customer
locations pursuant to contractual arrangements. We also utilize
distributors in Europe and China for CMP field and technical
services and a distributor in Israel for service support. We
also provide service and maintenance training as well as process
application training for our customers personnel. We
maintain an inventory of spare parts at our primary locations
and at our satellite service sites. This provides us the ability
to provide same day or overnight delivery for many parts.

Backlog

Backlog of orders for capital equipment, parts
and consumables was approximately $22.4 million on
July 31, 2002, compared to approximately $40.0 million
on July 31, 2001. The time between the placing of orders
and shipment of parts, consumables and slurries is significantly
less than for capital equipment and as a result, our backlog
consists mostly of orders for capital equipment. We include in
our backlog only those customer orders for which we have
accepted signed purchase orders with assigned delivery dates
within 12 months. Orders generally carry a stipulation that
customers may incur a penalty in the event of cancellation.
However, there is no assurance that customers will not cancel
orders or that we will obtain a meaningful penalty payment. As a
result of systems and equipment ordered and shipped in the same
quarter, possible changes in delivery schedules, cancellation of
orders and delays in product shipments, our backlog at any
particular date may not be indicative of actual sales for any
succeeding period.

Research and Development

The capital equipment market, and in particular
the semiconductor capital equipment market in which we operate,
is characterized by rapid technological development and product
innovation. Our research and

6



---



##### Table of Contents



development efforts are currently focused on
enhanced performance for finer geometries in oxide and tungsten
while developing new capabilities for STI, copper/ low k
and other advanced applications. In addition, we are focused on
continuous improvement in cost of ownership metrics for Momentum
and Momentum300. Our research and development expenditures
during 2002, 2001 and 2000 were approximately
$44.7 million, $64.0 million and $53.7 million,
respectively.


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

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

During 2001, we developed Momentum300, a
300-millimeter tool that delivers 0.13-micron and below process
metrics for copper/ low k, direct STI, tungsten and oxide.
Our pressure-controlled Hexazone multi-channel carrier is
the industrys most advanced polish carrier for optimized
removal rate and total wafer metrics control. The system
provides ease of process transfer from 200-millimeter to
300-millimeter wafer processing.

During 2002, we developed additional features and
process capabilities for both Momentum and Momentum300, and
enhanced the cost of ownership and productivity benefits of the
systems. We made overall improvements to our cost of ownership
through decreased slurry usage, longer pad life, higher
throughput and enhanced reliability. In addition, we continued
to enhance our total wafer metric control capabilities.

Manufacturing

We generally assemble our equipment and systems
from components and fabricated parts manufactured and supplied
by third parties, including stainless steel plates, gears,
frames and weldments, power supplies, process controllers,
robots and polishing heads. Certain of the items manufactured by
others are made to our specifications. However, for Momentum and
Momentum300 products, we have substantially implemented an
outsourced production model, in which a limited number of key
vendors are supplying a limited number of modules designed to
our specifications that we assemble into our products. All final
assembly and system tests are performed within our
manufacturing/ assembly facilities. Quality control is
maintained through incoming inspection of components, in-process
inspection during equipment assembly and final inspection and
operation of all manufactured equipment prior to shipment.
Substantially all of our products sold to manufacturers of
general industrial components are manufactured in our Illinois
facility. Substantially all of our products sold to the silicon
wafer market are manufactured by Obara. Our CMP system
development and manufacturing operations are located at our
headquarters in Chandler, Arizona.

Competition

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

7



---



##### Table of Contents



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

Competition in the general industrial products
market is fragmented with no one competitor currently holding a
dominant position. The Company faces significant competitive
pressure in the sale of slurries, particularly with regards to
pricing, which has resulted in decreased margins for certain
products of the Company in recent periods.

Employees

As of July 31, 2002, the Company had
approximately 476 full time employees located in the U.S.,
Europe and Asia. From time to time, the Company uses temporary
employees to respond more rapidly to fluctuations in assembly
and product demand and to better control the labor component of
its manufacturing costs. None of the Companys employees is
represented by a labor union and the Company has never
experienced a work stoppage or strike. The Company considers its
employee relations to be good.

Intellectual Property

The Company currently holds 190 United States
patents and 148 foreign patents in Asian and European countries.
As of July 31, 2002, the Company has 96 United States
patent applications pending and 238 foreign patent applications
pending. In addition, the Company believes that such factors as
continued innovation, technical expertise and know-how of its
personnel and other factors are also important. The Company also
owns 10 U.S. trademark registrations and numerous foreign
trademarks.

The Company licenses the right to manufacture CMP
machines employing the orbital motion used in its 676, 776,
Momentum and Momentum300 products from a semiconductor
manufacturer.

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

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

8



---



##### Table of Contents






Item 2.     Properties

The Companys operations are conducted
primarily in two buildings in Chandler, Arizona and one building
in Des Plaines, Illinois. The Chandler buildings, which were
previously owned by the Company, were sold in June 2002, as part
of a sale-leaseback transaction. These two buildings consist of
approximately 250,000 square feet and house the main
manufacturing operation, research and development, various
administrative and customer support offices, corporate
headquarters and a state-of-the-art applications and customer
demonstration lab. As part of the Companys cost reduction
measures, the Chandler, Arizona operations were consolidated
into the Research and Development Center during 2002. The
Company plans to leave the former administration and
manufacturing facility vacant until additional manufacturing
space is needed. The Des Plaines, Illinois building, which
houses the Industrial Applications Group, is owned by the
Company and consists of approximately 40,000 square feet.

SpeedFam-IPEC U.K. is located in Hinckley,
England and owns a 9,000 square foot facility used for
demonstration, customer service, sales and administration
purposes.

The Company also leases various smaller
facilities worldwide, which are used as sales and customer
service centers, including facilities in Germany, Japan, Taiwan,
Korea, Singapore and Malaysia.

The Company has subleased certain of the
properties previously occupied by the former IPEC operations,
which have been relocated to the facilities in Chandler,
Arizona. This includes a 150,000 square foot facility in
Phoenix, Arizona, which was the primary manufacturing, research
and administration facility for the IPEC operations. The Company
is also seeking sub-lessees for a 39,000 square foot facility in
Chandler, Arizona which was formerly used as a training
facility. The training operations were consolidated into the
main operating facility during the most recent industry downturn.

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




Item 3.     Legal
Proceedings

The Company is subject to various 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.




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

No matters were submitted to a vote of securities
holders during the three months ended June 1, 2002.




PART II




Item 5.     Market
for Common Equity and Related Stockholder Matters

Market for
Common Stock

The Companys Common Stock is traded on the
Nasdaq National Market under the symbol SFAM. Public
trading of the Common Stock commenced on October 10, 1995.
Prior to that time, there was no public

9



---



##### Table of Contents



market for the Companys Common Stock. The
following table sets forth the high and low closing sale prices
for the Common Stock as reported by Nasdaq for the periods
indicated:


|     |                |      |   |       |  |  |   |       | 
|---- | -------------- | ---- | - | ----- |  |  | - | ----- | 
|     |                | High |   | Low  
|     |                |      |   |      
|2000 |                |      |   |       |  |  |   |      
|     | First Quarter  |      | $ | 18.38 |  |  | $ | 8.69  | 
|     | Second Quarter |      |   | 14.38 |  |  |   | 9.56  | 
|     | Third Quarter  |      |   | 29.88 |  |  |   | 10.00 | 
|     | Fourth Quarter |      |   | 29.13 |  |  |   | 11.13 | 
|2001 |                |      |   |       |  |  |   |      
|     | First Quarter  |      | $ | 21.88 |  |  | $ | 14.44 | 
|     | Second Quarter |      |   | 17.31 |  |  |   | 5.25  | 
|     | Third Quarter  |      |   | 9.31  |  |  |   | 4.50  | 
|     | Fourth Quarter |      |   | 7.87  |  |  |   | 4.55  | 
|2002 |                |      |   |       |  |  |   |      
|     | First Quarter  |      | $ | 4.70  |  |  | $ | 1.83  | 
|     | Second Quarter |      |   | 3.20  |  |  |   | .94   | 
|     | Third Quarter  |      |   | 4.97  |  |  |   | 2.37  | 
|     | Fourth Quarter |      |   | 5.00  |  |  |   | 2.69  | 

Holders of
Record

As of July 31, 2002, we had approximately
210 holders of record of our common stock.

Dividends

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

Sale of
Unregistered Securities

During fiscal 2002, we did not issue any equity
securities that were not registered under the Securities Act of
1933, as amended.




Item 6.     Selected
Financial Data

SELECTED CONSOLIDATED FINANCIAL DATA

The selected consolidated financial data
presented below is not necessarily indicative of results of
future operations and should be read in conjunction with
Managements Discussion and Analysis of Financial
Condition and Results of Operations and with the
Companys consolidated financial statements, appearing
elsewhere in this report.

10



---



##### Table of Contents



|                                                                        |                   |                   |         |                                       |   |      |          |       |   |      |         |       |   |   |          |       |   |   |         |       |  
|----------------------------------------------------------------------- | ----------------- | ----------------- | ------- | ------------------------------------- | - | ---- | -------- | ----- | - | ---- | ------- | ----- | - | - | -------- | ----- | - | - | ------- | ----- | -
|                                                                        |                   |                  
|                                                                        |                   | Fiscal Year Ended
|                                                                        |                   |                  
|                                                                        |                   | 2002              |         | 2001                                  |   | 2000 |          | 1999  |   | 1998
|                                                                        |                   |                   |         |                                       |   |      |          |       |   |     
|                                                                        |                   |                   |         |                                       |   |     
|                                                                        |                   |                   |         | (In thousands, except per share data) |   |     
|Consolidated Statements of Operations
    Data:                         |                   |                   |         |                                       |   |      |          |       |   |      |         |       |   |   |          |       |   |   |         |      
|Net sales                                                               |                   | $                 | 119,166 |                                       |   | $    | 267,080  |       |   | $    | 274,048 |       |   | $ | 216,425  |       |   | $ | 374,268 |      
|Net loss from continuing operations                                     |                   |                   | (91,490 | )                                     |   |      | (97,946  | )     |   |      | (14,178 | )     |   |   | (139,775 | )     |   |   | (18,818 | )    
|Loss from discontinued operations                                       |                   |                   |        |                                       |   |      |         |       |   |      |        |       |   |   |         |       |   |   | (10,578 | )    
|Cumulative effect of accounting changes(1)                              |                   |                   | (2,582  | )                                     |   |      | (36,542  | )     |   |      |        |       |   |   |         |       |   |   |        |      
|                                                                        |                   |                   |         |                                       |   |      |          |       |   |      |         |       |   |   |          |       |   |   |         |      
|Net loss(2)(3)                                                          |                   |                   | (94,072 | )                                     |   |      | (134,488 | )     |   |      | (14,178 | )     |   |   | (139,775 | )     |   |   | (29,396 | )    
|Cumulative dividend on preferred stock                                  |                   |                   |        |                                       |   |      |         |       |   |      |        |       |   |   | (174     | )     |   |   | (244    | )    
|                                                                        |                   |                   |         |                                       |   |      |          |       |   |      |         |       |   |   |          |       |   |   |         |      
|Net loss attributable to common stockholders                            |                   | $                 | (94,072 | )                                     |   | $    | (134,488 | )     |   | $    | (14,178 | )     |   | $ | (139,949 | )     |   | $ | (29,640 | )    
|                                                                        |                   |                   |         |                                       |   |      |          |       |   |      |         |       |   |   |          |       |   |   |         |      
|Net loss per common share:                                              |                   |                   |         |                                       |   |      |          |       |   |      |         |       |   |   |          |       |   |   |         |      
|Basic and diluted:                                                      |                   |                   |         |                                       |   |      |          |       |   |      |         |       |   |   |          |       |   |   |         |      
|From continuing operations                                              |                   | $                 | (3.01   | )                                     |   | $    | (3.27    | )     |   | $    | (0.48   | )     |   | $ | (4.84    | )     |   | $ | (0.69   | )    
|                                                                        |                   |                   |         |                                       |   |      |          |       |   |      |         |       |   |   |          |       |   |   |         |      
|From discontinued operations                                            |                   | $                 |        |                                       |   | $    |         |       |   | $    |        |       |   | $ |         |       |   | $ | (0.39   | )    
|                                                                        |                   |                   |         |                                       |   |      |          |       |   |      |         |       |   |   |          |       |   |   |         |      
|From cumulative effect of accounting changes                            |                   | $                 | (0.08   | )                                     |   | $    | (1.22    | )     |   | $    |        |       |   | $ |         |       |   | $ |        |      
|                                                                        |                   |                   |         |                                       |   |      |          |       |   |      |         |       |   |   |          |       |   |   |         |      
|Net loss attributable to common stockholders                            |                   | $                 | (3.09   | )                                     |   | $    | (4.49    | )     |   | $    | (0.48   | )     |   | $ | (4.84    | )     |   | $ | (1.08   | )    
|                                                                        |                   |                   |         |                                       |   |      |          |       |   |      |         |       |   |   |          |       |   |   |         |      
|Weighted average shares used in per share
    calculation              |                   |                   |         |                                       |   |      |          |       |   |      |         |       |   |   |          |       |   |   |         |      
|Basic and diluted                                                       |                   |                   | 30,414  |                                       |   |      | 29,961   |       |   |      | 29,503  |       |   |   | 28,890   |       |   |   | 27,469  |      
|                                                                        |                   |                   |         |                                       |   |      |          |       |   |      |         |       |   |   |          |       |   |   |         |      
|Consolidated Balance Sheet Data:                                        |                   |                   |         |                                       |   |      |          |       |   |      |         |       |   |   |          |       |   |   |         |      
|Working capital                                                         |                   | $                 | 69,868  |                                       |   | $    | 139,520  |       |   | $    | 238,196 |       |   | $ | 243,735  |       |   | $ | 374,426 |      
|Total assets                                                            |                   |                   | 176,827 |                                       |   |      | 314,885  |       |   |      | 435,080 |       |   |   | 443,778  |       |   |   | 575,653 |      
|Long-term debt, less current maturities                                 |                   |                   | 115,054 |                                       |   |      | 115,124  |       |   |      | 115,162 |       |   |   | 116,129  |       |   |   | 117,078 |      
|Amounts as if the accounting changes were applied
    retroactively(4): |                   |                   |         |                                       |   |      |          |       |   |      |         |       |   |   |          |       |   |   |         |      
|Net loss                                                                |                   | $                 | (91,490 | )                                     |   | $    | (97,003  | )     |   | $    | (35,240 | )     |   | $ | (139,006 | )     |   | $ | (28,697 | )    
|                                                                        |                   |                   |         |                                       |   |      |          |       |   |      |         |       |   |   |          |       |   |   |         |      
|Net loss per share:                                                     |                   |                   |         |                                       |   |      |          |       |   |      |         |       |   |   |          |       |   |   |         |      
|                                                                        | Basic and diluted |                   | $       | (3.01                                 | ) |      | $        | (3.24 | ) |      | $       | (1.19 | ) |   | $        | (4.81 | ) |   | $       | (1.04 | )
|                                                                        |                   |                   |         |                                       |   |      |          |       |   |      |         |       |   |   |          |       |   |   |         |      



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Fiscal year 2002 reflects the adoption of the
    Financial Accounting Standards Boards Statement of
    Financial Accounting Standards (SFAS) No. 142,
    Goodwill and Other Intangible Assets, which resulted
    in a non-cash charge of $2.6 million related to the
    cumulative effect of the accounting change as of June 3,
    2001. Refer to Note 5 of the Consolidated Financial
    Statements. Fiscal year 2001 reflects the adoption of
    SAB 101, which resulted in a non-cash charge of
    $36.5 million related to the cumulative effect of the
    accounting change as of June 4, 2000. Refer to Note 5
    of the Consolidated Financial Statements.
|   
|(2) | Includes $0.1 million, $(3.8) million,
    $0.1 million and $2.8 million for the 2001 through
    1998 fiscal years, respectively, attributable to the
    Companys share of net earnings (loss) from the Far East
    Joint Venture, accounted for on the equity method. The remainder
    represents the Companys share of net earnings from the
    Fujimi Joint Venture.                                                                                                                                                                                                                                                                                                  
|   
|(3) | Includes merger, integration and restructuring
    charges of $48.1 million, $58.3 million, and
    $53.9 million for 2002, 2001, and 1999, respectively. There
    were no merger, integration and restructuring charges for 2000
    and 1998. Refer to Notes 2, 3, and 4 of the Consolidated
    Financial Statements.                                                                                                                                                                                                                                                                                                                                                       

11



---



##### Table of Contents





|    |                                                                                                                                                                                                                                     
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(4) | Data is not available in sufficient detail to
    show pro forma information for 1999 and 1998 for the impact of
    SAB 101. Therefore, 1999 and 1998 only reflect the elimination
    of goodwill amortization under SFAS No. 142.






|        |                                                                                          
|------- | -----------------------------------------------------------------------------------------
|Item 7. | Managements Discussion and Analysis
    of Financial Condition and Results of Operations

Overview

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

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

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

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

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

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

The Companys fiscal year consists of 52 or
53 weeks ending on the Saturday nearest May 31.
Accordingly, the 2002 fiscal year ended on June 1, 2002,
the 2001 fiscal year ended on June 2, 2001 and the 2000
fiscal year ended on June 3, 2000. All references to
quarters and years relate to fiscal quarters and fiscal years
unless otherwise noted.

On August 30, 2000, the Company and Obara
Corporation (Obara) effectively dissolved the Far East Joint
Venture. Under the terms of the Master Reorganization Agreement
with Obara, ownership of the CMP sales and service operations of
the Far East Joint Venture was transferred to the Company and
specific personnel involved in CMP efforts became employees of
the Company. Obara continues the non-CMP activities of the
former Far East Joint Venture, which include the manufacturing
of silicon wafer 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

12



---



##### Table of Contents



act as a direct distributor in the United States
and Europe for the wafer and disk polishing products
manufactured by Obara, under a five-year agreement, and is
prohibited from manufacturing these products.


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

Recent Events

On August 11, 2002, the Company entered into
an Agreement and Plan of Reorganization with Novellus Systems,
Inc., a Delaware corporation and the leader in thin film
deposition technology for the semiconductor industry. Novellus
will acquire all outstanding shares of SpeedFam-IPEC in a
stock-for-stock merger transaction. If the merger is completed,
the Company would become a wholly-owned subsidiary of Novellus.
Each share of SpeedFam-IPEC common stock outstanding as of the
closing date will be converted into 0.1818 shares of Novellus
common stock on a fixed exchange ratio basis. The merger is
intended to qualify as a tax-free reorganization under IRS
regulations. The transaction has been approved by the board of
directors of both companies and is expected to formally close in
the second quarter of fiscal 2003.

Results of Operations

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

|                                                       |  |      |       |      |  |      |       |    |  |  |       |   
|------------------------------------------------------ |  | ---- | ----- | ---- |  | ---- | ----- | -- |  |  | ----- | --
|                                                       |  | 2002 |       | 2001 |  | 2000
|                                                       |  |      |       |      |  |     
|Net sales                                              |  |      | 100.0 |      |  |      | 100.0 |    |  |  | 100.0 |   
|Cost of sales                                          |  |      | 108.2 |      |  |      | 85.6  |    |  |  | 67.3  |   
|                                                       |  |      |       |      |  |      |       |    |  |  |       |   
|Gross margin                                           |  |      | (8.2  | )    |  |      | 14.4  |    |  |  | 32.7  |   
|Operating expenses:                                    |  |      |       |      |  |      |       |    |  |  |       |   
|Research, development and engineering                  |  |      | 37.5  |      |  |      | 24.0  |    |  |  | 19.6  |   
|Selling, general and administrative                    |  |      | 23.6  |      |  |      | 19.6  |    |  |  | 19.1  |   
|Merger, integration and restructuring                  |  |      | 4.0   |      |  |      | 3.2   |    |  |  |      |   
|                                                       |  |      |       |      |  |      |       |    |  |  |       |   
|Operating loss                                         |  |      | (73.3 | )    |  |      | (32.4 | )  |  |  | (6.0  | ) 
|Other expense, net                                     |  |      | (5.6  | )    |  |      | (0.3  | )  |  |  | (0.2  | ) 
|Gain (loss) on disposal of investment in
    affiliate |  |      |      |      |  |      | (4.0  | )  |  |  | 2.2   |   
|Equity in net loss of affiliates                       |  |      |      |      |  |      |      |    |  |  | (1.2  | ) 
|                                                       |  |      |       |      |  |      |       |    |  |  |       |   
|Loss before income taxes                               |  |      | (78.9 | )    |  |      | (36.7 | )  |  |  | (5.2  | ) 
|Income tax benefit                                     |  |      | (2.1  | )    |  |      |      |    |  |  |      |   
|                                                       |  |      |       |      |  |      |       |    |  |  |       |   
|Loss before cumulative effect of accounting change     |  |      | (76.8 | )    |  |      | (36.7 | )  |  |  | (5.2  | ) 
|Cumulative effect of accounting change                 |  |      | (2.2  | )    |  |      | (13.7 | )  |  |  |      |   
|                                                       |  |      |       |      |  |      |       |    |  |  |       |   
|Net loss                                               |  |      | (79.0 | )%   |  |      | (50.4 | )% |  |  | (5.2  | )%
|                                                       |  |      |       |      |  |      |       |    |  |  |       |   

13



---



##### Table of Contents



2002 Compared
with 2001

Net Sales.Net sales
for 2002 were $119.2 million, down 55% from net sales of
$267.1 million in 2001. Sales of CMP systems totaled
$88.8 million, or 75% of net sales, down 59% from
$217.4 million, or 81% of net sales in 2001. Sales of CMP
systems decreased in 2002 due to the slowing of worldwide demand
for semiconductor manufacturing equipment caused by a rapid
decline in demand for semiconductor devices. Inventory buildups
in telecommunication products, slower than expected personal
computer sales and slower global economic growth have caused
semiconductor companies to reevaluate their capital spending
plans. A number of the Companys customers revised the
timing of their capital spending and rescheduled delivery or
canceled existing orders, resulting in the postponement of
equipment delivery and a decline in new orders and net sales.

Sales of silicon wafer products in 2002 decreased
to $16.2 million, or 13% of net sales, as compared to
$29.1 million, or 11% of net sales, in 2001. During 2002,
the silicon wafer market 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. This over-capacity situation has
created a larger market for used equipment, resulting in even
greater difficulty in the sale of 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.

Sales of products for general industrial
applications decreased to $14.2 million, or 12% of net
sales, in 2002 compared with $20.6 million, or 8% of net
sales in 2001 due to the general economic slowdown.

Gross Margin.Gross
margin for 2002 was ($9.7) million, or (8)% of net sales,
compared to 38.5 million, or 14% of net sales, in 2001.
Because the length and severity of the industry downturn has
been longer than originally anticipated, the Company believes
that purchases in the next upturn will be primarily for the
Momentum products. As a result, the Company recorded a one-time
charge of $37.6 million to cost of goods sold during 2002
for the write-down of inventory and recognition of liabilities
related to outstanding purchase commitments for the
Companys legacy tools. Excluding this write-down, gross
margin was $27.9 million, or 23% of net sales for 2002.
During 2001, the Company recorded a one-time charge of
$31.7 million to cost of goods sold related to the industry
downturn and $3.4 million related to the exit from the
manufacturing of wafer and disk polishing equipment. Excluding
these charges, gross margin was $73.6 million or 28% of net
sales for 2001. The Companys gross margins are below
historical levels due primarily to decreased production volume
resulting in lower overhead absorption on a reduced revenue
base. During the industry downturn, the Company expects this
trend of reduced gross margins to continue. The Companys
gross margin has fluctuated significantly in the past and will
continue to fluctuate based on several factors, including the
severity and duration of the current industry downturn, product
mix, overhead absorption levels, and costs associated with the
introduction of new products.

Research, Development and Engineering.In 2002, research, development and
engineering expense decreased to $44.7 million, or 38% of
net sales, compared to $64.0 million, or 24% of net sales,
in 2001. Research, development and engineering expenses in 2002
included $7.3 million in one-time charges related to the
asset impairment of certain legacy tools located in our labs,
which will no longer be used for ongoing research and
development programs, as well as capitalized costs associated
with certain patents that were written off. During 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 and an asset impairment
charge of $3.6 million related to certain tools no longer
used in our labs as a result of the industry slowdown. Excluding
these charges, research, development and engineering expenses in
2002 decreased by $20.7 million, or 36%, from 2001 as a
result of certain cost cutting measures which were implemented
by the Company in response to the industry wide downturn. The
Company expects to continue investing substantial resources in
research, development and engineering programs.

Selling, General and Administrative.In 2002, selling, general and
administrative expense decreased to $28.1 million, or 24%
of net sales, compared to $52.4 million, or 20% of net
sales, in 2001 as a result of certain cost cutting measures that
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

14



---



##### Table of Contents



two outstanding litigation cases. In addition,
during 2001, significant marketing and promotional costs were
incurred in connection with product launch activities related to
the introduction of the Companys new products, the
Momentum and the Auriga Vision.


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

Merger, Integration and Restructuring.During 2001 and continuing in 2002,
there was a significant decrease in the worldwide demand for
semiconductor capital equipment, which has resulted in inventory
buildups in telecommunications products, slower than expected
personal computer sales and overall slower global economic
growth. This has caused 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. As a result, the Company implemented
additional cost cutting measures in 2002 including the
downsizing and consolidation of operations in the Phoenix, AZ,
Portland, OR and Austin, TX areas and recorded lease termination
costs of $1.1 million and asset impairments of
$1.9 million for a total of $3.0 million related to
these actions.

During the year ended June 2, 2001, the
Company recorded restructuring charges of $8.6 million.
Approximately $3.5 million of restructuring charges related
to the industry downturn and $5.1 million related to the
restructuring associated with the Companys exit from the
manufacturing of silicon wafer and thin film memory disk
polishing equipment. In 2001, slowing worldwide demand for
semiconductors resulted in a rapid decline in demand for
manufacturing equipment. In response, the Company took actions
to substantially reduce overall operating expenses. Cost-cutting
measures included an 18-percent reduction in workforce, a
10-percent salary cutback for executives, the deferment of
management raises until business conditions improve and a
decrease in overall discretionary spending. As a result, the
Company recorded approximately $3.5 million in
restructuring and other special charges related to lease
termination costs of $1.7 million; severance costs of
$1.0 million for 247 employees, primarily manufacturing
technicians, engineers and field service representatives; and
$0.8 million of other charges. By the end of 2001, the
Company completed the majority of its restructuring activities
in accordance with its previously established plans. In regards
to the $5.1 million of restructuring charges,
$2.7 million related to fixed asset impairments,
$1.2 million related to severance costs for three employees
including a former executive of the Far East Joint Venture; and
$1.2 million related to other restructuring charges
associated with the Companys plan to exit the
manufacturing of wafer and disk polishing products.

During 2000, the Company completed the majority
of its merger, integration and restructuring activities in
accordance with its previous plans established in 1999 at the
time of the merger between SpeedFam International, Inc. and
Integrated Process Equipment Corporation (IPEC). Through
June 1, 2002, the Company recorded $27.0 million in
asset impairment charges and paid and charged to the liability
$22.3 million. The remaining restructuring accrual for
lease termination expenses associated with the merger was
approximately $4.6 million as of June 1, 2002, which
the Company believes is adequate to cover the remaining cash
outlays, primarily lease termination payments on certain vacated
facilities not offset by sublease income. Sublease activity
began in May 2000 is projected to continue through the
Companys lease term.

Other Expense, net.Other expense, net increased to
($6.6) million in 2002 from ($0.8) million in 2001.
Interest expense totaled $7.8 million in both 2002 and
2001, offset by interest income of $1.1 million in 2002 and
$4.7 million in 2001. The decrease in interest income
resulted from lower average balances in cash, cash equivalents
and short-term investments as well as a reduction in interest
rates that occurred during 2002 yielding lower interest income
when compared to 2001. In addition, a $1.8 million gain on
sale of land was recorded in 2001.

Gain (Loss) on Disposal of Investment in
Affiliate.In the first quarter of
2001, the Company recorded a $10.8 million loss on disposal
of investment in an affiliate in connection with the dissolution
of the Far East Joint Venture that occurred on August 30,
2000.

15



---



##### Table of Contents



Equity in Net Earnings of Affiliates.Equity in net earnings of affiliates
was $0.1 million in 2001. During 2001, the Company and
Obara restructured the Far East Joint Venture effectively
dissolving the joint venture; therefore, equity in earnings of
affiliates was only recorded for the first quarter of 2001 and
was not recorded in 2002.

Provision for Income Taxes.At the end 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 carryforward position. As a result, the effective
tax rate for 2002, exclusive of the net tax benefit discussed
below, and 2001 was zero.

The Company recorded a net tax benefit of
approximately $2.5 million in 2002 primarily for a refund
of taxes previously paid related to the Job Creation and
Worker Assistance Act of 2002 (The Act) passed by Congress
in March 2002. The Act temporarily extended the general net
operating loss carryback period to five years. This income tax
benefit was recorded in the fourth quarter, the period in which
the Act was passed, and will not impact future periods.

2001 Compared
with 2000

Net Sales.Net sales
for 2001 were $267.1 million, down 3% from net sales of
$274.0 million in 2000. Sales of CMP systems totaled
$217.4 million, or 81% of net sales, down 6% from
$230.2 million, or 84% of net sales in 2000. Had the
Company not changed its revenue recognition policy to conform to
the requirements of SAB 101, net sales for 2001 would have
been $252.6 million, down 8% from net sales of
$274.0 million in 2000. Sales of CMP systems decreased in
2001 due to the slowing of worldwide demand for semiconductor
manufacturing equipment caused by a rapid decline in demand for
semiconductor devices. Inventory buildups in telecommunication
products, slower than expected personal computer sales and
slower global economic growth have caused semiconductor
companies to reevaluate their capital spending plans. A number
of the Companys customers revised the timing of their
capital spending and rescheduled delivery or canceled existing
orders, resulting in the postponement of equipment delivery and
a decline in new orders and net sales. Net sales for 2001 as
stated above reflect the Companys adoption of SAB 101.

Sales for silicon wafer products in 2001 remained
unchanged at $29.2 million, or 11% of net sales, as
compared to $29.2 million, or 11% of net sales, in 2000.
With the dissolution of the Far East Joint Venture, the Company
has exited from the manufacturing of silicon wafer polishing
equipment, as required by the agreement with Obara. However, the
Company will continue to act as a direct distributor in the
United States and Europe for the silicon wafer polishing
products manufactured by Obara. The silicon wafer market has
experienced continued softness in demand due to ongoing
manufacturing over-capacity caused by various factors including
available capacity and increased production efficiencies due to
the fact that more chips could be produced on a given wafer.

Sales of products for general industrial
applications increased to $20.6 million, or 8% of net
sales, in 2001 compared with $14.7 million, or 5% of net
sales in 2000 due to increased shipments in European markets.

Gross Margin.Excluding special charges of
$31.7 million (primarily inventory writedowns) recorded in
response to the industry slowdown and $3.4 million related
to the exit from the manufacturing of wafer and disk polishing
equipment, gross margin for 2001 was $73.6 million, or 28%
of net sales, compared to $89.5 million, or 33% of net
sales, for 2000. The decrease in gross margin was primarily due
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. Gross margins for 2001 reflect the
Companys adoption of SAB 101, discussed above.
Excluding the effect of SAB 101, gross margin for the year
ended June 2, 2001 was 27% of net sales.

Research, Development and Engineering.In 2001, research, development and
engineering expense increased to $64.0 million, or 24% of
net sales, compared to $53.7 million, or 20% of net sales,
in 2000. The increase was primarily due to asset impairment
charges during 2001 of approximately $6.0 million related
to capital equipment that is no longer used in ongoing research
and development programs. The asset impairment charges included
$2.4 million of equipment that was designed by the Far East
Joint Venture. In

16



---



##### Table of Contents



addition, the Company has incurred incremental
hardware, software and process engineering costs related to the
design and development of the Momentum300 system. The Company
expects to continue investing substantial resources in research,
development and engineering programs.


Selling, General and Administrative.In 2001, selling, general and
administrative expense remained unchanged at $52.4 million,
or 20% of net sales from $52.4 million, or 19% of net
sales, in 2000. During 2001, significant marketing and
promotional costs were incurred in connection with product
launch activities related to the introduction of the
Companys new products, the Momentum and the Auriga
VisionTM. These incremental costs were largely offset
by certain cost cutting measures implemented during 2001 in
response to the industry downturn.

Merger, Integration and Restructuring.During the year ended June 2,
2001, the Company recorded restructuring charges of
$8.6 million. Approximately $5.1 million related to
restructuring associated with the Companys exit from the
manufacturing of silicon wafer and thin film memory disk
polishing equipment and $3.5 million of restructuring
charges were recorded during the quarter ended March 3,
2001 related to the industry downturn. In regards to the
$5.1 million restructuring charges, $2.7 million
related to fixed asset impairments, $1.2 million related to
severance costs for three employees including a former executive
of the Far East Joint Venture; and $1.2 million related to
other restructuring charges associated with the Companys
plan to exit the manufacturing of wafer and disk polishing
products. During the third quarter ended March 3, 2001,
slowing worldwide demand for semiconductors resulted in a rapid
decline in demand for manufacturing equipment. In response, the
Company took actions to substantially reduce overall operating
expenses. Cost-cutting measures included an 18-percent reduction
in workforce, a 10-percent salary cutback for executives, the
deferment of management raises until business conditions improve
and a decrease in overall discretionary spending. As a result,
the Company recorded approximately $3.5 million in
restructuring and other special charges related to lease
termination costs of $1.7 million; severance costs of
$1.0 million for 247 employees, primarily manufacturing
technicians, engineers and field service representatives; and
$0.8 million of other charges. By the end of 2001, the
Company completed the majority of its restructuring activities
in accordance with its previously established plans.

Other Expense, net.Other expense, net increased to
($0.8) million in 2001 from ($0.5) million in 2000.
Interest expense totaled $7.8 million in 2001 and
$8.0 million in 2000, offset by interest income of
$4.7 million in 2001 and $6.8 million in 2000. The
decrease in interest income resulted from lower average balances
in cash, cash equivalents and short-term investments as well as
a reduction in interest rates that occurred during 2001 yielding
lower interest income when compared to 2000. In addition, a
$1.8 million gain on sale of land was recorded in 2001.

Gain (Loss) on Disposal of Investment in
Affiliate and Equity in Net Earnings (Loss) of Affiliates.In the first quarter of 2001, the
Company recorded a $10.8 million loss on disposal of
investment in affiliate in connection with the dissolution of
the Far East Joint Venture that occurred on August 30,
2000. During 2000, the Company recorded a $6.1 million gain
on the sale of the Companys 50% interest in its joint
venture, Fujimi Corporation.

Equity in Net Earnings (Loss) of Affiliates.Equity in net earnings of affiliates
was $0.1 million in 2001 compared to equity in net loss of
$3.3 million in 2000. During 2001, the Company and Obara
restructured the Far East Joint Venture effectively dissolving
the joint venture; therefore, equity in earnings of affiliates
was only recorded for the first quarter of 2001. Included in
equity in net loss of affiliates for 2000 are charges recorded
by the former Far East Joint Venture for certain asset
impairments, severance costs and other reorganization costs to
account for the slowdown in the thin film memory disk media
market and the transition of CMP research and development
operations to the Company. The Companys share of this
charge was approximately $2.9 million.

Provision for Income Taxes.At the end of 2001 and 2000, the
Company established a valuation allowance for deferred tax
assets generated by its operating losses and is in a net
operating loss carryforward position. As a result, the effective
tax rate for 2001 and 2000 was zero.

17



---



##### Table of Contents



Liquidity and Capital Resources

As of June 1, 2002, the Company had
$33.4 million in cash, cash equivalents and short-term
investments compared to $60.8 million at June 2, 2001.
The Company used $25.4 million of cash in operating
activities during 2002 compared to $30.0 million in 2001.
During 2002, $4.0 million of cash was used for working
capital requirements. The net loss of $94.1 million
included non-cash items totaling $64.4 million: fixed asset
impairments and the non-cash portion of restructuring charges of
$48.1 million; contribution of stock to employee benefit
plan of $0.2 million; cumulative effect of change in
accounting principle of $2.6 million and depreciation and
amortization expense of $13.5 million.

Net cash provided by investing activities totaled
$10.0 million in 2002 compared with $4.3 million in
2001. The Company incurred capital expenditures of
$3.2 million and $15.3 million in 2002 and 2001,
respectively. The majority of the cash was used to fund building
improvements and laboratory equipment in 2002. During 2002,
proceeds of maturing investments totaled $13.5 million, and
in 2001 proceeds from maturing investments, net of investment
purchases, totaled $15.3 million. Asset sales also
generated proceeds of $8.1 million in 2001.

Financing activities provided $1.3 million
and $1.7 million during 2002 and 2001, respectively. The
sale of stock to employees and the exercise of stock options
generated proceeds of $1.4 million and 3.4 million in
2002 and 2001, respectively. Principal payments on capital lease
obligations amounted to $0.1 million in 2002 compared to
$1.6 million in 2001. Total long-term debt was
$115.0 million at June 1, 2002 compared to
$115.1 million at the end of the prior year.

The Company has incurred operating losses of
$87.3 million and $86.5 million in 2002 and 2001,
respectively. Coinciding with these operating losses, the
Company has incurred a decrease in its cash and investment
balances of $27.5 million and $39.4 million in 2002
and 2001, respectively.

On June 21, 2002, the Company completed a
sale-leaseback transaction of its corporate headquarters and
research and development facilities in Chandler, Arizona. As a
result of the transaction, the Company received net cash
proceeds of approximately $23.7 million. The book value of
buildings and improvements removed from the balance sheet in the
first quarter of 2003 was $25.1 million. The loss on the
sale of the buildings was immaterial. The Company simultaneously
entered into a 15-year lease for the buildings which contains
provisions for three five-year extensions and requires minimum
annual rental payments of $3.0 million. Annual operating
expenses will increase by approximately $2.4 million,
reflecting the new rental payments, offset by interest income on
the net proceeds and reduced depreciation expense.

During 2001 and continuing in 2002, there was a
significant decrease in the worldwide demand for semiconductor
capital equipment. As a result of a rapid decline in the demand
for semiconductor devices, inventory buildups in
telecommunications products, slower than expected personal
computer sales and overall slower global economic growth, many
semiconductor manufacturers reevaluated their capital spending
plans. Accordingly, several of the Companys customers
rescheduled delivery or canceled existing orders. Furthermore,
the Company experienced a substantial decline in new orders. In
response to industry conditions and the introduction of new
products that are technologically advanced, the Company recorded
significant inventory write-downs, charges related to asset
impairments and severance costs related to across-the-board
headcount reductions. In addition, the Company implemented
measures to reduce discretionary spending.

Due to the continuation and severity of the
industry-wide downturn, the Company implemented additional
cost-cutting measures during 2002, which included further
decreases in discretionary spending and reductions in worldwide
headcount. Despite the expected continuation of the
industry-wide downturn and uncertainty associated with the
introduction of new products, and taking into account the
Companys actions to restructure and downsize the Company,
management believes that the Companys current cash and
investment balances along with net cash generated through
operations and the proceeds of the sale-leaseback of its
corporate headquarters and research and development facilities
will be sufficient to meet the Companys anticipated cash
needs for working capital and capital expenditures at least
through May 31, 2003. However, due to significant
uncertainties related to the duration and severity of the
semiconductor industry downturn and overall economic conditions,
the Company may require additional sources of funds in order to
strengthen

18



---



##### Table of Contents



its working capital position. Based on
discussions with various lenders, the Company believes that the
sources of funds available include a line of credit facility and
term debt. If the Company were to raise additional funds through
the issuance of equity securities, the percentage ownership of
the Companys stockholders would be reduced. In addition,
these equity securities may have rights, preferences or
privileges senior to the Companys common stock.
Furthermore, the Company may need to raise additional funds in
future periods through public or private financing, or other
sources, to fund working capital requirements driven by the
expansion of the business during the industrys upturn.
There are no assurances that the Company will be able to
consummate any of these transactions. For more detailed
information, see Certain Factors Affecting the
Companys Business, set forth below.


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

Related Party Transactions

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

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

As a result of the transaction, the Company
received net cash proceeds of approximately $23.7 million.
The book value of buildings and improvements removed from the
balance sheet in the first quarter of 2003 is
$25.1 million. The loss on the sale of the buildings was
immaterial.

During 2002, 2001 and 2000, the Company had
purchases of raw materials of approximately $0.3 million,
$6.2 million and $2.9 million, respectively, from
Berkeley Process Controls, a California-based company, that is
affiliated with a former member of the Companys Board of
Directors.

Changes in Accounting Principles

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

Prior to the implementation of SAB 101, the
Company recognized revenue from the sale of its products
generally upon shipment. Effective June 4, 2000, the
Company changed its method of recognizing revenue for

19



---



##### Table of Contents



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 below for a description of the Companys
revenue recognition policy). Due to the cyclical nature of the
semiconductor capital equipment industry, and the Companys
dependence on a relatively small number of large sales, the
change in the Companys revenue recognition practices could
have a material affect on recorded revenue in any particular
reporting period. In periods of declining business, such as the
current environment, revenues would exceed shipments, and in
periods of increasing revenues, shipments would exceed revenues.


In June 2001, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards
(SFAS) No. 142, Goodwill and Other Intangible
Assets. Under SFAS No. 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 No. 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 No. 142 in the first quarter of 2002.
Based on the implementation of the non-amortization,
impairment-only accounting approach, it was determined that an
impairment charge of $2.6 million representing the carrying
value of goodwill as of June 3, 2001 should be recorded.
Accordingly, the Company recorded the cumulative effect of the
change in accounting principle of ($2.6) million, or ($0.08) per
share, as of the beginning of 2002 (June 3, 2001) as a
charge in the first quarter of 2002. Net loss for 2001 would
have been ($133.5) million or ($4.46) per share if the
accounting change related to goodwill required by SFAS
No. 142 had been applied to 2001. Net loss for 2000 would
have been ($13.2) million or ($0.45) per share if the accounting
change related to goodwill required by SFAS No. 142 had
been applied to 2000.

Critical Accounting Policies and Accounting
Estimates

Managements Discussion and Analysis of the
Financial Condition and Results of Operations of SpeedFam-IPEC,
Inc. is based upon the Companys consolidated financial
statements, which have been prepared in accordance with the
United States generally accepted accounting principles (GAAP).
The preparation of these financial statements requires the
Company to make estimates and assumptions that affect the
reported amounts of assets and liabilities as of the date of the
financial statements, the disclosure of contingent assets and
liabilities as of the date of the financial statements, and the
reported revenue and expenses during the reported periods. On a
continual basis, the Company evaluates its estimates, including
those related to valuation of inventories, collectability of
accounts receivable, long-lived and intangible assets, income
taxes, warranty obligations, and contingencies. The Company
operates in a highly cyclical and competitive industry that is
influenced by a variety of factors, including, but not limited
to, rapid technological advances, product life cycles, customer
and supplier lead times, and general economic conditions.
Estimating product demand beyond a relatively short forecasting
horizon is difficult and prone to forecasting error due to the
cyclical nature and inherent lack of visibility in the industry.
The Company bases its estimates on historical experience, and on
various other assumptions that it believes to be reasonable
under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and
liabilities that are not readily apparent from other sources.
Actual results may differ from these estimates under different
assumptions or conditions. The following sets forth the critical
accounting policies used in the preparation of our consolidated
financial statements.

Revenue
Recognition

The Company generates revenues from the sale of
systems, spare parts and service contracts. Prior to the
implementation of SAB 101, the Company recognized revenue from
the sale of our products generally upon shipment. Effective
June 4, 2000, we changed our method of recognizing revenue
for sales of CMP systems to reflect the following approach;



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

20



---



##### Table of Contents



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | approach is used are recorded as shipped systems
    pending acceptance until customer acceptance, at which time cost
    of goods sold is recorded.                                                                                                                                                                                                                                                                                                                  
|
| |  | For CMP system sales to existing customers who
    have previously purchased the same system with the same
    customer-specified acceptance provisions, revenue is recognized
    under a multiple-element arrangement. Accordingly, upon
    shipment, the contractual amount payable by the customer is
    recorded as revenue and title is transferred. The remainder is
    recorded as deferred revenue and recognized as revenue upon
    customer acceptance.

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

Inventory and
Purchase Order Commitments

We value our inventory at the lower of cost or
the current estimated market value. We regularly review
inventory quantities on hand and record a provision for excess
and obsolete inventory. The determination of the provision
requires that we make significant assumptions about future
demand for products (typically a twelve to twenty-four month
future demand horizon) and the transition to new product
offerings from legacy products. As demonstrated in the past
twenty-four months, demand for our products can fluctuate
significantly, which could result in an increase in the cost of
inventory purchases or an increase in the amount of excess
inventory quantities on hand. Also, our industry is
characterized by rapid technological changes, frequent new
product developments, and rapid product obsolescence. This could
result in an increase in the amount of obsolete inventory
quantities on hand. In 2001 and 2002, we recorded significant
inventory write-downs for obsolete inventory and inventory in
excess of forecasted requirements.

We also reserve against open purchase order
commitments in which our estimated obligation to receive
inventory under these commitments exceeds expected production
demand. These assumptions include, but are not limited to,
future manufacturing schedules, customer demand, supplier lead
time and technological and market obsolescence. If market
conditions are less favorable than those projected by
management, additional inventory provisions may be required.

Allowance for
Doubtful Accounts

We maintain allowances for doubtful accounts for
estimated losses resulting from the inability of our customers
to make required payments for products and services. These
allowances are established based upon historical experience,
credit evaluations and specific customer collection issues we
have identified. Since our accounts receivable are concentrated
in a relatively few number of customers, a significant change in
the liquidity or financial position of any one of these
customers could have a material adverse impact on the
collectability of our accounts receivable and our future
operating results. Collection of some accounts receivable are
conditioned upon system acceptance. We have on occasion
experienced longer than expected delays in receiving cash from
certain customers until CMP system acceptance was completed. If
some of our customers refuse to accept our CMP systems and
withhold payment of account receivable, the allowance for
doubtful accounts and future operating results may be adversely
affected.

Valuation
Allowance on Deferred Tax Assets

We review deferred tax assets generated by our
operating losses quarterly and are currently in a net operating
loss carryforward position. Based upon available data, which
includes historical operating performance, we have provided a
full valuation allowance against our net deferred tax assets
June 1, 2002, as the future realization of the tax benefit
is not sufficiently assured. Should we determine that we will be
able to realize all or part of our deferred tax assets in the
future, an adjustment to the valuation would be made in the
period the determination was made.

21



---



##### Table of Contents



Product
Warranty Costs

We generally warrant our systems for a period of
up to 12 months from shipment for material and labor to
repair and service a system. A provision for the estimated cost
of warranty is recorded at the time product revenue is
recognized. On occasion, we have been required and may be
required in the future to provide an extended warranty period to
ensure that the systems are ultimately accepted. While our
warranty costs have historically been within our expectations
and provisions established, we cannot guarantee that we will
continue to experience a similar level of predictability with
regard to warranty costs. In addition, new technological changes
and frequent product development may result in products
requiring more extensive and frequent warranty service, which
may have a material adverse impact on our operating results for
the periods in which such additional costs materialize.

Impairment of
Long-lived and Intangible Assets

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

Contractual Obligations and Commercial
Commitments

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

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

|                      |  |      |         |           |  |             |        |  |  |   |       | 
|--------------------- |  | ---- | ------- | --------- |  | ----------- | ------ |  |  | - | ----- | 
|                      |  |      |         | Operating |  | Commercial 
|                      |  | Debt |         | Leases(1) |  | Commitments
|                      |  |      |         |           |  |            
|Through May 2003      |  | $    | 65      |           |  | $           | 4,309  |  |  | $ | 7,238 | 
|June 2003 to May 2006 |  |      | 115,054 |           |  |             | 10,968 |  |  |   | 10    | 
|June 2006 to May 2008 |  |      |        |           |  |             | 6,599  |  |  |   |      | 
|Thereafter            |  |      |        |           |  |             | 33,487 |  |  |   |      | 
|                      |  |      |         |           |  |             |        |  |  |   |       | 
|Total                 |  | $    | 115,119 |           |  | $           | 55,363 |  |  | $ | 7,248 | 
|                      |  |      |         |           |  |             |        |  |  |   |       | 



---



|    |                                                                                                                                                                                                                                      
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Reported amounts for operating leases have been
    reduced for income from subleases. Sublease income is as
    follows: $2,375 through May 2003, $7,619 June 2003 to May 2006;
    $5,106 June 2006 to May 2008; $9,210 thereafter.

Impact of Recently Issued Accounting
Standards

In June 2001, the Financial Accounting Standards
Board issued SFAS No. 143, Accounting for Asset
Retirement Obligations. SFAS No. 143 addresses
financial accounting and reporting for obligations associated
with the retirement of tangible long-lived assets and the
associated asset retirement costs. This Statement applies to all
entities and applies to legal obligations associated with the
retirement of long-lived

22



---



##### Table of Contents



assets that result from the acquisition,
construction, development and (or) the normal operation of
a long-lived asset, except for certain obligations of lessees.
It requires that the fair value of a liability for an asset
retirement obligation be recognized in the period in which it is
incurred if a reasonable estimate of fair value can be made. The
associated asset retirement costs would be capitalized as part
of the carrying amount of the long-lived asset. SFAS
No. 143 is effective for financial statements issued for
fiscal years beginning after June 15, 2002. The Company has
not yet determined the effects SFAS No. 143 will have on
its financial position, results of operations or cash flows.


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

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

In June 2002, the Financial Accounting Standards
Board issued SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities. SFAS No. 146
requires that a liability for a cost associated with an exit or
disposal activity be recognized when the liability is incurred.
Prior guidance required that a liability for an exit cost be
recognized at the date of an entitys commitment to an exit
plan. This Statement also establishes that fair value is the
objective for initial measurement of the liability. SFAS
No. 146 is effective for exit or disposal activities that
are initiated after December 31, 2002.

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING
STATEMENTS

This annual report on Form 10-K, includes
statements that constitute forward-looking
statements within the meaning of the Private Securities
Litigation Reform Act of 1995 (the Reform Act) and
SpeedFam-IPEC, Inc. claims the protection of the safe-harbor for
forward-looking statements contained in the Reform Act. 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 annual report on Form 10-K, in the Notes
to Consolidated Financial Statements, and under the captions
Business and Managements Discussion and
Analysis of Financial Condition and Results of Operations
include, but are not limited to: (i) the Companys
belief that it is achieving success in the evaluation process
and that such success will lead to additional tool of record
designations; (ii) the Companys anticipation that
several tool of record decisions will be made over the next
several months, thereby facilitating significant equipment
sales; (iii) the Companys assertion that the
semiconductor market will rebound and that new fabrication
facilities will be built; (iv) the Companys belief
that its current properties will be sufficient to meet the
Companys requirements for the foreseeable future;
(v) the Companys expectation that it will continue to
invest substantial resources in research, development, and
engineering programs; (vi) managements belief that
the current cash and investment balances, along with net cash
generated

23



---



##### Table of Contents



through operations will be sufficient to meet the
Companys anticipated cash needs at least through
May 31, 2003; and (vii) the Companys belief that
the merger will be successful.


Forward-looking statements involve risks,
uncertainties and other factors which may cause actual results,
performance or achievements of the Company to be materially
different from those expressed or implied by such
forward-looking statements. Factors that could affect the
Company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. The Company
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, the Companys business, financial
condition and results of operations could be seriously harmed.

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

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

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



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

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

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

24



---



##### Table of Contents



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.During 2002, we
used $25.4 million in operating activities compared to
$30.0 million during the same period of the prior year. We
are currently exploring options to generate positive cash flow,
including continued reduction in operating expenses. However, we
continue to experience depressed revenues and orders and we are
unable to determine when increasing demand for our products will
resume, if ever. Accordingly, we can provide no assurances that
we will achieve a positive cash flow position in the future or
obtain or generate sufficient cash proceeds from financings to
sustain our operations.

Our common stock may be delisted by Nasdaq if
we do not comply with its listing maintenance requirements.Our common stock is listed on the
Nasdaq National Market. We are currently in compliance with
Nasdaqs continued listing requirements. However, if the
price of our common stock falls below $3 for 30 consecutive days
and if our stockholders equity falls below
$10 million, or if we are not otherwise able to demonstrate
to Nasdaq our ability to comply with its other listing
standards, our shares of common stock might be delisted. A
delisting is likely to make the price of our common stock fall
steeply. This lack of liquidity also could make it more
difficult for us to raise capital in the future. As of
June 1, 2002 our stockholders equity was $13.8 million
and our stock price as quoted on Nasdaq was $2.85 per share as
of July 31, 2002.

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

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

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



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

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

25



---



##### Table of Contents



Our dependence on selling a small number of
high-priced machines to a small number of major customers may
lead to reduced revenues and profits should our customers delay
or cancel delivery orders.We derive a
significant portion of our revenue from the sale of a relatively
small number of high-priced CMP systems to a select group of CMP
customers. The loss of a significant customer or a substantial
reduction in orders by any significant customer, including
reductions due to customer departures from previous buying
patterns, would damage our business and results of operations.
Moreover, we are subject to the credit risk of our customers.
Consequently, if any one of our significant customers delays
payment or is unable to pay, our financial condition and
business would be affected.

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



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

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

The downturn in the semiconductor industry has
led and may continue to lead to decreased revenues.During 2001 and 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 fiscal 2002, we experienced
cancellations and suspensions of orders for our products and a
significant decrease in orders. Although we experienced a
significant increase in bookings during the fourth quarter, we
are uncertain as to the timing of a significant and sustainable
industry recovery. If the downturn continues or worsens, we may
experience additional cancellations and/or suspensions of orders
for our products and a continuing slowdown in orders.

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



| |   |                                                                                                                                                
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------
| |  | industry demand for our products, which depends
    on economic conditions in the semiconductor and silicon wafer
    markets;                 
|
| |  | timing of new product introductions and market
    acceptance of new or enhanced versions of our or our
    customers products;               
|
| |  | ability to develop and implement new technologies
    in a timely fashion to meet market demand;                                               
|
| |  | the health of other industries on which we are
    dependant, such as the personal computer, telecommunications and
    electronics industries;
|
| |  | consolidation in the chip manufacturing industry;                                                                                              
|
| |  | the actions of our competitors;                                                                                                                

26



---



##### Table of Contents





| |   |                                                                                           
| | - | ------------------------------------------------------------------------------------------
| |  | timing, cancellation or delay of customer orders,
    shipments and acceptance;           
|
| |  | unexpected costs associated with sales and
    service of the CMP tools and processes; and
|
| |  | foreign currency exchange rates.                                                          

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



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

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

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



| |   |                                                                                                                                                                                                                                                                                                                                             
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Some competitors have greater financial resources
    and are in better financial condition than us.                                                                                                                                                                                                                                        
|
| |  | Some competitors have more extensive engineering,
    manufacturing, marketing and customer service and support
    capabilities.                                                                                                                                                                                                           
|
| |  | Some competitors may supply a broader range of
    semiconductor capital equipment, enabling them to serve more or
    all of their customers needs. This could limit sales for
    us and strengthen existing relationships that competitors have
    with semiconductor manufacturers, including our current and
    potential customers.
|
| |  | Some competitors may be able to better adapt to
    changing market conditions and customer demand.                                                                                                                                                                                                                                         
|
| |  | Competitors are expected to continue to improve
    their existing technology and introduce new products. These
    products may be better than ours, cheaper than ours or more
    efficient than ours.                                                                                                                                    
|
| |  | Other capital equipment manufacturers not
    currently involved in the development of CMP systems may enter
    the market or develop technology that reduces the need for our
    products.                                                                                                                                               

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

27



---



##### Table of Contents



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



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

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

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



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

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

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



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

International sales accounted for 64% of our
total revenue for 2002, 61% for 2001, and 70% for 2000. We
expect that international sales will continue to account for a
significant portion of total revenue in future periods. If
international sales are adversely effected as a result of any of
the foregoing risks or uncertainties, our cash flows and
financial condition would be similarly effected.

28



---



##### Table of Contents



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



| |   |                                                                                                                                                                                                                     
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | pending and new patent applications may not be
    approved in a timely manner or approved at all;                                                                                                                  
|
| |  | third parties may try to challenge or invalidate
    existing patents and new patents;                                                                                                                              
|
| |  | policing unauthorized use of intellectual
    property is difficult and expensive;                                                                                                                                  
|
| |  | the laws of some foreign countries do not protect
    intellectual property rights as much as U.S. laws;                                                                                                            
|
| |  | competitors may independently develop similar
    technology or design around our intellectual property;                                                                                                            
|
| |  | third parties may prevent us from selling
    products by alleging infringement, obtaining intellectual
    property rights that limit our ability to do business or require
    us to license technology; and      
|
| |  | we may not have adequate financial resources to
    address a dispute.                                                                                                                                              
|
| |  | The occurrence of any of the foregoing risks or
    uncertainties concerning our intellectual property could make us
    less competitive and adversely affect our revenues, cash flows
    and financial condition.

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

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

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




Item 7A.     Quantitative
and Qualitative Disclosures about Market Risk.

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

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

The Company has no cash flow exposure due to rate
changes for cash equivalents and short-term investments, as all
of these investments are at fixed interest rates. Long-term debt
is at a fixed interest rate.

29



---



##### Table of Contents



The long-term debt was primarily incurred in
connection with the Companys issuance of convertible
subordinated notes.


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

|                 |                       |      |        |      |   |      |         |      |   |      |    |            |  |       |   |            |  |  |   |   |  |  |   |   |  |   |         |      |   |   |        |  | 
|---------------- | --------------------- | ---- | ------ | ---- | - | ---- | ------- | ---- | - | ---- | -- | ---------- |  | ----- | - | ---------- |  |  | - | - |  |  | - | - |  | - | ------- | ---- | - | - | ------ |  | 
|                 |                       |      |        |      |   |      |         |      |   |      |    |            |  |       |   | Fair Value
|                 |                       |      |        |      |   |      |         |      |   |      |    |            |  |       |   | June 1,   
|                 |                       | 2003 |        | 2004 |   | 2005 |         | 2006 |   | 2007 |    | Thereafter |  | Total |   | 2002      
|                 |                       |      |        |      |   |      |         |      |   |      |    |            |  |       |   |           
|Cash equivalents |                       | $    | 33,358 |      |   |      |        |      |   |      |   |            |  |       |  |            |  |  |  |   |  |  |  |   |  | $ | 33,358  |      |   | $ | 33,358 | 
|                 | Average interest rate |      |        | 2.00 | % |      |         |     |   |      |    |           |  |       |   |           |  |  |   |  |  |  |   |  |  |   |         | 2.00 | % |   |        |  | 
|Long term debt   |                       | $    | 65     |      |   |      | 115,040 |      |   |      | 14 |            |  |       |  |            |  |  |  |   |  |  |  |   |  | $ | 115,119 |      |   | $ | 73,006 | 
|                 | Average interest rate |      |        | 2.73 | % |      |         | 6.25 | % |      |    |           |  |       |   |           |  |  |   |  |  |  |   |  |  |   |         | 6.24 | % |   |        |  | 

Foreign Currency Risk.The Company transacts business in
various foreign countries. Its primary foreign currency cash
flows are in countries in Asia and Europe. During 2002, 2001 and
2000, the Company utilized financial instruments such as forward
exchange contracts to hedge a portion, but not all, of its firm
commitments denominated in foreign currencies, and uses currency
option contracts to hedge a portion, but not all, of its
anticipated and uncommitted transactions expected to be
denominated in foreign currencies. The terms of currency
instruments used for hedging purposes are generally consistent
with the timing of the committed or anticipated transactions
being hedged. The purpose of the Companys foreign currency
management is to minimize the effect of exchange rate changes on
actual cash flows from foreign currency denominated
transactions. The Company recognizes all derivatives, including
foreign currency exchange contracts, as either assets or
liabilities on the balance sheet and measures the 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, are recognized in earnings. At June 1, 2002,
the Companys foreign exchange contracts were not
considered effective hedges. Those forward exchange contracts
that have been marked to market are included in accounts payable
and accrued expenses on the Companys Consolidated Balance
Sheet. To date, premiums paid for currency option contracts have
not been material. The Company does not use derivative financial
instruments for trading or speculative purposes.

The following table provides information as of
June 1, 2002 about the Companys derivative financial
instruments, which are comprised of foreign currency forward
exchange contracts. The information is provided in U.S. dollar
equivalent amounts, as presented in the Companys financial
statements. The table presents the notional amounts (at the
contract exchange rates), the weighted average contractual
foreign currency exchange rates, and the estimated fair value of
those contracts.

|                                             |                         |                          |   |               |   |             |  |        |  |  |   |     |  
|-------------------------------------------- | ----------------------- | ------------------------ | - | ------------- | - | ----------- |  | ------ |  |  | - | --- | -
|                                             |                         |                          |   |               |   | Estimated  
|                                             |                         | Notional                 |   | Average       |   | Fair Value 
|June 1, 2002                                 |                         | Amount                   |   | Contract Rate |   | Gain/(Loss)
|                                             |                         |                          |   |               |   |            
|                                             |                         |                         
|                                             |                         | In thousands, except for
|                                             |                         | average contract rate   
|Foreign currency forward exchange contracts: |                         |                          |   |               |   |             |  |        |  |  |   |    
|                                             | Japanese yen, purchases |                          | $ | (65           | ) |             |  | 127.20 |  |  | $ | (3  | )
|                                             | Japanese yen, sales     |                          | $ | 2,193         |   |             |  | 134.65 |  |  | $ | 205 |  
|                                             | Euro, sales             |                          | $ | 59            |   |             |  | 1.03   |  |  | $ | 3   |  

30



---



##### Table of Contents






Item 8.     Financial
Statements and Supplementary Data.

The information required by this item is set
forth in the Consolidated Financial Statements filed with this
report.

31



---



##### Table of Contents



INDEPENDENT AUDITORS REPORT

The Board of Directors

SpeedFam-IPEC, Inc.:


We have audited the accompanying consolidated
balance sheets of SpeedFam-IPEC, Inc. and subsidiaries as of
June 1, 2002 and June 2, 2001, and the related
consolidated statements of operations, stockholders equity
and comprehensive income, and cash flows for each of the three
fiscal years in the period from June 1, 1999 through
June 1, 2002. These consolidated financial statements are
the responsibility of the management of SpeedFam-IPEC, Inc. Our
responsibility is to express an opinion on these consolidated
financial statements based on our audits.

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

In our opinion, the financial statements referred
to above present fairly, in all material respects, the financial
position of SpeedFam-IPEC, Inc. and consolidated subsidiaries as
of June 1, 2002 and June 2, 2001, and the results of
their operations and their cash flows for each of the three
fiscal years in the period from June 1, 1999 through
June 1, 2002 in conformity with accounting principles
generally accepted in the United States of America.

As discussed in Note 5 to the consolidated
financial statements, the Company changed its method of
accounting for goodwill in fiscal 2002 and its method of
accounting for revenue in fiscal 2001.



| |                  
| | -----------------
| | KPMG LLP         
|
| | Chicago, Illinois
| | June 28, 2002    

32



---



##### Table of Contents



SPEEDFAM-IPEC, INC.

CONSOLIDATED BALANCE SHEETS

June 1, 2002 and June 2,
2001


|                                         |                                                                                                                                                              |                                            |        |          |         |  |        |          |         | 
|---------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------ | ------------------------------------------ | ------ | -------- | ------- |  | ------ | -------- | ------- | 
|                                         |                                                                                                                                                              | 2002                                       |        | 2001    
|                                         |                                                                                                                                                              |                                            |        |         
|                                         |                                                                                                                                                              |                                           
|                                         |                                                                                                                                                              | (In thousands)                            
|ASSETS                                  
|Current assets:                          |                                                                                                                                                              |                                            |        |          |         |  |        |         
|                                         | Cash and cash equivalents                                                                                                                                    |                                            | $      | 33,358   |         |  | $      | 47,344   |        
|                                         | Short-term investments                                                                                                                                       |                                            |        |         |         |  |        | 13,495   |        
|                                         | Trade accounts receivable, less allowance for
    doubtful accounts of $2,659 in 2002 and $2,907 in 2001.                                                    |                                            |        | 22,162   |         |  |        | 60,619   |        
|                                         | Inventories                                                                                                                                                  |                                            |        | 44,545   |         |  |        | 88,059   |        
|                                         | Shipped systems pending acceptance                                                                                                                           |                                            |        | 9,175    |         |  |        | 13,953   |        
|                                         | Prepaid expenses and other current assets                                                                                                                    |                                            |        | 3,896    |         |  |        | 4,549    |        
|                                         |                                                                                                                                                              |                                            |        |          |         |  |        |         
|                                         |                                                                                                                                                              | Total current assets                       |        |          | 113,136 |  |        |          | 228,019 | 
|Property, plant, and equipment, net      |                                                                                                                                                              |                                            | 58,007 |          |         |  | 75,241 |         
|Other assets                             |                                                                                                                                                              |                                            | 5,684  |          |         |  | 11,625 |         
|                                         |                                                                                                                                                              |                                            |        |          |         |  |        |         
|                                         |                                                                                                                                                              | Total assets                               |        | $        | 176,827 |  |        | $        | 314,885 | 
|                                         |                                                                                                                                                              |                                            |        |          |         |  |        |         
|LIABILITIES AND STOCKHOLDERS
    EQUITY
|Current liabilities:                     |                                                                                                                                                              |                                            |        |          |         |  |        |         
|                                         | Current portion of long-term debt                                                                                                                            |                                            | $      | 65       |         |  | $      | 229      |        
|                                         | Accounts payable                                                                                                                                             |                                            |        | 11,061   |         |  |        | 23,314   |        
|                                         | Deferred systems revenue                                                                                                                                     |                                            |        | 18,238   |         |  |        | 46,281   |        
|                                         | Accrued liabilities                                                                                                                                          |                                            |        | 13,904   |         |  |        | 18,675   |        
|                                         |                                                                                                                                                              |                                            |        |          |         |  |        |         
|                                         |                                                                                                                                                              | Total current liabilities                  |        |          | 43,268  |  |        |          | 88,499  | 
|                                         |                                                                                                                                                              |                                            |        |          |         |  |        |         
|Long-term liabilities:                   |                                                                                                                                                              |                                            |        |          |         |  |        |         
|                                         | Long-term debt                                                                                                                                               |                                            |        | 115,054  |         |  |        | 115,124  |        
|                                         | Other liabilities                                                                                                                                            |                                            |        | 4,620    |         |  |        | 5,321    |        
|                                         |                                                                                                                                                              |                                            |        |          |         |  |        |         
|                                         |                                                                                                                                                              | Total long-term liabilities                |        |          | 119,674 |  |        |          | 120,445 | 
|                                         |                                                                                                                                                              |                                            |        |          |         |  |        |         
|Stockholders equity:                    |                                                                                                                                                              |                                            |        |          |         |  |        |         
|                                         | Common stock, no par value, 60,000 shares
    authorized, 30,672 and 30,116 shares issued and outstanding at
    June 1, 2002 and June 2, 2001, respectively |                                            |        | 1        |         |  |        | 1        |        
|                                         | Additional paid-in capital                                                                                                                                   |                                            |        | 435,663  |         |  |        | 434,090  |        
|                                         | Retained deficit                                                                                                                                             |                                            |        | (423,049 | )       |  |        | (328,977 | )      
|                                         | Accumulated comprehensive income                                                                                                                             |                                            |        | 1,270    |         |  |        | 827      |        
|                                         |                                                                                                                                                              |                                            |        |          |         |  |        |         
|                                         |                                                                                                                                                              | Total stockholders equity                 |        |          | 13,885  |  |        |          | 105,941 | 
|                                         |                                                                                                                                                              |                                            |        |          |         |  |        |         
|                                         |                                                                                                                                                              | Total liabilities and stockholders equity |        | $        | 176,827 |  |        | $        | 314,885 | 
|                                         |                                                                                                                                                              |                                            |        |          |         |  |        |         

See accompanying notes to consolidated financial
statements.

33



---



##### Table of Contents



SPEEDFAM-IPEC, INC.

CONSOLIDATED STATEMENTS OF
OPERATIONS

Years Ended June 1, 2002, June 2,
2001 and June 3, 2000


|                                                                     |                                        |                                                         |                                                         |        |       |         |         |        |       |          |         |        |       |         |  
|-------------------------------------------------------------------- | -------------------------------------- | ------------------------------------------------------- | ------------------------------------------------------- | ------ | ----- | ------- | ------- | ------ | ----- | -------- | ------- | ------ | ----- | ------- | -
|                                                                     |                                        | 2002                                                    |                                                         | 2001   |       | 2000   
|                                                                     |                                        |                                                         |                                                         |        |       |        
|                                                                     |                                        |                                                        
|                                                                     |                                        | (In thousands, except per share data)                  
|Net sales                                                            |                                        | $                                                       | 119,166                                                 |        |       | $       | 267,080 |        |       | $        | 274,048 |       
|Cost of sales                                                        |                                        |                                                         | 128,909                                                 |        |       |         | 228,545 |        |       |          | 184,527 |       
|                                                                     |                                        |                                                         |                                                         |        |       |         |         |        |       |          |         |       
|                                                                     |                                        |                                                         | Gross margin                                            |        |       | (9,743  | )       |        |       | 38,535   |         |        |       | 89,521  |  
|                                                                     |                                        |                                                         |                                                         |        |       |         |         |        |       |          |         |       
|Operating expenses:                                                  |                                        |                                                         |                                                         |        |       |         |         |        |       |          |         |       
|                                                                     | Research, development, and engineering |                                                         |                                                         | 44,665 |       |         |         | 64,026 |       |          |         | 53,714 |      
|                                                                     | Selling, general, and administrative   |                                                         |                                                         | 28,131 |       |         |         | 52,436 |       |          |         | 52,356 |      
|                                                                     | Litigation settlement cost             |                                                         |                                                         | 1,800  |       |         |         |       |       |          |         |       |      
|                                                                     | Merger, integration, and restructuring |                                                         |                                                         | 3,000  |       |         |         | 8,583  |       |          |         |       |      
|                                                                     |                                        |                                                         |                                                         |        |       |         |         |        |       |          |         |       
|                                                                     |                                        |                                                         | Total operating expenses                                |        |       | 77,596  |         |        |       | 125,045  |         |        |       | 106,070 |  
|                                                                     |                                        |                                                         |                                                         |        |       |         |         |        |       |          |         |       
|                                                                     |                                        |                                                         | Operating loss                                          |        |       | (87,339 | )       |        |       | (86,510  | )       |        |       | (16,549 | )
|Other expense, net                                                   |                                        |                                                         | (6,633                                                  | )      |       |         | (783    | )      |       |          | (454    | )     
|Gain (loss) on disposal of investment in
    affiliate               |                                        |                                                         |                                                        |        |       |         | (10,763 | )      |       |          | 6,103   |       
|Equity in net earnings (loss) of affiliates                          |                                        |                                                         |                                                        |        |       |         | 110     |        |       |          | (3,278  | )     
|                                                                     |                                        |                                                         |                                                         |        |       |         |         |        |       |          |         |       
|                                                                     |                                        |                                                         | Loss before income taxes                                |        |       | (93,972 | )       |        |       | (97,946  | )       |        |       | (14,178 | )
|Income tax benefit                                                   |                                        |                                                         | 2,482                                                   |        |       |         |        |        |       |          |        |       
|                                                                     |                                        |                                                         |                                                         |        |       |         |         |        |       |          |         |       
|                                                                     |                                        |                                                         | Loss before cumulative effect of accounting
    changes |        |       | (91,490 | )       |        |       | (97,946  | )       |        |       | (14,178 | )
|Cumulative effect of accounting changes                              |                                        |                                                         | (2,582                                                  | )      |       |         | (36,542 | )      |       |          |        |       
|                                                                     |                                        |                                                         |                                                         |        |       |         |         |        |       |          |         |       
|                                                                     |                                        |                                                         | Net loss                                                |        | $     | (94,072 | )       |        | $     | (134,488 | )       |        | $     | (14,178 | )
|                                                                     |                                        |                                                         |                                                         |        |       |         |         |        |       |          |         |       
|Net loss per common share:                                           |                                        |                                                         |                                                         |        |       |         |         |        |       |          |         |       
|                                                                     | Basic and diluted:                     |                                                         |                                                         |        |       |         |         |        |       |          |         |        |      
|                                                                     |                                        | Loss before cumulative effect of accounting
    changes |                                                         | $      | (3.01 | )       |         | $      | (3.27 | )        |         | $      | (0.48 | )      
|                                                                     |                                        | From cumulative effect of accounting changes            |                                                         |        | (0.08 | )       |         |        | (1.22 | )        |         |        |      |        
|                                                                     |                                        |                                                         |                                                         |        |       |         |         |        |       |          |         |       
|                                                                     |                                        | Net loss                                                |                                                         | $      | (3.09 | )       |         | $      | (4.49 | )        |         | $      | (0.48 | )      
|                                                                     |                                        |                                                         |                                                         |        |       |         |         |        |       |          |         |       
|Weighted average shares used in per share
    calculation:           |                                        |                                                         |                                                         |        |       |         |         |        |       |          |         |       
|                                                                     | Basic and diluted                      |                                                         |                                                         | 30,414 |       |         |         | 29,961 |       |          |         | 29,503 |      
|                                                                     |                                        |                                                         |                                                         |        |       |         |         |        |       |          |         |       
|Amounts as if the accounting changes were applied
    retroactively: |                                        |                                                         |                                                         |        |       |         |         |        |       |          |         |       
|Net loss                                                             |                                        | $                                                       | (91,490                                                 | )      |       | $       | (97,003 | )      |       | $        | (35,240 | )     
|                                                                     |                                        |                                                         |                                                         |        |       |         |         |        |       |          |         |       
|Net loss per share:                                                  |                                        |                                                         |                                                         |        |       |         |         |        |       |          |         |       
|                                                                     | Basic and diluted                      |                                                         | $                                                       | (3.01  | )     |         | $       | (3.24  | )     |          | $       | (1.19  | )    
|                                                                     |                                        |                                                         |                                                         |        |       |         |         |        |       |          |         |       

See accompanying notes to consolidated financial
statements.

34



---



##### Table of Contents



SPEEDFAM-IPEC, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS
EQUITY AND

COMPREHENSIVE INCOME


Years Ended June 1, 2002, June 2,
2001 and June 3, 2000


|                                                                |                                                |                |   |            |  |          |         |               |  |       |          |         |   |   |       |       |   |   |          |         |  
|--------------------------------------------------------------- | ---------------------------------------------- | -------------- | - | ---------- |  | -------- | ------- | ------------- |  | ----- | -------- | ------- | - | - | ----- | ----- | - | - | -------- | ------- | -
|                                                                |                                                |                |   |            |  |          |         | Accumulated   |  |      
|                                                                |                                                |                |   |            |  |          |         | Other         |  |      
|                                                                |                                                |                |   | Additional |  |          |         | Comprehensive |  |      
|                                                                |                                                | Common         |   | Paid-in    |  | Retained |         | Income        |  |      
|                                                                |                                                | Stock          |   | Capital    |  | Deficit  |         | (Loss)        |  | Total
|                                                                |                                                |                |   |            |  |          |         |               |  |      
|                                                                |                                                |               
|                                                                |                                                | (In thousands)
|Balance at May 31, 1999                                         |                                                | $              | 1 |            |  | $        | 427,290 |               |  | $     | (180,311 | )       |   | $ | (230  | )     |   | $ | 246,750  |        
|Comprehensive income (loss):                                    |                                                |                |   |            |  |          |         |               |  |       |          |         |   |   |       |       |   |   |          |        
|                                                                | Net loss                                       |                |   |           |  |          |         |              |  |       |          | (14,178 | ) |   |       |      |   |   |          | (14,178 | )
|                                                                | Foreign currency translation adjustments       |                |   |           |  |          |         |              |  |       |          |        |   |   |       | 1,299 |   |   |          | 1,299   |  
|                                                                | Net unrealized change in investment securities |                |   |           |  |          |         |              |  |       |          |        |   |   |       | (317  | ) |   |          | (317    | )
|                                                                |                                                |                |   |            |  |          |         |               |  |       |          |         |   |   |       |       |   |   |          |        
|Total comprehensive loss                                        |                                                |                |   |            |  |          |         |               |  |       |          |         |   |   |       |       |   |   | (13,196  | )      
|Exercise of stock options and employee stock plan
    purchases |                                                |                |  |            |  |          | 3,416   |               |  |       |         |         |   |   |      |       |   |   | 3,416    |        
|                                                                |                                                |                |   |            |  |          |         |               |  |       |          |         |   |   |       |       |   |   |          |        
|Balance at June 3, 2000                                         |                                                |                | 1 |            |  |          | 430,706 |               |  |       | (194,489 | )       |   |   | 752   |       |   |   | 236,970  |        
|                                                                |                                                |                |   |            |  |          |         |               |  |       |          |         |   |   |       |       |   |   |          |        
|Comprehensive income (loss):                                    |                                                |                |   |            |  |          |         |               |  |       |          |         |   |   |       |       |   |   |          |        
|Net loss                                                        |                                                |                |  |            |  |          |        |               |  |       | (134,488 | )       |   |   |      |       |   |   | (134,488 | )      
|                                                                | Foreign currency translation adjustments       |                |   |           |  |          |         |              |  |       |          |        |   |   |       | (436  | ) |   |          | (436    | )
|                                                                | Net unrealized change in investment securities |                |   |           |  |          |         |              |  |       |          |        |   |   |       | 511   |   |   |          | 511     |  
|                                                                |                                                |                |   |            |  |          |         |               |  |       |          |         |   |   |       |       |   |   |          |        
|Total comprehensive loss                                        |                                                |                |   |            |  |          |         |               |  |       |          |         |   |   |       |       |   |   | (134,413 | )      
|Exercise of stock options and employee stock plan
    purchases |                                                |                |  |            |  |          | 3,384   |               |  |       |         |         |   |   |      |       |   |   | 3,384    |        
|                                                                |                                                |                |   |            |  |          |         |               |  |       |          |         |   |   |       |       |   |   |          |        
|Balance at June 2, 2001                                         |                                                |                | 1 |            |  |          | 434,090 |               |  |       | (328,977 | )       |   |   | 827   |       |   |   | 105,941  |        
|                                                                |                                                |                |   |            |  |          |         |               |  |       |          |         |   |   |       |       |   |   |          |        
|Comprehensive income loss:                                      |                                                |                |   |            |  |          |         |               |  |       |          |         |   |   |       |       |   |   |          |        
|Net loss                                                        |                                                |                |  |            |  |          |        |               |  |       | (94,072  | )       |   |   |      |       |   |   | (94,072  | )      
|                                                                | Foreign currency translation adjustments       |                |   |           |  |          |         |              |  |       |          |        |   |   |       | 467   |   |   |          | 467     |  
|                                                                | Net unrealized change in investment securities |                |   |           |  |          |         |              |  |       |          |        |   |   |       | (24   | ) |   |          | (24     | )
|                                                                |                                                |                |   |            |  |          |         |               |  |       |          |         |   |   |       |       |   |   |          |        
|Total comprehensive income (loss)                               |                                                |                |   |            |  |          |         |               |  |       |          |         |   |   |       |       |   |   | (93,629  | )      
|Exercise of stock options and employee stock plan
    purchases |                                                |                |  |            |  |          | 1,376   |               |  |       |         |         |   |   |      |       |   |   | 1,376    |        
|Contribution of stock to employee benefit plan                  |                                                |                |  |            |  |          | 197     |               |  |       |         |         |   |   |      |       |   |   | 197      |        
|                                                                |                                                |                |   |            |  |          |         |               |  |       |          |         |   |   |       |       |   |   |          |        
|Balance at June 1, 2002                                         |                                                | $              | 1 |            |  | $        | 435,663 |               |  | $     | (423,049 | )       |   | $ | 1,270 |       |   | $ | 13,885   |        
|                                                                |                                                |                |   |            |  |          |         |               |  |       |          |         |   |   |       |       |   |   |          |        

See accompanying notes to consolidated financial
statements.

35



---



##### Table of Contents



SPEEDFAM-IPEC, INC.

CONSOLIDATED STATEMENTS OF CASH
FLOWS

Years Ended June 1, 2002, June 2,
2001 and June 3, 2000


|                                                |                                                                                 |                                                                              |                                           |                                           |        |         |         |          |        |         |         |         |        |         |         |  
|----------------------------------------------- | ------------------------------------------------------------------------------- | ---------------------------------------------------------------------------- | ----------------------------------------- | ----------------------------------------- | ------ | ------- | ------- | -------- | ------ | ------- | ------- | ------- | ------ | ------- | ------- | -
|                                                |                                                                                 | 2002                                                                         |                                           | 2001                                      |        | 2000   
|                                                |                                                                                 |                                                                              |                                           |                                           |        |        
|                                                |                                                                                 |                                                                             
|                                                |                                                                                 | (In thousands)                                                              
|Cash flows from operating activities:           |                                                                                 |                                                                              |                                           |                                           |        |         |         |          |        |         |         |        
|                                                | Net loss                                                                        |                                                                              | $                                         | (94,072                                   | )      |         | $       | (134,488 | )      |         | $       | (14,178 | )     
|                                                | Adjustments to reconcile net loss to net cash
    used in operating activities: |                                                                              |                                           |                                           |        |         |         |          |        |         |         |         |       
|                                                |                                                                                 | Equity in net (earnings) loss of affiliates                                  |                                           |                                           |       |         |         |          | (110   | )       |         |         | 3,278  |        
|                                                |                                                                                 | Depreciation and amortization                                                |                                           |                                           | 13,453 |         |         |          | 17,024 |         |         |         | 17,446 |        
|                                                |                                                                                 | (Gain) loss on disposal of investments in
    affiliates                     |                                           |                                           |       |         |         |          | 10,763 |         |         |         | (6,103 | )      
|                                                |                                                                                 | Non-cash portion of merger, integration,
    restructuring and other charges |                                           |                                           | 48,099 |         |         |          | 45,624 |         |         |         |       |        
|                                                |                                                                                 | Contribution of stock to employee benefit plan                               |                                           |                                           | 197    |         |         |          |       |         |         |         |       |        
|                                                |                                                                                 | Cumulative effect of change in accounting
    principle                      |                                           |                                           | 2,582  |         |         |          | 36,542 |         |         |         |       |        
|                                                |                                                                                 | (Gain) loss on sales of assets                                               |                                           |                                           |       |         |         |          | (1,966 | )       |         |         | 54     |        
|                                                |                                                                                 | (Increase) decrease in assets:                                               |                                           |                                           |        |         |         |          |        |         |         |         |        |        
|                                                |                                                                                 |                                                                              | Trade accounts receivable                 |                                           |        | 39,057  |         |          |        | 69,524  |         |         |        | (52,703 | )      
|                                                |                                                                                 |                                                                              | Inventories                               |                                           |        | 8,697   |         |          |        | (40,442 | )       |         |        | (1,271  | )      
|                                                |                                                                                 |                                                                              | Shipped systems pending acceptance        |                                           |        | 4,779   |         |          |        | 7,357   |         |         |        |        |        
|                                                |                                                                                 |                                                                              | Prepaid expenses and other current assets |                                           |        | 767     |         |          |        | (1,200  | )       |         |        | 6,526   |        
|                                                |                                                                                 | Increase (decrease) in liabilities:                                          |                                           |                                           |        |         |         |          |        |         |         |         |        |        
|                                                |                                                                                 |                                                                              | Accounts payable and due to affiliates    |                                           |        | (13,978 | )       |          |        | (20,468 | )       |         |        | 26,853  |        
|                                                |                                                                                 |                                                                              | Accrued liabilities                       |                                           |        | (6,936  | )       |          |        | (3,665  | )       |         |        | (25,131 | )      
|                                                |                                                                                 |                                                                              | Deferred systems revenue                  |                                           |        | (28,043 | )       |          |        | (14,475 | )       |         |        |        |        
|                                                |                                                                                 |                                                                              |                                           |                                           |        |         |         |          |        |         |         |        
|                                                |                                                                                 |                                                                              |                                           | Net cash used in operating activities     |        |         | (25,398 | )        |        |         | (29,980 | )       |        |         | (45,229 | )
|                                                |                                                                                 |                                                                              |                                           |                                           |        |         |         |          |        |         |         |        
|Cash flows from investing activities:           |                                                                                 |                                                                              |                                           |                                           |        |         |         |          |        |         |         |        
|                                                | Net proceeds from disposal of investment in
    affiliate                       |                                                                              |                                           |                                          |        |         |         | 661      |        |         |         |        |       
|                                                | Purchases of short-term investments                                             |                                                                              |                                           |                                          |        |         |         | (24,674  | )      |         |         | (64,340 | )     
|                                                | Maturities of short-term investments                                            |                                                                              |                                           | 13,495                                    |        |         |         | 39,924   |        |         |         | 85,808  |       
|                                                | Capital expenditures                                                            |                                                                              |                                           | (3,230                                    | )      |         |         | (15,282  | )      |         |         | (15,060 | )     
|                                                | Proceeds from sales of assets                                                   |                                                                              |                                           |                                          |        |         |         | 8,125    |        |         |         |        |       
|                                                | Proceeds from the sale of Fujimi Corporation                                    |                                                                              |                                           |                                          |        |         |         |         |        |         |         | 10,000  |       
|                                                | Proceeds from licensing technology and transfer
    of associated assets        |                                                                              |                                           |                                          |        |         |         |         |        |         |         | 2,335   |       
|                                                | Other investing activities                                                      |                                                                              |                                           | (297                                      | )      |         |         | (4,430   | )      |         |         | (371    | )     
|                                                |                                                                                 |                                                                              |                                           |                                           |        |         |         |          |        |         |         |        
|                                                |                                                                                 |                                                                              |                                           | Net cash provided by investing activities |        |         | 9,968   |          |        |         | 4,324   |         |        |         | 18,372  |  
|                                                |                                                                                 |                                                                              |                                           |                                           |        |         |         |          |        |         |         |        
|Cash flows from financing activities:           |                                                                                 |                                                                              |                                           |                                           |        |         |         |          |        |         |         |        
|                                                | Proceeds from exercise of stock options and
    employee stock purchases        |                                                                              |                                           | 1,376                                     |        |         |         | 3,384    |        |         |         | 3,416   |       
|                                                | Principal payments on long-term debt                                            |                                                                              |                                           | (90                                       | )      |         |         | (1,641   | )      |         |         | (1,165  | )     
|                                                |                                                                                 |                                                                              |                                           |                                           |        |         |         |          |        |         |         |        
|                                                |                                                                                 |                                                                              |                                           | Net cash provided by financing activities |        |         | 1,286   |          |        |         | 1,743   |         |        |         | 2,251   |  
|                                                |                                                                                 |                                                                              |                                           |                                           |        |         |         |          |        |         |         |        
|Effect of foreign currency rate changes on cash |                                                                                 |                                                                              | 158                                       |                                           |        |         | (803    | )        |        |         | (337    | )      
|                                                |                                                                                 |                                                                              |                                           |                                           |        |         |         |          |        |         |         |        
|                                                |                                                                                 |                                                                              |                                           | Net decrease in cash and cash equivalents |        |         | (13,986 | )        |        |         | (24,716 | )       |        |         | (24,943 | )
|Cash and cash equivalents at beginning of year  |                                                                                 |                                                                              | 47,344                                    |                                           |        |         | 72,060  |          |        |         | 97,003  |        
|                                                |                                                                                 |                                                                              |                                           |                                           |        |         |         |          |        |         |         |        
|Cash and cash equivalents at end of year        |                                                                                 | $                                                                            | 33,358                                    |                                           |        | $       | 47,344  |          |        | $       | 72,060  |        
|                                                |                                                                                 |                                                                              |                                           |                                           |        |         |         |          |        |         |         |        
|Supplemental cash flow information              |                                                                                 |                                                                              |                                           |                                           |        |         |         |          |        |         |         |        
|                                                | Cash paid during the year for:                                                  |                                                                              |                                           |                                           |        |         |         |          |        |         |         |         |       
|                                                |                                                                                 | Interest                                                                     |                                           | $                                         | 7,258  |         |         | $        | 7,245  |         |         | $       | 7,379  |        
|                                                |                                                                                 | Income taxes                                                                 |                                           | $                                         | 1,417  |         |         | $        | 902    |         |         | $       | 435    |        

See accompanying notes to consolidated financial
statements.

36



---



##### Table of Contents



SPEEDFAM-IPEC, INC.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS

(1) Summary of Significant Accounting
Policies

SpeedFam-IPEC, Inc. (the Company), an Illinois
corporation, is a leading global supplier of chemical mechanical
planarization (or CMP) systems, with more than 1,300 systems
installed worldwide. 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, consumables and slurries used in surface
processing.

(a) Principles
of Consolidation

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

The Companys investment in the common stock
of its 50% joint venture, SpeedFam-IPEC Co., Ltd., was accounted
for by the equity method prior to the dissolution of the joint
venture in the first quarter of 2001. The Companys
investment in the common stock of its 50% joint venture, Fujimi
Corporation, was accounted for by the equity method prior to the
sale of the Companys interest in the second quarter of
2000.

(b) Fiscal
Year

The Companys fiscal year consists of 52 or
53 weeks ending on the Saturday nearest May 31.
Accordingly, the 2002 fiscal year ended on June 1 and
contained 52 weeks, the 2001 fiscal year ended on
June 2 and contained 52 weeks, and the 2000 fiscal
year ended on June 3 and contained 53 weeks. All
references to years relate to fiscal years unless otherwise
noted.

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

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

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

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

(d) Inventories

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

(e) Property,
Plant, and Equipment

Property, plant, and equipment is stated at cost
less accumulated depreciation. Depreciation is provided on the
straight-line method over the estimated useful lives of the
assets. The estimated useful lives of the assets are as follows:
building and improvements, 7 to 40 years; machinery and
equipment, 5 to 7 years;

37



---



##### Table of Contents



SPEEDFAM-IPEC, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

furniture and fixtures, 3 to 5 years; and
leasehold improvements, the shorter of the useful life of the
asset or the lease term.

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

(f) Income
Taxes

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

(g) Revenue
Recognition

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 elected early adoption of SAB 101 in the third
quarter of 2001, retroactive to the beginning of 2001 as a
charge in the first quarter of 2001. The previously reported
results for the first and second quarters of 2001 prior to the
adoption of SAB 101 were restated to reflect the new
revenue recognition method.

Prior to the implementation of SAB 101, the
Company recognized revenue from the sales of its products
generally upon shipment. Effective June 4, 2000, the
Company changed its method of recognizing revenue for sales of
CMP systems to reflect the following approach; 1) for CMP
system sales to a new customer, or CMP system sales of existing
products with new specifications or acceptance criteria, and for
all new CMP products, revenue is 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 who have previously purchased
the same system with the same customer-specified acceptance
provisions, revenue is recognized under a multiple-element
arrangement. Accordingly, upon shipment, the contractual amount
payable by the customer is recorded as revenue and title is
transferred. The remainder is recorded as deferred revenue and
recognized as revenue upon customer acceptance. Revenue related
to non-CMP systems and spare parts for all segments will
continue to be recognized upon transfer of title, which is
generally upon shipment. Revenue related to service contracts is
recognized ratably over the duration of the contracts. In all
cases, revenue is only recognized when persuasive evidence of an
arrangement exists, delivery has occurred or services have been
rendered, the price is fixed or determinable and collectability
is reasonably assured.

(h) Warranty
Costs

The Company generally warrants its systems for a
period of up to 12 months from shipment for material and
labor to repair and service the system. A provision for the
estimated cost of warranty is recorded at the time product
revenue is recognized.

38



---



##### Table of Contents



SPEEDFAM-IPEC, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(i) Foreign
Currency Translation

The local currency is the functional currency for
all foreign operations. Accordingly, translation gains or losses
resulting from the translation of foreign denominated assets and
liabilities into U.S. dollars are included as a component
of accumulated other comprehensive income.

(j) Earnings
(Loss) Per Share

Basic earnings (loss) per common share is based
upon the weighted average number of common shares outstanding.
Diluted earnings (loss) per common share assumes the
exercise of all options and warrants which are dilutive, whether
exercisable or not.

In calculating diluted net loss per common share,
common stock equivalent shares (determined under the treasury
stock method) consisting of stock options, warrants, convertible
notes, and convertible preferred stock have been excluded
because their inclusion would have been anti-dilutive.

(k) Significant
Customers and Concentration of Credit Risk

The Company sells its products and services
primarily to semiconductor manufacturers, and extends credit
based on an evaluation of the customers financial
condition, generally without requiring collateral. Exposure to
losses on receivables is principally dependent on each
customers financial condition. The Company monitors its
exposure for credit losses and maintains allowances for
anticipated losses.

(l) Patents
and Trademarks

Patents and trademarks included in other assets
are amortized on a straight-line basis over 5 years.

(m) Research,
Development, and Engineering

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

(n) Use
of Estimates

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

(o) Employee
Stock Plans

The Company applies the intrinsic value-based
method of accounting for its stock options issued to employees.
As such, compensation expense is recorded on the date of grant
only if the current market price of the underlying stock exceeds
the exercise price. Under Accounting Principles Board Opinion
25, Accounting for Stock Issued to Employees,
because the exercise price of the Companys employee stock
options equals the market price of the underlying stock on the
date of grant, no compensation expense is recognized.

(p) Fair
Value of Financial Instruments

The Companys financial instruments at
June 1, 2002 and June 2, 2001 include cash
equivalents, short-term investments, trade receivables, trade
payables, foreign exchange contracts, and long-term debt.
Information about the fair value of short-term investments is
presented in Note 6. The carrying value of cash
equivalents, trade receivables, and trade payables approximates
fair value because of the short maturity of

39



---



##### Table of Contents



SPEEDFAM-IPEC, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

these instruments. Fair values relating to
foreign currency contracts (used for hedging purposes) reflect
the estimated net amounts that the Company would receive or pay
to terminate the contracts at the reporting date based on quoted
market prices of comparable contracts and are not material at
June 1, 2002 and June 2, 2001. The fair value of the
Companys long-term debt is approximately
$73.0 million as of the end of 2002. The fair value of the
Companys long-term debt is estimated based on quoted
market prices.

(q) Impairment
of Long-lived Assets and Long-lived Assets to Be Disposed
Of

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

(r) Derivative
Financial Instruments

The Company conducts portions of its business in
various foreign currencies. The Company entered into forward
foreign exchange contracts to buy and sell foreign currencies as
economic hedges of trade receivables and accounts payable
denominated in a currency other than the U.S. dollar. In
2002, 2001 and 2000 these hedging contracts were denominated
primarily in the Japanese yen. The maturities of all the forward
foreign exchange contracts are generally short-term in nature.
As the impact of movements in currency exchange rates on forward
foreign exchange contracts offset the related impact on the
underlying items being hedged, the Company believes these
financial instruments do not subject the Company to speculative
risk that would otherwise result from changes in currency
exchange rates. Net foreign transaction currency gains and
losses have not been significant.

Statement of Financial Accounting Standards
(SFAS) No. 133, Accounting for Derivative
Instruments and Hedging Activities and No. 138,
Accounting for Certain Derivative Instruments and Certain
Hedging Activities, established accounting and reporting
standards related to derivative financial instruments and
hedging activities. These statements require that the Company
recognize all derivatives, including foreign currency exchange
contracts, as either assets or liabilities on the balance sheet
and measure those instruments at fair value. Changes in the fair
value of derivatives that do not qualify for hedge treatment, as
well as the ineffective portion of any hedges, must be
recognized currently in earnings. At June 1, 2002,the
Companys foreign exchange contracts were not considered
effective hedges. The Company adopted SFAS 133 and
SFAS 138 as of June 3, 2001 and the transition
adjustment was not material.

The Company conducts business in a number of
foreign countries, with certain transactions denominated in
local currencies, primarily Japanese yen. The purpose of the
Companys foreign currency management is to minimize the
effect of exchange rate fluctuations on certain foreign
denominated revenues, costs and eventual cash flows. The terms
of currency instruments used for hedging purposes are generally
consistent with the timing of the transactions being hedged. The
Company does not use derivative financial instruments for
trading or speculative purposes.

(s) Reclassifications

Certain reclassifications have been made in the
2001 and 2000 financial statements to conform to the 2002
presentation.

40



---



##### Table of Contents



SPEEDFAM-IPEC, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(t) Recent
Accounting Pronouncements

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

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

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

In June 2002, the Financial Accounting Standards
Board issued SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities. SFAS
No. 146 requires that a liability for a cost associated
with an exit or disposal activity be recognized when the
liability is incurred. Prior guidance required that a liability
for an exit cost be recognized at the date of an entitys
commitment to an exit plan. This Statement also establishes that
fair value is the objective for initial measurement of the
liability. SFAS No. 146 is effective for exit or disposal
activities that are initiated after December 31, 2002.

(2) Restructuring and Other Charges
Associated with the Industry Downturn

During 2001, slowing worldwide demand for
semiconductors resulted in a rapid decline in demand for
manufacturing equipment. Inventory buildups in telecommunication
products, slower than expected personal computer sales and
slower global economic growth caused semiconductor companies to
reevaluate their capital spending plans. A number of the
Companys customers revised the timing of their capital
spending and rescheduled or canceled existing orders, resulting
in the postponement or cancellation of equipment delivery and a
decline in new orders. As a result, the Company was forced to
record significant inventory write-downs and take swift actions
to substantially reduce overall operating expenses. Cost-cutting
measures included a

41



---



##### Table of Contents



SPEEDFAM-IPEC, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

30 percent reduction in workforce, a
15 percent salary cutback for executives, as well as pay
reductions for all mid-to upper-level employees and a decrease
in overall discretionary spending.

During the year ended June 2, 2001, the
Company recorded approximately $39.1 million in
restructuring and other special charges which included inventory
write-downs of $31.2 million; asset impairments of
$4.4 million; lease termination costs of $1.7 million;
severance costs of $1.0 million for 247 employees,
primarily manufacturing technicians, engineers and field service
representatives; and $0.8 million of other charges. As of
June 1, 2002, the Company had completed all restructuring
activities in accordance with its previously established and
announced plans which included cash expenditures of
$1.5 million and asset write-offs of $37.6 million.

These costs were classified in the statement of
operations for the year ended June 2, 2001 in cost of sales
and operating expenses. The following table summarizes the
classification of the restructuring and other charges (in
thousands):

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

This decline in demand for semiconductors has
continued in 2002 and several of the Companys customers
have rescheduled deliveries or canceled existing orders and the
Company has experienced a substantial decline in new orders.
Because the duration of this downturn in demand has been longer
than originally anticipated, the Company believes that purchases
in the next upturn will be primarily for the Companys
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 and
implemented additional cost cutting measures including the
downsizing and consolidation of operations in the Phoenix, AZ,
Portland, OR and Austin, TX areas. During the year ended
June 1, 2002, the Company recorded charges of
$48.1 million which included inventory write-downs of
$36.3 million; asset impairments of $8.5 million;
lease termination costs of $1.1 million; $1.3 million
in non-cancelable purchase commitments; and $0.9 million of
other charges. In 2002, the Company spent $0.9 million for
non-cancelable purchase commitments and anticipates spending the
remaining $0.4 million in first half of 2003. Cash outlays
for non-cancelable leases were $0.3 million in 2002 and the
Company anticipates spending the remaining $0.8 million
over the next three years.

These costs were classified in the statement of
operations for the year ended June 1, 2002 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 | 
|                                          |  |   |        | 

(3) Restructuring and Other Charges
Associated with the 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

42



---



##### Table of Contents



SPEEDFAM-IPEC, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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 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 and 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 charge
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.

During 2001, the Company completed all of its
restructuring activities in accordance with its previously
established and announced plans; therefore, no remaining
liability exists as of June 1, 2002. During 2001, the
Company incurred $15.8 million in asset write-offs and paid
and charged to the liability $3.4 million.

These costs were classified in the statement of
operations for the year ended June 2, 2001 in cost of
sales, loss on disposal of investment in affiliate and operating
expenses. The following table summarizes the classification of
the restructuring and other charges (in thousands):

|                                            |  |   |        | 
|------------------------------------------- |  | - | ------ | 
|Cost of sales                               |  | $ | 3,351  | 
|Restructuring charges                       |  |   | 5,123  | 
|Loss on disposal of investment in affiliate |  |   | 10,763 | 
|                                            |  |   |        | 
|                                            |  | $ | 19,237 | 
|                                            |  |   |        | 

Also included in 2001 was $2.4 million of
asset impairment charges for CMP equipment that was designed by
the Far East Joint Venture that is no longer used in ongoing
research and development programs. These charges were classified
in the statement of operations for the year ended June 2,
2001 as research and development expenses.

(4) Merger, Integration and Restructuring
Costs Associated with the 1999 Merger

In connection with the merger of SpeedFam
International, Inc. and Integrated Process Equipment Corp. in
April 1999 (the merger), the Company recorded various merger,
integration and restructuring costs. Direct merger costs
primarily consisted of professional fees related to investment
banking, legal and accounting services incurred through the date
of the merger. The Company recorded integration and
restructuring costs for lease terminations, the write-off of
duplicative equipment previously used for demonstration
purposes, the write-down of inventory and equipment related to
product lines that are no longer supported, and severance costs
resulting from workforce reductions. Severance and other related
employee costs provided for the reduction of approximately 70
employment positions resulting from facility closures, and the
elimination of duplicate positions or positions no longer
necessary due to the streamlining of operations.

The remaining restructuring accrual for lease
terminations associated with the merger is approximately
$4.6 million which the Company believes is adequate to
cover the remaining costs, primarily lease termination payments
on certain vacated facilities not offset by sublease income.
Sublease activity began in May 2000 and

43



---



##### Table of Contents



SPEEDFAM-IPEC, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

is projected to continue through the
Companys lease term. For the year ended June 1, 2002,
$2.0 million in lease termination costs were charged to the
accrual, all of which were cash expenditures.

(5) Changes in Accounting
Principle

In July 2001, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards
(SFAS) No. 142, Goodwill and Other Intangible
Assets. SFAS No. 142 supersedes prior guidance and
requires that goodwill no longer be amortized to earnings, but
instead be annually reviewed for impairment. In addition,
goodwill should be tested for impairment upon adoption. The
Company early adopted SFAS No. 142 in the first quarter of
2002 and recorded a cumulative effect of change in accounting
principle for the write-off of goodwill of ($2.6) million,
or ($0.08) per share, as of the beginning of 2002 (June 3,
2001). The impact of adoption was to reduce the loss before
cumulative effect of accounting change for 2002 by
$0.9 million or $0.03 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 2001 would
have been ($133.5) million or ($4.46) per share, if the
accounting change related to goodwill required by SFAS
No. 142 had been applied to that period. Net loss for 2000
would have been ($13.2) million or ($0.45) per share if the
accounting change related to goodwill required by SFAS
No. 142 had been applied to that period.

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

Prior to the implementation of SAB 101, the
Company recognized revenue from the sales of its products
generally upon shipment. Effective June 4, 2000, the
Company changed its method of recognizing revenue for sales of
CMP systems to reflect the following approach: 1) for CMP
system sales to a new customer, or CMP system sales of existing
products with new specifications or acceptance criteria, and for
all new CMP products, revenue is deferred until customer
acceptance, at which time the revenue is recognized. The related
costs for systems for which this approach is used are recorded
as shipped systems pending acceptance until customer acceptance,
at which time cost of goods sold is recorded; and 2) for
CMP system sales to existing customers that have previously
purchased the same system with the same customer-specified
acceptance provisions, revenue is recognized under a
multiple-element arrangement. Accordingly, upon shipment, the
contractual amount payable by the customer is recorded as
revenue and title is transferred. The remainder is recorded as
deferred revenue and recognized as revenue upon customer
acceptance. Revenue related to non-CMP systems and spare parts
for all segments continues to be recognized upon transfer of
title, which is generally upon shipment. Revenue related to
service contracts is recognized ratably over the duration of the
contracts. In all cases, revenue is only recognized when
persuasive evidence of an arrangement exists, delivery has
occurred or services have been rendered, the price is fixed or
determinable and collectability 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.

SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities and
No. 138, Accounting for Certain Derivative
Instruments and Certain Hedging Activities, established
accounting and

44



---



##### Table of Contents



SPEEDFAM-IPEC, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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.

(6) Short-term Investments

The Company held no short-term investments at the
end of 2002. The amortized cost, gross unrealized gains, gross
unrealized losses, and approximate fair value of short-term
investments classified as available-for-sale are summarized as
follows at the end of 2001 (in thousands):

|                                    |  |      |        |            |  |            |    |             |  |   |   |  |  |   |        | 
|----------------------------------- |  | ---- | ------ | ---------- |  | ---------- | -- | ----------- |  | - | - |  |  | - | ------ | 
|                                    |  |     
|                                    |  | 2001
|                                    |  |     
|                                    |  |      |        | Gross      |  | Gross      |    |            
|                                    |  |      |        | Unrealized |  | Unrealized |    | Approximate
|                                    |  | Cost |        | Gains      |  | Losses     |    | Fair Value 
|                                    |  |      |        |            |  |            |    |            
|Corporate debt securities and other |  | $    | 13,471 |            |  | $          | 24 |             |  | $ |  |  |  | $ | 13,495 | 
|                                    |  |      |        |            |  |            |    |             |  |   |   |  |  |   |        | 

(7) Inventories

Inventories at the end of 2002 and 2001 are
summarized as follows (in thousands):

|                |                   |      |        |        |  |   |        |        | 
|--------------- | ----------------- | ---- | ------ | ------ |  | - | ------ | ------ | 
|                |                   | 2002 |        | 2001  
|                |                   |      |        |       
|Raw materials   |                   | $    | 19,164 |        |  | $ | 49,081 |       
|Work-in-process |                   |      | 11,490 |        |  |   | 19,706 |       
|Finished goods  |                   |      | 13,891 |        |  |   | 19,272 |       
|                |                   |      |        |        |  |   |        |       
|                | Total inventories |      | $      | 44,545 |  |   | $      | 88,059 | 
|                |                   |      |        |        |  |   |        |       

45



---



##### Table of Contents



SPEEDFAM-IPEC, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(8) Property, Plant, and
Equipment

Property, plant, and equipment at the end of 2002
and 2001 are summarized as follows (in thousands):

|                                    |                                    |      |         |        |  |   |         |        | 
|----------------------------------- | ---------------------------------- | ---- | ------- | ------ |  | - | ------- | ------ | 
|                                    |                                    | 2002 |         | 2001  
|                                    |                                    |      |         |       
|Land                                |                                    | $    | 2,592   |        |  | $ | 2,634   |       
|Buildings and building improvements |                                    |      | 41,620  |        |  |   | 42,463  |       
|Machinery and equipment             |                                    |      | 58,082  |        |  |   | 65,897  |       
|Furniture and fixtures              |                                    |      | 4,604   |        |  |   | 4,785   |       
|Leasehold improvements              |                                    |      | 2,031   |        |  |   | 2,457   |       
|Construction in progress            |                                    |      | 7       |        |  |   | 2,946   |       
|                                    |                                    |      |         |        |  |   |         |       
|                                    |                                    |      | 108,936 |        |  |   | 121,182 |       
|Less accumulated depreciation       |                                    |      | (50,929 | )      |  |   | (45,941 | )     
|                                    |                                    |      |         |        |  |   |         |       
|                                    | Net property, plant, and equipment |      | $       | 58,007 |  |   | $       | 75,241 | 
|                                    |                                    |      |         |        |  |   |         |       

Depreciation expense was $10.8 million,
$15.2 million, and $15.4 million in 2002, 2001, and
2000, respectively.

(9) Intangible Assets

Intangible assets included in other assets at the
end of 2002 and 2001 are summarized as follows (in thousands):

|                                                        |                       |      |        |       |  |   |        |       | 
|------------------------------------------------------- | --------------------- | ---- | ------ | ----- |  | - | ------ | ----- | 
|                                                        |                       | 2002 |        | 2001 
|                                                        |                       |      |        |      
|Patents                                                 |                       | $    | 3,089  |       |  | $ | 4,379  |      
|Debt issuance costs                                     |                       |      | 3,800  |       |  |   | 3,800  |      
|Goodwill                                                |                       |      |       |       |  |   | 10,138 |      
|Trademarks                                              |                       |      |       |       |  |   | 370    |      
|                                                        |                       |      |        |       |  |   |        |      
|                                                        |                       |      | 6,889  |       |  |   | 18,687 |      
|Less accumulated amortization  patents                 |                       |      | (416   | )     |  |   | (120   | )    
|Less accumulated amortization  debt
    issuance costs |                       |      | (2,452 | )     |  |   | (1,961 | )    
|Less accumulated amortization  goodwill                |                       |      |       |       |  |   | (7,556 | )    
|Less accumulated amortization 
    trademarks          |                       |      |       |       |  |   | (229   | )    
|                                                        |                       |      |        |       |  |   |        |      
|                                                        | Net intangible assets |      | $      | 4,021 |  |   | $      | 8,821 | 
|                                                        |                       |      |        |       |  |   |        |      

Amortization expense was $2.6 million,
$1.8 million, and $2.1 million in 2002, 2001 and 2000,
respectively. Estimated amortization expense for the next five
years is: $1.1 million in 2003, $1.1 million in 2004,
$0.7 million in 2005, $0.5 million in 2006 and
$0.5 million in 2007.

46



---



##### Table of Contents



SPEEDFAM-IPEC, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(10) Accrued Liabilities

Accrued liabilities at the end of 2002 and 2001
are summarized as follows (in thousands):

|                                                         |                           |      |       |        |  |   |       |        | 
|-------------------------------------------------------- | ------------------------- | ---- | ----- | ------ |  | - | ----- | ------ | 
|                                                         |                           | 2002 |       | 2001  
|                                                         |                           |      |       |       
|Accrued payroll and benefits                             |                           | $    | 2,310 |        |  | $ | 3,361 |       
|Accrued merger, integration, and restructuring
    costs |                           |      | 1,288 |        |  |   | 1,719 |       
|Accrued warranty and installation costs                  |                           |      | 804   |        |  |   | 6,156 |       
|Other accrued liabilities                                |                           |      | 9,502 |        |  |   | 7,439 |       
|                                                         |                           |      |       |        |  |   |       |       
|                                                         | Total accrued liabilities |      | $     | 13,904 |  |   | $     | 18,675 | 
|                                                         |                           |      |       |        |  |   |       |       

(11) Investment in Affiliates

In August 2000, the Far East Joint Venture
was dissolved. 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 former
Joint Venture, which include the manufacturing of wafer and disk
polishing 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
Joint Venture. Summary financial information relating to the
Joint Venture is as follows:

Statements of Earnings (in
thousands)

|                             |                                              |               |        |            |  |   |         |         |  
|---------------------------- | -------------------------------------------- | ------------- | ------ | ---------- |  | - | ------- | ------- | -
|                             |                                              |               |        | Year Ended
|                             |                                              | May 1, 2000 - |        | April 30, 
|                             |                                              | July 31, 2000 |        | 2000      
|                             |                                              |               |        |           
|Net sales                    |                                              | $             | 29,626 |            |  | $ | 108,000 |        
|Costs and operating expenses |                                              |               | 29,267 |            |  |   | 118,922 |        
|                             |                                              |               |        |            |  |   |         |        
|                             | Earnings (loss) before income taxes          |               |        | 359        |  |   |         | (10,922 | )
|Income taxes                 |                                              |               | (130   | )          |  |   | (3,346  | )      
|                             |                                              |               |        |            |  |   |         |        
|                             | Net earnings (loss) before minority interest |               |        | 229        |  |   |         | (7,576  | )
|Minority interest            |                                              |               | 9      |            |  |   | 50      |        
|                             |                                              |               |        |            |  |   |         |        
|                             | Net earnings (loss)                          |               | $      | 220        |  |   | $       | (7,526  | )
|                             |                                              |               |        |            |  |   |         |        

(12) Income Taxes

The Company files consolidated U.S. Federal
income tax returns with its domestic subsidiary. Operations in
the United Kingdom, Germany, Japan, Taiwan, Korea, Singapore and
Malaysia file local income tax returns. Earnings (loss) before
income taxes are as follows (in thousands):

|         |       |      |         |         |   |      |          |         |   |   |         |         |  
|-------- | ----- | ---- | ------- | ------- | - | ---- | -------- | ------- | - | - | ------- | ------- | -
|         |       | 2002 |         | 2001    |   | 2000
|         |       |      |         |         |   |     
|U.S.     |       | $    | (97,270 | )       |   | $    | (102,675 | )       |   | $ | (15,322 | )      
|Non-U.S. |       |      | 3,298   |         |   |      | 4,729    |         |   |   | 1,144   |        
|         |       |      |         |         |   |      |          |         |   |   |         |        
|         | Total |      | $       | (93,972 | ) |      | $        | (97,946 | ) |   | $       | (14,178 | )
|         |       |      |         |         |   |      |          |         |   |   |         |        

47



---



##### Table of Contents



SPEEDFAM-IPEC, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Income tax expense (benefit) is as follows (in
thousands):

|          |                        |                              |        |        |        |      |   |   |  |  |   |   |   | 
|--------- | ---------------------- | ---------------------------- | ------ | ------ | ------ | ---- | - | - |  |  | - | - | - | 
|          |                        | 2002                         |        | 2001   |        | 2000
|          |                        |                              |        |        |        |     
|Current:  |                        |                              |        |        |        |      |   |   |  |  |   |  
|          | U.S. Federal           |                              | $      | (3,578 | )      |      | $ |  |  |  | $ |  |  
|          | State                  |                              |        |       |        |      |   |  |  |  |   |  |  
|          | Non-U.S.               |                              |        | 1,096  |        |      |   |  |  |  |   |  |  
|          |                        |                              |        |        |        |      |   |   |  |  |   |  
|          |                        |                              | (2,482 | )      |        |      |  |   |  |  |  |  
|Deferred: |                        |                              |        |        |        |      |   |   |  |  |   |  
|          | U.S. Federal and state |                              |        |       |        |      |   |  |  |  |   |  |  
|          | Non-U.S.               |                              |        |       |        |      |   |  |  |  |   |  |  
|          |                        |                              |        |        |        |      |   |   |  |  |   |  
|          |                        |                              |       |        |        |      |  |   |  |  |  |  
|          |                        |                              |        |        |        |      |   |   |  |  |   |  
|          |                        | Income tax expense (benefit) |        | $      | (2,482 | )    |   | $ |  |  |   | $ |  | 
|          |                        |                              |        |        |        |      |   |   |  |  |   |  

The tax effects of temporary differences that
give rise to the deferred tax assets (liabilities) at the end of
2002 and 2001 are attributable to (in thousands):

|                          |                                                 |                            |         |          |   |  |         |          |     |  
|------------------------- | ----------------------------------------------- | -------------------------- | ------- | -------- | - |  | ------- | -------- | --- | -
|                          |                                                 | 2002                       |         | 2001    
|                          |                                                 |                            |         |         
|Deferred tax assets:      |                                                 |                            |         |          |   |  |         |         
|                          | Deferred revenue, net                           |                            | $       | 3,625    |   |  | $       | 12,931   |    
|                          | Financial valuation accounts                    |                            |         | 24,075   |   |  |         | 18,516   |    
|                          | Expenses not currently deductible               |                            |         | 264      |   |  |         | 3,065    |    
|                          | Merger, integration, and restructuring accruals |                            |         | 2,284    |   |  |         | 2,804    |    
|                          | Net operating loss and tax credit carryforwards |                            |         | 140,379  |   |  |         | 105,673  |    
|                          | Other                                           |                            |         | 442      |   |  |         | 366      |    
|                          |                                                 |                            |         |          |   |  |         |         
|                          |                                                 |                            | 171,069 |          |   |  | 143,355 |         
|                          | Valuation allowance                             |                            |         | (170,401 | ) |  |         | (142,698 | )  
|                          |                                                 |                            |         |          |   |  |         |         
|                          |                                                 |                            | 668     |          |   |  | 657     |         
|Deferred tax liabilities: |                                                 |                            |         |          |   |  |         |         
|                          | Depreciation and amortization differences       |                            |         | (668     | ) |  |         | (668     | )  
|                          |                                                 |                            |         |          |   |  |         |         
|                          |                                                 | Net deferred tax liability |         | $        |  |  |         | $        | (11 | )
|                          |                                                 |                            |         |          |   |  |         |         

The net deferred tax liability in 2001 was
recorded in the accompanying consolidated balance sheets as a
component of other liabilities.

The Company has in excess of $34.0 million
of Federal net operating loss carryforwards at June 1, 2002
which expire between 2003 and 2022. The Company also has
$9.3 million of Federal research and development tax credit
carryforwards available. These carryforwards begin to expire in
2011.

The Company recorded a net tax benefit of
approximately $2.5 million in 2002 primarily for a refund
of taxes previously paid related to the Job Creation and
Worker Assistance Act of 2002 (The Act) passed by Congress
in March, 2002. The Act temporarily extended the general net
operating loss carryback period to five years. This income tax
benefit was recorded in the fourth quarter, the period in which
the Act was passed, and will not impact future periods.

48



---



##### Table of Contents



SPEEDFAM-IPEC, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The valuation allowance for deferred taxes was
increased by $27.7 million and $46.8 million during
2002 and 2001, respectively. A valuation allowance is required
to be recorded against deferred tax assets if it is more likely
than not that the tax assets will not be realized. This
determination is dependent on many factors, including the
Companys ability to generate taxable income within the net
operating loss carryforward period. The Company has established
a full valuation allowance against all of its deferred tax
assets. The Company will recognize future benefits only as
reassessment demonstrates that the deferred tax assets are
realizable. While the need for this valuation allowance is
subject to periodic review, if the allowance is reduced, the tax
benefits attributable to the deferred tax assets will be
recorded in future operations as a reduction of the
Companys income tax expense.

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

|                                                                                                       |  |      |     |      |  |      |     |    |  |  |     |   
|------------------------------------------------------------------------------------------------------ |  | ---- | --- | ---- |  | ---- | --- | -- |  |  | --- | --
|                                                                                                       |  | 2002 |     | 2001 |  | 2000
|                                                                                                       |  |      |     |      |  |     
|Expected income tax rate                                                                               |  |      | (34 | )%   |  |      | (34 | )% |  |  | (34 | )%
|State taxes, net of U.S. Federal tax benefit                                                           |  |      | (6  | )    |  |      | (6  | )  |  |  | (6  | ) 
|Research and development and other tax credits                                                         |  |      | (2  | )    |  |      | (2  | )  |  |  | (22 | ) 
|Disposition of investments                                                                             |  |      |    |      |  |      |    |    |  |  | 14  |   
|Non-deductible expenses, including purchased
    research and development and amortization of goodwill |  |      | 13  |      |  |      | 9   |    |  |  | 8   |   
|Change in beginning of year valuation allowance                                                        |  |      | 27  |      |  |      | 33  |    |  |  | 39  |   
|Other                                                                                                  |  |      |    |      |  |      |    |    |  |  | 1   |   
|                                                                                                       |  |      |     |      |  |      |     |    |  |  |     |   
|Effective income tax rate                                                                              |  |      | (2  | )%   |  |      | 0   | %  |  |  | 0   | % 
|                                                                                                       |  |      |     |      |  |      |     |    |  |  |     |   

No provision is made for income taxes on
undistributed earnings of wholly owned non-U.S. subsidiaries,
because it is the Companys present intention to reinvest
substantially all the earnings of these operations. At the end
of 2002, there was approximately $7.2 million of
accumulated undistributed earnings of those operations. It is
not practical for the Company to compute the amount of
unrecognized deferred tax liability on the undistributed
earnings. However, the Company would be able to apply foreign
tax credits to reduce any such tax liability and also would be
able to apply its net operating loss carryforward.

(13) Line of Credit

SpeedFam-IPEC Limited in the United Kingdom, a
wholly owned subsidiary of the Company, has a £950,000
($1.4 million) revolving line of credit with a major United
Kingdom bank. The revolving line of credit is secured by
property and equipment of the subsidiary and is payable on
demand. If the line of credit is utilized, interest will accrue
on the outstanding balance at 1.75% above the banks base
rate (4.00% at June 1, 2002). As of June 1, 2002 and
June 2, 2001, no amounts were outstanding under the line of
credit.

49



---



##### Table of Contents



SPEEDFAM-IPEC, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(14) Long-term Debt

Long-term debt at June 1, 2002 and
June 2, 2001 consists of the following (in thousands):

|                                                                         |                                        |      |         |         |  |   |         |         | 
|------------------------------------------------------------------------ | -------------------------------------- | ---- | ------- | ------- |  | - | ------- | ------- | 
|                                                                         |                                        | 2002 |         | 2001   
|                                                                         |                                        |      |         |        
|Convertible subordinated notes                                           |                                        | $    | 115,000 |         |  | $ | 115,000 |        
|Capital lease obligations, interest rates ranging
    from 4.08% to 9.8% |                                        |      | 119     |         |  |   | 353     |        
|                                                                         |                                        |      |         |         |  |   |         |        
|                                                                         |                                        |      | 115,119 |         |  |   | 115,353 |        
|Less current portion                                                     |                                        |      | 65      |         |  |   | 229     |        
|                                                                         |                                        |      |         |         |  |   |         |        
|                                                                         | Long term debt, net of current portion |      | $       | 115,054 |  |   | $       | 115,124 | 
|                                                                         |                                        |      |         |         |  |   |         |        

The Company completed a private placement in the
first quarter of 1998 of $115.0 million Convertible
Subordinated Notes (Notes) due in 2004 bearing interest at a
rate of 6.25%. The Notes were subsequently registered with the
Securities and Exchange Commission in 1998. Interest is payable
semi-annually in March and September. The Notes are subordinated
to all existing and future senior indebtedness and are
effectively subordinated to all liabilities, including trade
payables and lease obligations of the Company and its
subsidiaries. The Notes can be converted into the Companys
common stock at a conversion price of $54.93 per share. The
Notes are redeemable by the Company. Debt issuance costs of
$3.8 million incurred in connection with the issuance have
been included in other assets and are being amortized over seven
years.

The Company entered into lease financing
arrangements for certain equipment that expire at various dates
through September 2004.

The future maturities of long-term debt are as
follows (in thousands):

|      |       |        |         |         | 
|----- | ----- | ------ | ------- | ------- | 
|Years |       | Amount
|      |       |       
|2003  |       | $      | 65      |        
|2004  |       |        | 115,040 |        
|2005  |       |        | 14      |        
|      |       |        |         |        
|      | Total |        | $       | 115,119 | 
|      |       |        |         |        

(15) 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.

50



---



##### Table of Contents



SPEEDFAM-IPEC, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Raytheon
Aircraft Company Litigation

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

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

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

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

The Company and its subsidiaries occupy certain
manufacturing and office facilities and use certain equipment
under noncancelable operating leases expiring at various dates
through 2006. Rental expense was approximately
$3.0 million, $3.4 million, and $3.0 million in 2002,
2001, and 2000, respectively.

Future minimum lease payments for all
noncancelable operating leases having remaining terms in excess
of one year at the end of 2002, excluding the lease termination
payments relating to the former IPEC Planar facility which are
classified as restructuring costs (refer to Note 4) and the
lease of the Companys corporate headquarters and research
and development facilities subsequent to June 1, 2002
(refer to note 25), are as follows (in thousands):

|           |  |        |       | 
|---------- |  | ------ | ----- | 
|Year       |  | Amount
|           |  |       
|2003       |  | $      | 1,131 | 
|2004       |  |        | 798   | 
|2006       |  |        | 359   | 
|2006       |  |        | 76    | 
|2007       |  |        | 26    | 
|Thereafter |  |        | 6     | 
|           |  |        |       | 
|Total      |  | $      | 2,396 | 
|           |  |        |       | 

(16) Forward Exchange Contracts

The notional amounts of foreign exchange
contracts as of June 1, 2002 and June 2, 2001 were as
follows (in thousands):

|                                                        |  |      |       |      |  |   |       | 
|------------------------------------------------------- |  | ---- | ----- | ---- |  | - | ----- | 
|                                                        |  | 2002 |       | 2001
|                                                        |  |      |       |     
|Forward exchange contracts to buy foreign currency      |  | $    | 65    |      |  | $ | 5,232 | 
|                                                        |  |      |       |      |  |   |       | 
|Forward exchange contracts to sell foreign
    currency |  | $    | 2,252 |      |  | $ | 5,153 | 
|                                                        |  |      |       |      |  |   |       | 

51



---



##### Table of Contents



SPEEDFAM-IPEC, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

All currency forward contracts outstanding at
June 1, 2002 have maturities of less than one year and are
primarily to buy or sell Japanese yen in exchange for U.S.
dollars. Management believes that these contracts should not
subject the Company to undue risk from foreign exchange
movements, because gains and losses on these contracts generally
offset gains and losses on the assets, liabilities, and
transactions being hedged.

(17) Employee Benefits

The Company maintains defined-contribution
savings and profit-sharing plans for its employees. The plans
cover certain employees who meet length of service requirements.
Effective November 30, 2001, the Company established a
discretionary matching program whereby the Company contributes a
matching contribution to the plans in the form of Company stock
every six months. In 2002, 63,903 shares were contributed
at a price of $3.06, resulting in an expense of
$0.2 million. Prior to the implementation of this program,
total Company contributions were $1.2 million and
$1.1 million 2001 and 2000, respectively. These
contributions were made in cash.

The Companys 1995 Employee Stock Purchase
Plan qualifies under Section 423 of the Internal Revenue
Code. The maximum number of shares of the Companys stock
which shall be made available for sale under the Plan shall be
1,300,000 shares plus an annual increase to be added on
June 1 of each year (beginning June 1, 2001) equal to
the lesser of (i) 1,000,000 shares, (ii) 1% of the
outstanding shares of the Company, or (iii) a number of
shares determined by the Board of Directors of the Company. In
2002 and 2001, 306,720 and 301,164 shares were added to the
plan, respectively. Payroll deductions for the purchase of stock
may not exceed 15% of an employees base compensation, or
$25,000. The employee stock purchase plan provides that eligible
employees may purchase stock at 85% of its fair value on
specified dates. Under the plan, the Company sold approximately
398,000, 330,000 and 67,000 shares in 2002, 2001, and 2000,
respectively.

(18) Warrants and Stock Option
Plans

Warrants

A total of 338,210 warrants to acquire
common stock were issued in connection with preferred stock
previously outstanding and were assigned a value of
$4.8 million. The warrants have an exercise price of $34.61
and expire on December 16, 2002.

Stock
Options

The Company grants options to employees under the
1991 Employee Incentive Stock Option Plan and the 1995 Stock
Plan for Employees and Directors of the Company. Under the
plans, options may be granted to purchase up to
6,800,000 shares of the Companys authorized but
unissued common stock. Stock options are granted at a price not
less than the fair market value on the date of grant.
Substantially all stock option vesting periods range from four
to five years.

The Companys 1992 Stock Option Plan
provides for the issuance of incentive stock options and
non-qualified stock options to purchase up to
3,727,500 shares of common stock to employees, directors,
and consultants. The options vest over periods ranging up to
five years. Options may be granted to purchase shares of the
Companys common stock at not less than fair market value
at the date of grant, and are exercisable for a period not
exceeding ten years from that date.

The Companys 2001 Nonstatutory Stock Option
Plan for employees and directors provides for the issuance of
non-qualified stock options to purchase up to
3,000,000 shares of common stock. The vesting is determined
for each grant issued. Options may be granted to purchase shares
of the Companys common stock at not less than fair market
value at the date of grant, and are exercisable for a period not
exceeding ten years from that date.

52



---



##### Table of Contents



SPEEDFAM-IPEC, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The following table summarizes option activity
and related information:

|                        |                     |         |           |                 |   |          |              |              |  |   |       |       | 
|----------------------- | ------------------- | ------- | --------- | --------------- | - | -------- | ------------ | ------------ |  | - | ----- | ----- | 
|                        |                     |         |           |                 |   | Weighted
|                        |                     |         |           |                 |   | Average 
|                        |                     |         |           |                 |   | Exercise
|                        |                     | Options |           | Price Per Share |   | Price   
|                        |                     |         |           |                 |   |         
|Balance at May 31, 1999 |                     |         | 3,813,839 |                 |   | $        | 2.04  59.00 |              |  | $ | 20.71 |      
|                        | Granted             |         |           | 2,213,750       |   |          |              | 9.44  21.50 |  |   |       | 11.86 | 
|                        | Exercised           |         |           | (242,214        | ) |          |              | 2.04  25.18 |  |   |       | 12.05 | 
|                        | Canceled or expired |         |           | (402,292        | ) |          |              | 2.04  56.25 |  |   |       | 19.98 | 
|                        |                     |         |           |                 |   |          |              |              |  |   |       |      
|Balance at June 3, 2000 |                     |         | 5,383,083 |                 |   | $        | 2.04  59.00 |              |  | $ | 17.51 |      
|                        | Granted             |         |           | 1,554,100       |   |          |              | 4.56  20.06 |  |   |       | 5.38  | 
|                        | Exercised           |         |           | (84,480         | ) |          |              | 2.04  19.54 |  |   |       | 9.81  | 
|                        | Canceled or expired |         |           | (1,457,596      | ) |          |              | 2.04  59.00 |  |   |       | 17.10 | 
|                        |                     |         |           |                 |   |          |              |              |  |   |       |      
|Balance at June 2, 2001 |                     |         | 5,395,107 |                 |   | $        | 2.04  59.00 |              |  | $ | 13.77 |      
|                        | Granted             |         |           | 2,704,500       |   |          |              | 1.10   4.69 |  |   |       | 3.40  | 
|                        | Exercised           |         |           | (95,411         | ) |          |              | 1.51   4.56 |  |   |       | 3.46  | 
|                        | Canceled or expired |         |           | (2,274,191      | ) |          |              | 1.10  56.25 |  |   |       | 15.59 | 
|                        |                     |         |           |                 |   |          |              |              |  |   |       |      
|Balance at June 1, 2002 |                     |         | 5,730,005 |                 |   | $        | 1.10  59.00 |              |  | $ | 8.54  |      
|                        |                     |         |           |                 |   |          |              |              |  |   |       |      

The following table summarizes information about
stock options outstanding at June 1, 2002:

|                |  |             |             |             |  |           |     |             |  |           |       |  |  |  |           |  |  |   |       | 
|--------------- |  | ----------- | ----------- | ----------- |  | --------- | --- | ----------- |  | --------- | ----- |  |  |  | --------- |  |  | - | ----- | 
|                |  |             |             | Weighted    |  |           |     |             |  |          
|                |  | Options     |             | Average     |  |           |     | Options     |  |          
|                |  | Outstanding |             | Remaining   |  | Weighted- |     | Exercisable |  | Weighted-
|                |  | at          |             | Contractual |  | Average   |     | at          |  | Average  
|Range of        |  | June 1,     |             | Life        |  | Exercise  |     | June 1,     |  | Exercise 
|Exercise Prices |  | 2002        |             | (Years)     |  | Price     |     | 2002        |  | Price    
|                |  |             |             |             |  |           |     |             |  |          
|$ 2.04   5.9   |  |             | 0 3,181,398 |             |  |           | 7.4 |             |  | $         | 3.70  |  |  |  | 1,122,985 |  |  | $ | 3.96  | 
|$ 5.91  11.8   |  |             | 0 900,900   |             |  |           | 7.0 |             |  |           | 9.32  |  |  |  | 539,500   |  |  |   | 9.45  | 
|$11.81  17.70  |  |             | 710,553     |             |  |           | 7.6 |             |  |           | 12.68 |  |  |  | 447,399   |  |  |   | 12.70 | 
|$17.71  23.60  |  |             | 856,827     |             |  |           | 4.3 |             |  |           | 19.64 |  |  |  | 823,894   |  |  |   | 19.62 | 
|$23.61  29.50  |  |             | 13,607      |             |  |           | 6.1 |             |  |           | 24.36 |  |  |  | 13,017    |  |  |   | 24.28 | 
|$29.51  35.40  |  |             | 6,404       |             |  |           | 5.3 |             |  |           | 31.17 |  |  |  | 6,364     |  |  |   | 34.18 | 
|$35.41  41.30  |  |             | 49,716      |             |  |           | 4.9 |             |  |           | 36.52 |  |  |  | 49,596    |  |  |   | 36.52 | 
|$41.31  47.20  |  |             | 1,200       |             |  |           | 5.2 |             |  |           | 45.93 |  |  |  | 960       |  |  |   | 45.73 | 
|$53.11  59.00  |  |             | 9,400       |             |  |           | 3.1 |             |  |           | 56.37 |  |  |  | 8,320     |  |  |   | 56.36 | 
|                |  |             |             |             |  |           |     |             |  |           |       |  |  |  |           |  |  |   |       | 
|$ 2.04  59.0   |  |             | 0 5,730,005 |             |  |           | 6.9 |             |  | $         | 8.54  |  |  |  | 3,012,035 |  |  | $ | 11.37 | 
|                |  |             |             |             |  |           |     |             |  |           |       |  |  |  |           |  |  |   |       | 

The Company applies the intrinsic value-based
method of accounting for its fixed plan stock options.
Accordingly, no compensation cost has been recognized for the
stock option and stock purchase plans. Had compensation cost for
the Companys stock option and stock purchase plans been
determined based on the fair

53



---



##### Table of Contents



SPEEDFAM-IPEC, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

value at the grant date for awards in 2002, 2001
and 2000, the Companys net loss and loss per share would
have been increased to the pro forma amounts indicated below (in
thousands except per share data):

|                                                 |  |      |         |      |  |      |          |   |  |   |         |  
|------------------------------------------------ |  | ---- | ------- | ---- |  | ---- | -------- | - |  | - | ------- | -
|                                                 |  | 2002 |         | 2001 |  | 2000
|                                                 |  |      |         |      |  |     
|Net loss as reported                             |  | $    | (94,072 | )    |  | $    | (134,488 | ) |  | $ | (14,178 | )
|Pro forma net loss                               |  |      | (99,983 | )    |  |      | (144,343 | ) |  |   | (23,588 | )
|Basic and diluted net loss per share as reported |  |      | (3.09   | )    |  |      | (4.49    | ) |  |   | (0.48   | )
|Basic and diluted pro forma net loss per share   |  |      | (3.29   | )    |  |      | (4.82    | ) |  |   | (0.80   | )
|                                                 |  |      |         |      |  |      |          |   |  |   |         |  

In calculating pro forma compensation, the fair
value of each option is estimated on the date of grant using the
Black-Scholes option-pricing model, with the following weighted
average assumptions for grants made in 2002, 2001 and 2000.

|                        |  |      |      |      |  |      |      |   |  |  |      |  
|----------------------- |  | ---- | ---- | ---- |  | ---- | ---- | - |  |  | ---- | -
|                        |  | 2002 |      | 2001 |  | 2000
|                        |  |      |      |      |  |     
|Dividend yield          |  |      | None |      |  |      | None |   |  |  | None |  
|Expected volatility     |  |      | 105  | %    |  |      | 94   | % |  |  | 85   | %
|Risk-free interest rate |  |      | 3.73 |      |  |      | 4.55 |   |  |  | 6.60 |  
|Expected lives in years |  |      | 3    |      |  |      | 3    |   |  |  | 3    |  
|                        |  |      |      |      |  |      |      |   |  |  |      |  

The weighted average fair value of options
granted was $2.10 per share, $3.34 per share, and $6.88 per
share for 2002, 2001, and 2000, respectively.

(19) Business Segment
Information

The Company classifies its products into three
core business segments: (i) the CMP Group, which is
comprised of the Companys development and production of
chemical mechanical planarization systems; (ii) the Surface
Technology Group, which is comprised of the distribution of
high-throughput precision surface processing equipment used in
silicon wafer products; and (iii) the Industrial
Applications Group, which is comprised of the distribution of
high-throughput precision surface processing equipment used in
general industrial applications. Information concerning the
Companys business segments in 2002, 2001, and 2000 is as
follows (in thousands):

|                                 |                               |                                       |   |         |         |   |   |         |         |   |   |         |         | 
|-------------------------------- | ----------------------------- | ------------------------------------- | - | ------- | ------- | - | - | ------- | ------- | - | - | ------- | ------- | 
|Net sales to customers:          |                               |                                       |   |         |         |   |   |         |         |   |   |        
|                                 | CMP Group                     |                                       | $ | 88,700  |         |   | $ | 217,358 |         |   | $ | 230,191 |        
|                                 | Surface Technology Group      |                                       |   | 16,241  |         |   |   | 29,159  |         |   |   | 29,155  |        
|                                 | Industrial Applications Group |                                       |   | 14,225  |         |   |   | 20,563  |         |   |   | 14,702  |        
|                                 |                               |                                       |   |         |         |   |   |         |         |   |   |        
|                                 |                               | Total net sales                       |   | $       | 119,166 |   |   | $       | 267,080 |   |   | $       | 274,048 | 
|                                 |                               |                                       |   |         |         |   |   |         |         |   |   |        
|Segment operating profit (loss): |                               |                                       |   |         |         |   |   |         |         |   |   |        
|                                 | CMP Group                     |                                       | $ | (60,983 | )       |   | $ | (58,535 | )       |   | $ | (1,157  | )      
|                                 | Surface Technology Group      |                                       |   | (1,603  | )       |   |   | (2,119  | )       |   |   | (651    | )      
|                                 | Industrial Applications Group |                                       |   | 1,248   |         |   |   | 3,173   |         |   |   | 2,341   |        
|                                 |                               |                                       |   |         |         |   |   |         |         |   |   |        
|                                 |                               | Total segment operating profit (loss) |   |         | (61,338 | ) |   |         | (57,481 | ) |   |         | 533     | 

54



---



##### Table of Contents



SPEEDFAM-IPEC, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

|                                                       |                               |                            |         |        |         |   |         |         |         |   |         |        |         |  
|------------------------------------------------------ | ----------------------------- | -------------------------- | ------- | ------ | ------- | - | ------- | ------- | ------- | - | ------- | ------ | ------- | -
|General corporate expense                              |                               |                            | (25,892 | )      |         |   | (27,075 | )       |         |   | (16,336 | )     
|Interest expense, net                                  |                               |                            | (6,742  | )      |         |   | (2,737  | )       |         |   | (1,200  | )     
|Gain (loss) on disposal of investment in
    affiliate |                               |                            |        |        |         |   | (10,763 | )       |         |   | 6,103   |       
|Equity in net earnings (loss) of affiliates            |                               |                            |        |        |         |   | 110     |         |         |   | (3,278  | )     
|                                                       |                               |                            |         |        |         |   |         |         |         |   |         |       
|                                                       |                               | Loss before income taxes   |         | $      | (93,972 | ) |         | $       | (97,946 | ) |         | $      | (14,178 | )
|                                                       |                               |                            |         |        |         |   |         |         |         |   |         |       
|Identifiable assets:                                   |                               |                            |         |        |         |   |         |         |         |   |         |       
|                                                       | CMP Group                     |                            | $       | 84,055 |         |   | $       | 169,830 |         |   |         |        |        
|                                                       | Surface Technology Group      |                            |         | 4,600  |         |   |         | 13,141  |         |   |         |        |        
|                                                       | Industrial Applications Group |                            |         | 6,543  |         |   |         | 11,133  |         |   |         |        |        
|                                                       | Corporate assets              |                            |         | 81,629 |         |   |         | 120,781 |         |   |         |        |        
|                                                       |                               |                            |         |        |         |   |         |         |         |   |         |       
|                                                       |                               | Total identifiable assets  |         | $      | 176,827 |   |         | $       | 314,885 |   |         |        |         |  
|                                                       |                               |                            |         |        |         |   |         |         |         |   |         |       
|Capital expenditures:                                  |                               |                            |         |        |         |   |         |         |         |   |         |       
|                                                       | CMP Group                     |                            | $       | 2,282  |         |   | $       | 11,489  |         |   | $       | 9,790  |        
|                                                       | Surface Technology Group      |                            |         | 4      |         |   |         | 265     |         |   |         | 225    |        
|                                                       | Industrial Applications Group |                            |         | 186    |         |   |         |        |         |   |         |       |        
|                                                       | Corporate                     |                            |         | 758    |         |   |         | 3,528   |         |   |         | 5,045  |        
|                                                       |                               |                            |         |        |         |   |         |         |         |   |         |       
|                                                       |                               | Total capital expenditures |         | $      | 3,230   |   |         | $       | 15,282  |   |         | $      | 15,060  |  
|                                                       |                               |                            |         |        |         |   |         |         |         |   |         |       
|Depreciation expense:                                  |                               |                            |         |        |         |   |         |         |         |   |         |       
|                                                       | CMP Group                     |                            | $       | 6,152  |         |   | $       | 9,885   |         |   | $       | 11,101 |        
|                                                       | Surface Technology Group      |                            |         | 189    |         |   |         | 323     |         |   |         | 808    |        
|                                                       | Industrial Applications Group |                            |         | 154    |         |   |         | 127     |         |   |         | 176    |        
|                                                       | Corporate                     |                            |         | 4,313  |         |   |         | 4,840   |         |   |         | 3,283  |        
|                                                       |                               |                            |         |        |         |   |         |         |         |   |         |       
|                                                       |                               | Total depreciation expense |         | $      | 10,808  |   |         | $       | 15,175  |   |         | $      | 15,368  |  
|                                                       |                               |                            |         |        |         |   |         |         |         |   |         |       

Intersegment sales are not material. Segment
operating profit represents total net sales less cost of sales
and operating expenses, and excludes equity in net earnings of
affiliates, general corporate expenses, interest income and
expense and income taxes. Segment identifiable assets are those
assets employed in each segments operation. Corporate
assets consist primarily of cash and cash equivalents,
short-term investments, investments in affiliates and property,
plant and equipment used in corporate and research and
development activities.

55



---



##### Table of Contents



SPEEDFAM-IPEC, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Information regarding the Companys
operations in the United States and internationally is presented
below (in thousands):

|                                                |               |                                |   |        |         |      |   |         |         |  |   |         |         | 
|----------------------------------------------- | ------------- | ------------------------------ | - | ------ | ------- | ---- | - | ------- | ------- |  | - | ------- | ------- | 
|                                                |               | 2002                           |   | 2001   |         | 2000
|                                                |               |                                |   |        |         |     
|Third party sales (by destination of shipment): |               |                                |   |        |         |      |   |         |         |  |   |        
|                                                | United States |                                | $ | 43,432 |         |      | $ | 104,455 |         |  | $ | 83,461  |        
|                                                | Europe        |                                |   | 40,454 |         |      |   | 61,948  |         |  |   | 72,876  |        
|                                                | Asia          |                                |   | 35,280 |         |      |   | 100,677 |         |  |   | 115,407 |        
|                                                | Other         |                                |   |       |         |      |   |        |         |  |   | 2,304   |        
|                                                |               |                                |   |        |         |      |   |         |         |  |   |        
|                                                |               | Consolidated net sales         |   | $      | 119,166 |      |   | $       | 267,080 |  |   | $       | 274,048 | 
|                                                |               |                                |   |        |         |      |   |         |         |  |   |        
|Long-lived assets:                              |               |                                |   |        |         |      |   |         |         |  |   |        
|                                                | United States |                                | $ | 62,118 |         |      | $ | 85,097  |         |  |   |         |        
|                                                | Europe        |                                |   | 418    |         |      |   | 320     |         |  |   |         |        
|                                                | Asia          |                                |   | 1,155  |         |      |   | 1,449   |         |  |   |         |        
|                                                |               |                                |   |        |         |      |   |         |         |  |   |        
|                                                |               | Consolidated long-lived assets |   | $      | 63,691  |      |   | $       | 86,866  |  |   |         |         | 
|                                                |               |                                |   |        |         |      |   |         |         |  |   |        

(20) Significant Customers

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

|         |  |      |    |      |  |      |    |   |  |  |    |  
|-------- |  | ---- | -- | ---- |  | ---- | -- | - |  |  | -- | -
|Customer |  | 2002 |    | 2001 |  | 2000
|         |  |      |    |      |  |     
|A        |  |      | 11 | %    |  |      | 15 | % |  |  | 11 | %
|B        |  |      | 14 | %    |  |      | 11 | % |  |  | 12 | %
|C        |  |      | *  |      |  |      | 10 | % |  |  | *  |  




* Less than 10%.


(21) Quarterly Financial Information
(Unaudited)

Following is a summary of unaudited quarterly
information (in thousands except per share data):

|                                     |  |            |         |            |  |         |         |            |  |   |         |   |  |   |        |  
|------------------------------------ |  | ---------- | ------- | ---------- |  | ------- | ------- | ---------- |  | - | ------- | - |  | - | ------ | -
|                                     |  | First      |         | Second     |  | Third   |         | Fourth    
|                                     |  | Quarter(1) |         | Quarter(2) |  | Quarter |         | Quarter(3)
|                                     |  |            |         |            |  |         |         |           
|Year ended June 1, 2002:             |  |            |         |            |  |         |         |            |  |   |         |   |  |   |        |  
|Net sales                            |  | $          | 41,082  |            |  | $       | 25,827  |            |  | $ | 25,119  |   |  | $ | 27,138 |  
|                                     |  |            |         |            |  |         |         |            |  |   |         |   |  |   |        |  
|Gross margin                         |  | $          | 9,387   |            |  | $       | (32,083 | )          |  | $ | 6,320   |   |  | $ | 6,633  |  
|                                     |  |            |         |            |  |         |         |            |  |   |         |   |  |   |        |  
|Net loss                             |  | $          | (17,005 | )          |  | $       | (61,677 | ))         |  | $ | (10,434 | ) |  | $ | (4,956 | )
|                                     |  |            |         |            |  |         |         |            |  |   |         |   |  |   |        |  
|Basic and diluted net loss per share |  | $          | (0.56   | )          |  | $       | (2.03   | )          |  | $ | (0.34   | ) |  | $ | (0.16  | )
|                                     |  |            |         |            |  |         |         |            |  |   |         |   |  |   |        |  




|    |                                                                                                                                                                    
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Includes a non-cash charge of $2.6 million,
    or ($0.09) per share, to reflect the cumulative effect of the
    accounting change for goodwill (refer to Note 5).
|   
|(2) | Includes restructuring and other charges totaling
    $48.1 million, or ($1.57) per share, associated with the
    continued industry downturn (refer to Note 2).  
|   
|(3) | Includes income tax benefit of $2.5 million,
    or $0.08 per share (refer to Note 12).                                                                            

56



---



##### Table of Contents



SPEEDFAM-IPEC, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

|                                     |  |              |         |            |  |            |        |         |  |   |         |   |  |   |         |  
|------------------------------------ |  | ------------ | ------- | ---------- |  | ---------- | ------ | ------- |  | - | ------- | - |  | - | ------- | -
|                                     |  | First        |         | Second     |  | Third      |        | Fourth 
|                                     |  | Quarter(1,2) |         | Quarter(1) |  | Quarter(3) |        | Quarter
|                                     |  |              |         |            |  |            |        |        
|Year ended June 2, 2001:             |  |              |         |            |  |            |        |         |  |   |         |   |  |   |         |  
|Net sales                            |  | $            | 73,019  |            |  | $          | 83,911 |         |  | $ | 58,818  |   |  | $ | 51,332  |  
|                                     |  |              |         |            |  |            |        |         |  |   |         |   |  |   |         |  
|Gross margin                         |  | $            | 15,934  |            |  | $          | 27,135 |         |  | $ | (15,289 | ) |  | $ | 10,755  |  
|                                     |  |              |         |            |  |            |        |         |  |   |         |   |  |   |         |  
|Net loss                             |  | $            | (69,515 | )          |  | $          | (2,381 | )       |  | $ | (50,929 | ) |  | $ | (11,663 | )
|                                     |  |              |         |            |  |            |        |         |  |   |         |   |  |   |         |  
|Basic and diluted net loss per Share |  | $            | (2.32   | )          |  | $          | (0.08  | )       |  | $ | (1.70   | ) |  | $ | (0.39   | )
|                                     |  |              |         |            |  |            |        |         |  |   |         |   |  |   |         |  




|    |                                                                                                                                                                                                                                                                                                                                                    
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Restated from original amounts reported to
    reflect the change in the Companys revenue recognition
    policy that occurred in the third quarter of 2001 as a result of
    SAB 101 (refer to Note 5).                                                                                                                                         
|   
|(2) | Includes a non-cash charge of $36.5 million,
    or ($1.22) per share, to reflect the cumulative effect of the
    accounting change for revenue recognition. Also includes
    restructuring and other charges totaling $19.2 million, or
    ($0.64) per share, associated with the disposal of the Far East
    Joint Venture (refer to Note 3).
|   
|(3) | Includes restructuring charges associated with
    the industry downturn of $39.1 million, or ($1.30) per
    share (refer to Note 2).                                                                                                                                                                                                             

(22) Other Expense, net

Other expense, net consisted of the following for
2002, 2001 and 2000 (in thousands):

|                     |  |      |        |      |  |      |        |   |  |   |        |  
|-------------------- |  | ---- | ------ | ---- |  | ---- | ------ | - |  | - | ------ | -
|                     |  | 2002 |        | 2001 |  | 2000
|                     |  |      |        |      |  |     
|Interest income      |  | $    | 1,053  |      |  | $    | 4,748  |   |  | $ | 6,808  |  
|Interest expense     |  |      | (7,796 | )    |  |      | (7,825 | ) |  |   | (8,008 | )
|Gain on sale of land |  |      |       |      |  |      | 1,799  |   |  |   |       |  
|Miscellaneous, net   |  |      | 110    |      |  |      | 495    |   |  |   | 746    |  
|                     |  |      |        |      |  |      |        |   |  |   |        |  
|                     |  | $    | (6,633 | )    |  | $    | (783   | ) |  | $ | (454   | )
|                     |  |      |        |      |  |      |        |   |  |   |        |  

(23) Other Comprehensive Income

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

|                                                     |                              |      |   |       |   |      |   |       |   |  |   |       |  
|---------------------------------------------------- | ---------------------------- | ---- | - | ----- | - | ---- | - | ----- | - |  | - | ----- | -
|                                                     |                              | 2002 |   | 2001  |   | 2000
|                                                     |                              |      |   |       |   |     
|Foreign currency translation adjustments:            |                              |      |   |       |   |      |   |       |   |  |   |      
|                                                     | Balance at beginning of year |      | $ | 803   |   |      | $ | 1,239 |   |  | $ | (60   | )
|                                                     | Adjustments for year         |      |   | 467   |   |      |   | (436  | ) |  |   | 1,299 |  
|                                                     |                              |      |   |       |   |      |   |       |   |  |   |      
|                                                     | Balance at end of year       |      | $ | 1,270 |   |      | $ | 803   |   |  | $ | 1,239 |  
|                                                     |                              |      |   |       |   |      |   |       |   |  |   |      
|Unrealized holding gains (losses) on
    securities: |                              |      |   |       |   |      |   |       |   |  |   |      
|                                                     | Balance at beginning of year |      | $ | 24    |   |      | $ | (487  | ) |  | $ | (170  | )
|                                                     | Adjustments for year         |      |   | (24   | ) |      |   | 511   |   |  |   | (317  | )
|                                                     |                              |      |   |       |   |      |   |       |   |  |   |      
|                                                     | Balance at end of year       |      | $ |      |   |      | $ | 24    |   |  | $ | (487  | )
|                                                     |                              |      |   |       |   |      |   |       |   |  |   |      

57



---



##### Table of Contents



SPEEDFAM-IPEC, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

|                                                         |                              |      |   |       |  |      |   |     |  |  |   |      |  
|-------------------------------------------------------- | ---------------------------- | ---- | - | ----- |  | ---- | - | --- |  |  | - | ---- | -
|                                                         |                              | 2002 |   | 2001  |  | 2000
|                                                         |                              |      |   |       |  |     
|Total accumulated other comprehensive income
    (loss): |                              |      |   |       |  |      |   |     |  |  |   |     
|                                                         | Balance at beginning of year |      | $ | 827   |  |      | $ | 752 |  |  | $ | (230 | )
|                                                         | Adjustments for year         |      |   | 443   |  |      |   | 75  |  |  |   | 982  |  
|                                                         |                              |      |   |       |  |      |   |     |  |  |   |     
|                                                         | Balance at end of year       |      | $ | 1,270 |  |      | $ | 827 |  |  | $ | 752  |  
|                                                         |                              |      |   |       |  |      |   |     |  |  |   |     

(24) Related Party Transactions

During 2002, 2001 and 2000, the Company had
purchases of raw materials of approximately $0.3 million,
$6.2 million and $2.9 million, respectively, from
Berkeley Process Controls, a California-based company, that is
affiliated with a former member of the Companys Board of
Directors.

(25) Subsequent Events
(Unaudited)

On June 21, 2002, the Company completed a
sale-leaseback transaction of its corporate headquarters and
research and development facilities in Chandler, Arizona. The
purchaser/ lessor is Phoenix Industrial Investment Partners,
L.P. (the Buyer), a firm controlled by Kenneth Levy,
a director of the Company. The sales price was $25 million.

In connection with the sale of the buildings, the
Company has simultaneously entered into a 15-year lease for the
buildings. The lease, which has been accounted for as an
operating lease, contains provisions for three, five-year
extensions and requires minimum annual rental payments of
$3.0 million. Annual operating expenses will increase by
approximately $2.4 million, reflecting the new rental
payments, offset by interest income on the net proceeds and
reduced depreciation expense.

As a result of the transaction, the Company
received net cash proceeds of approximately $23.7 million.
The book value of buildings and improvements removed from the
balance sheet in the first quarter of 2003 is
$25.1 million. The loss on the sale of the buildings was
immaterial.

On August 11, 2002, the Company entered into
an Agreement and Plan of Reorganization with Novellus Systems,
Inc. (Novellus), a Delaware corporation and the leader in thin
film deposition technology for the semiconductor industry.
Novellus will acquire all outstanding shares of SpeedFam-IPEC in
a stock-for-stock merger transaction. If the merger is
completed, the Company would become a wholly-owned subsidiary of
Novellus. Each share of SpeedFam-IPEC common stock outstanding
as of the closing date will be converted into 0.1818 shares
of Novellus common stock on a fixed exchange ratio basis. The
merger is intended to qualify as a tax-free reorganization under
IRS regulations. The transaction has been approved by the board
of directors of both companies and is expected to formally close
in the second quarter of fiscal 2003.

58



---



##### Table of Contents






Item 9.Changes
in and Disagreements with Accountants on Accounting and
Financial Disclosure.

None.




PART III




Item 10.Directors,
Executive Officers And Key Employees

Directors of the Company

|                   |  |     |    |                      |  |                                                             |  |  |      | 
|------------------ |  | --- | -- | -------------------- |  | ----------------------------------------------------------- |  |  | ---- | 
|                   |  |     |    |                      |  | Director                                                   
|Name of Nominee    |  | Age |    | Principal Occupation |  | Since                                                      
|                   |  |     |    |                      |  |                                                            
|Peter J. Simone    |  |     | 55 |                      |  | Executive Chairman, SpeedFam-IPEC, Inc.                     |  |  | 2001 | 
|Richard J. Faubert |  |     | 54 |                      |  | President, Chief Executive Officer,
    SpeedFam-IPEC, Inc. |  |  | 1998 | 
|Neil R. Bonke      |  |     | 60 |                      |  | Private Investor                                            |  |  | 1996 | 
|Kenneth Levy       |  |     | 60 |                      |  | Chairman of the Board, KLA-Tencor Corporation               |  |  | 1999 | 
|Carl Neun          |  |     | 58 |                      |  | Chairman of the Board, WireX Communications, Inc.           |  |  | 2000 | 

Peter J. Simonehas
been Executive Chairman of the Board since June 2001. From
August 2000 to February 2001, Mr. Simone was President and
a director of Active Control eXperts, Inc. (now a wholly-owned
subsidiary of Cymer, Inc.), a leading supplier of precision
motion control and smart structures technology. He served as a
consultant to Active Control eXperts from January 2000 to August
2000. Mr. Simone served as President, Chief Executive
Officer and a director of Xionics Document Technologies, Inc., a
provider of software solutions for printer and copier
manufacturers, from April 1997 until Xionics merged with Oak
Technology, Inc. in January 2000. From 1992 to 1996,
Mr. Simone was Group Vice President of the Time/ Data
Systems Division of Simplex Time Recorder Company, Inc. From
1974 to 1992, Mr. Simone held various management positions,
including President and director, with GCA Corporation, a
semiconductor capital equipment corporation. Mr. Simone
also serves on the boards of Cymer, Inc., Oak Technology, Inc.
and several private companies.

Richard J. Fauberthas been a director of the Company
since October 1998. Mr. Faubert has served as its President
and Chief Executive Officer since October 1998. From September
1994 until October 1998, he served as Vice President and General
Manager of the TV/ Comm Business Unit of Tektronix, Inc., a
communications test and measurement company. Mr. Faubert
also serves on the board of directors of RadiSys Corporation, a
provider of Internet and communications products, and Semi North
America Advisory Board, a nonprofit consortium whose members are
suppliers to the global semiconductor manufacturing industry.

Neil R. Bonkehas
been a director of the Company since May 1996. Mr. Bonke
was the Chairman of the Board of Electroglas, Inc. from April
1993 to July 1997 and its Chief Executive Officer from April
1993 until April 1996. Mr. Bonke was a Group Vice President
of General Signal and President of General Signals
Semiconductor Equipment Operations from September 1991 to July
1993. He also serves on the boards of Boxer Cross, Inc., Sanmina
Corporation and San Jose State University Foundation.

Kenneth Levyhas
been a director of the Company since April 1999. Mr. Levy
was a director of Integrated Process Equipment Corp (IPEC) from
May 1995 to April 1999. Mr. Levy is a co-founder of
KLA-Tencor Corporation, a semiconductor manufacturing
instrumentation company, and since July 1, 1999 has been
its Chairman of the Board and a director. From July 1, 1998
until June 30, 1999, he was Chief Executive Officer and a
director of KLA-Tencor Corporation. From April 30, 1997
until June 30, 1998 he was Chairman of the Board and a
director of KLA-Tencor Corporation. From May 1975 until
April 30, 1997, he was Chairman of the Board, Chief
Executive Officer and a director of KLA-Tencor Corporation.
Mr. Levy is a director of Ultratech Stepper, Inc., Extreme
Networks, and several privately held companies. Mr. Levy is
also a director emeritus of Semiconductor Equipment and
Materials Institute.

Carl Neunhas been a
director of the Company since October 2000. From March 1993 to
January 2000, Mr. Neun was Senior Vice President and Chief
Financial Officer of Tektronix, Inc. From September 1987 through
March 1993, he was Senior Vice President and Chief Financial
Officer of Conner Peripherals, Inc., a

59



---



##### Table of Contents



disk drive manufacturer. Mr. Neun also
serves on the boards of Powerwave Technologies, Inc., RadiSys
Corporation and Planar Systems, Inc.


Executive Officers of the Company

|                                                             |  |     |    |              |  |                                             |      |  |  |                                                                                                                                                                   
|------------------------------------------------------------ |  | --- | -- | ------------ |  | ------------------------------------------- | ---- |  |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                             |  |     |    | Held Present |  |                                            
|Name and Position                                            |  | Age |    | Office Since |  | Other Positions Held During Past Five Years
|                                                             |  |     |    |              |  |                                            
|Richard J. Faubert                                           |  |     | 54 |              |  |                                             | 1998 |  |  | Vice President of the T.V. and                                                                                                                                    
|President and Chief Executive Officer                        |  |     |    |              |  |                                             |      |  |  | Telecommunications Test Business Unit of
    Tektronix, Inc.                                                                                                      
|J. Michael Dodson                                            |  |     | 41 |              |  |                                             | 1999 |  |  | Vice President, Corporate Controller                                                                                                                              
|Chief Financial Officer and Secretary                        |  |     |    |              |  |                                             |      |  |  | and Chief Accounting Officer of Novellus Systems,
    Inc.                                                                                                        
|Giovanni N. Nocerino                                         |  |     | 50 |              |  |                                             | 2000 |  |  | Executive Vice President of CVC, Inc.                                                                                                                             
|Executive Vice President of Sales,
    Marketing and Service |  |     |    |              |  |                                             |      |  |  | (now Veeco Instruments); Vice President and
    General Manager at Varian; Executive Vice President and member
    of the Board at Sony Materials Research Company
|Saket Chadda                                                 |  |     | 36 |              |  |                                             | 2000 |  |  | Senior Section Manager at Atmel                                                                                                                                   
|Vice President and                                           |  |     |    |              |  |                                             |      |  |  | Corporation; Project Manager at OnTrak                                                                                                                            
|Chief Technical Officer                                      |  |     |    |              |  |                                             |      |  |  | Systems, Inc; Senior Development Engineer
    Specialist at Philips Semiconductors                                                                                
|Robert Carey                                                 |  |     | 61 |              |  |                                             | 2001 |  |  | Vice President of Research and Development, CMP
    Group                                                                                                         

Richard J. Fauberthas served as our President and Chief
Executive Officer and as a member of our board since October
1998. From September 1994 until October 1998, he served as Vice
President and General Manager of the TV/Comm Business Unit of
Tektronix, Inc., a communications test and measurement company.
Mr. Faubert also serves on the board of directors of
RadiSys Corporation, a provider of Internet and communications
products, and Semi North America Advisory Board, a nonprofit
consortium whose members are suppliers to the global
semiconductor manufacturing industry.

J. Michael Dodsonhas served as our Chief Financial
Officer since August 1999. Mr. Dodson was vice president,
corporate controller, and chief accounting officer of Novellus
Systems, Inc., a publicly traded supplier of thin film
deposition technologies for semiconductor manufacturing. Prior
to joining Novellus in April 1996, Mr. Dodson spent
12 years with the public accounting firm of Ernst &
Young LLP in San Jose, California. He holds a B.B.A. degree in
accounting and information systems analysis from the University
of Wisconsin at Madison.

Giovanni N. Nocerinohas served as our Executive Vice
President of sales, marketing, and service since June 2000. From
1998 to 2000, Dr. Nocerino was executive vice president at
CVC (now Veeco Instruments), where he was responsible for field
operations and business development. From 1994 to 1998, he
served as vice president and general manager of sales and
marketing at Varian Associates, Inc. From 1992 to 1994,
Dr. Nocerino served as executive vice president and member
of the board of directors at Sony Materials Research Company.
From 1982 to 1992, Dr. Nocerino served in various
management positions at Varian Associates, Inc. He holds a
bachelor of science degree with honors in physics and electronic
engineering and a doctorate in solid-state electronics from the
University of Manchester in the United Kingdom.

Saket Chaddahas
served as our Vice President & Chief Technical Officer for
our CMP Group since April 2000. From May 1997 to April 2000,
Dr. Chadda was responsible for the CMP, defect density and
process module integration groups at Atmel Corporation, a
company that specializes in the design, manufacturing and
marketing of advanced semiconductors. From May 1996 to April
1997, Dr. Chadda served

60



---



##### Table of Contents



as project manager for CMP polishing at OnTrak
Systems, Inc. (now a wholly-owned subsidiary of Lam Research
Corporation). From March 1994 to May 1996, Dr. Chadda was
senior development engineer and etch team leader at Philips
Semiconductor. Dr. Chadda holds a Ph.D. and an M.S. in
chemical engineering from the University of New Mexico and a
bachelor of technology degree in chemical engineering from the
Institute of Technology at Banaras Hindu University in Varanasi,
India.


Robert Careyhas
served as our Vice President of Research and Development for our
CMP Group since September 2001. From September 1998 to September
2001, Mr. Carey served as an engineering and business
consultant for a number of high technology companies. From March
1996 to September 1998, Mr. Carey was senior vice president
of technology at Brooks Automation, Inc., a leading supplier of
integrated tool and factory automation solutions for the global
semiconductor industry. From November 1988 to February 1996,
Mr. Carey served in various senior management positions at
General Signal. Mr. Carey holds a master of science degree
in systems engineering and a bachelor of science degree in
electrical engineering from the University of Strathclyde in
Glasgow, Scotland.

Compliance with Section 16(A) of the
Exchange Act

Section 16(a) of the Exchange Act requires
the Companys officers and directors, and persons who
beneficially own more than 10% of the Companys common
stock, to file certain reports regarding ownership of, and
transactions in, the Companys securities with the
Securities and Exchange Commission (SEC). Such
officers, directors and 10% shareholders are also required by
SEC rules to furnish the Company with copies of all
Section 16(a) forms that they file. Based solely on our
review of the copies of such forms we have received during the
most recent fiscal year, or written representations from certain
reporting persons, we believe that during fiscal 2002 all the
reporting persons complied with Section 16(a) filing
requirements.




Item 11.     Executive
Compensation

COMPENSATION OF EXECUTIVE OFFICERS

Summary Compensation Table

The following table shows the total compensation
awarded or paid to our President and Chief Executive Officer and
four other most highly paid executive officers that were
employed by us at the end of fiscal 2002. These officers are
collectively referred to as the Named Executive
Officers.

|                            |                          |        |      |        |  |              |         |              |  |              |         |                 |  |   |         |         |        |  |         |         |  |   |     |       | 
|--------------------------- | ------------------------ | ------ | ---- | ------ |  | ------------ | ------- | ------------ |  | ------------ | ------- | --------------- |  | - | ------- | ------- | ------ |  | ------- | ------- |  | - | --- | ----- | 
|                            |                          |        |      |        |  |              |         |              |  | Long Term    |         |                
|                            |                          |        |      |        |  |              |         |              |  | Compensation |         |                
|                            |                          |        |      |        |  |              |         |              |  | Awards       |         |                
|                            |                          |        |      |        |  |              |         |              |  | Securities   |         |                
|                            |                          |        |      |        |  |              |         | Other        |  | Underlying   |         |                
|                            |                          | Fiscal |      | Annual |  | Compensation |         | Annual       |  | Options      |         | All Other      
|Name and Principal Position |                          | Year   |      | Salary |  | Bonus        |         | Compensation |  | (# Shares)   |         | Compensation(1)
|                            |                          |        |      |        |  |              |         |              |  |              |         |                
|Richard J. Faubert          |                          |        | 2002 |        |  | $            | 320,000 |              |  | $            |        |                 |  | $ |        |         |        |  | 160,500 |         |  | $ |    |      
|                            | President and Chief      |        |      | 2001   |  |              |         | 406,154      |  |              |         |                |  |   |         | 106,240 | (2)(3) |  |         |        |  |   |     | 2,000 | 
|                            | Executive Officer        |        |      | 2000   |  |              |         | 400,000      |  |              |         |                |  |   |         | 39,566  | (2)    |  |         | 160,000 |  |   |     | 2,282 | 
|                           
|J. Michael Dodson(5)        |                          |        | 2002 |        |  | $            | 178,500 |              |  | $            |        |                 |  | $ |        |         |        |  | 80,500  |         |  | $ |    |      
|                            | Chief Financial Officer  |        |      | 2001   |  |              |         | 207,846      |  |              |         | 100,000         |  |   |         |        |        |  |         |        |  |   |     |      | 
|                            |                          |        | 2000 |        |  |              | 161,539 |              |  |              | 42,000  |                 |  |   | 153,962 | (2)     |        |  | 156,000 |         |  |   | 808 |      
|                           
|Giovanni Nocerino(6)        |                          |        | 2002 |        |  | $            | 238,000 |              |  | $            | 100,000 |                 |  | $ | 33,756  | (2)     |        |  | 80,500  |         |  | $ |    |      
|                            | Executive Vice President |        |      | 2001   |  |              |         | 278,923      |  |              |         | 100,000         |  |   |         | 93,739  | (2)    |  |         |        |  |   |     | 2,000 | 

61



---



##### Table of Contents



|                            |                                                             |        |      |        |  |              |         |              |  |              |        |                 |  |   |       |        |        |  |        |        |  |   |   |       | 
|--------------------------- | ----------------------------------------------------------- | ------ | ---- | ------ |  | ------------ | ------- | ------------ |  | ------------ | ------ | --------------- |  | - | ----- | ------ | ------ |  | ------ | ------ |  | - | - | ----- | 
|                            |                                                             |        |      |        |  |              |         |              |  | Long Term    |        |                
|                            |                                                             |        |      |        |  |              |         |              |  | Compensation |        |                
|                            |                                                             |        |      |        |  |              |         |              |  | Awards       |        |                
|                            |                                                             |        |      |        |  |              |         |              |  | Securities   |        |                
|                            |                                                             |        |      |        |  |              |         | Other        |  | Underlying   |        |                
|                            |                                                             | Fiscal |      | Annual |  | Compensation |         | Annual       |  | Options      |        | All Other      
|Name and Principal Position |                                                             | Year   |      | Salary |  | Bonus        |         | Compensation |  | (# Shares)   |        | Compensation(1)
|                            |                                                             |        |      |        |  |              |         |              |  |              |        |                
|Saket Chadda(7)             |                                                             |        | 2002 |        |  | $            | 170,000 |              |  | $            |       |                 |  | $ | 7,514 | (3)(4) |        |  | 80,000 |        |  | $ |  |      
|                            | Chief Technical Officer                                     |        |      | 2001   |  |              |         | 163,423      |  |              |        |                |  |   |       | 68,642 | (2)(3) |  |        | 20,000 |  |   |   | 2,000 | 
|                           
|Robert Carey(8)             |                                                             |        | 2002 |        |  | $            | 147,115 |              |  | $            | 28,000 |                 |  | $ |      |        |        |  | 80,500 |        |  | $ |  |      
|                            | Vice President of Research, Development and
    Engineering |        |      |        |  |              |         |              |  |              |        |                 |  |   |       |        |        |  |        |        |  |   |   |       | 



---



|    |                                                                                  
|--- | ---------------------------------------------------------------------------------
|(1) | Consists of the Companys matching
    contribution to the Companys 401(k) Plan.
|   
|(2) | Consists of relocation expenses.                                                 
|   
|(3) | Consists of payments for completed patents.                                      
|   
|(4) | Consists of deferred compensation program payout.                                
|   
|(5) | Mr. Dodson began employment with the Company
    in August 1999.                 
|   
|(6) | Mr. Nocerino began employment with the
    Company in May 2000.                  
|   
|(7) | Mr. Chadda began employment with the Company
    in April 2000.                  
|   
|(8) | Mr. Carey began employment with the Company
    in September 2001.               

Option Grants In Last Fiscal Year

The following table sets forth each grant of
stock options made during the fiscal year ended June 1,
2002 to those named executive officers who received stock
options. No stock appreciation rights were granted during such
year to any of the named executive officers.

|                      |  |                   |         |                      |  |           |      |                  |  |                |      |     |  |  |         |  |  |   |         |  |  |   |         | 
|--------------------- |  | ----------------- | ------- | -------------------- |  | --------- | ---- | ---------------- |  | -------------- | ---- | --- |  |  | ------- |  |  | - | ------- |  |  | - | ------- | 
|                      |  |                   |         |                     
|                      |  | Individual Grants |         | Potential Realizable
|                      |  |                   |         | Value At Assumed    
|                      |  | Number of         |         | Percent of           |  |           |      | Annual Rates of 
|                      |  | Securities        |         | Total Options        |  |           |      | Appreciation For
|                      |  | Underlying        |         | Granted to           |  | Exercise  |      |                  |  | Option Term(8)
|                      |  | Options           |         | Employees in         |  | Price     |      | Expiration       |  |               
|Name                  |  | Granted(#)        |         | Fiscal Year(6)       |  | ($/SH)(7) |      | Date             |  | 5%             |      | 10%
|                      |  |                   |         |                      |  |           |      |                  |  |                |      |    
|Richard J. Faubert(1) |  |                   | 160,000 |                      |  |           | 5.91 |                  |  | $              | 3.08 |     |  |  | 7/27/11 |  |  | $ | 309,919 |  |  | $ | 785,396 | 
|                      |  |                   | 500     |                      |  |           | *    |                  |  | $              | 3.50 |     |  |  | 3/13/12 |  |  | $ | 1,101   |  |  | $ | 2,789   | 
|J. Michael Dodson(2)  |  |                   | 80,000  |                      |  |           | 2.96 |                  |  | $              | 3.08 |     |  |  | 7/27/11 |  |  | $ | 154,960 |  |  | $ | 392,698 | 
|                      |  |                   | 500     |                      |  |           | *    |                  |  | $              | 3.50 |     |  |  | 3/13/12 |  |  | $ | 1,101   |  |  | $ | 2,789   | 
|Giovanni Nocerino(3)  |  |                   | 80,000  |                      |  |           | 2.96 |                  |  | $              | 3.08 |     |  |  | 7/27/11 |  |  | $ | 154,960 |  |  | $ | 392,698 | 
|                      |  |                   | 500     |                      |  |           | *    |                  |  | $              | 3.50 |     |  |  | 3/13/12 |  |  | $ | 1,101   |  |  | $ | 2,789   | 
|Saket Chadda (4)      |  |                   | 80,000  |                      |  |           | 2.96 |                  |  | $              | 3.08 |     |  |  | 7/27/11 |  |  | $ | 154,960 |  |  | $ | 392,698 | 
|Robert Carey (5)      |  |                   | 80,000  |                      |  |           | 2.96 |                  |  | $              | 1.99 |     |  |  | 9/11/11 |  |  | $ | 100,000 |  |  | $ | 254,400 | 
|                      |  |                   | 500     |                      |  |           | *    |                  |  | $              | 3.50 |     |  |  | 3/13/12 |  |  | $ | 1,101   |  |  | $ | 2,789   | 



---



|  |                      
|- | ---------------------
|* | Less than one percent



|    |                                                                                                                                                                                                    
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Two ten year grants: (i) 160,000 options
    vesting annually over four years beginning July 27, 2002 at
    $3.08 per share and (ii) 500 options vesting on
    March 13, 2003 at $3.50 per share.
|   
|(2) | Two ten year grants: (i) 80,000 options
    vesting annually over four years beginning July 27, 2002 at
    $3.08 per share and (ii) 500 options vesting on
    March 13, 2003 at $3.50 per share. 
|   
|(3) | Two ten year grants: (i) 80,000 options
    vesting annually over four years beginning July 27, 2002 at
    $3.08 per share and (ii) 500 options vesting on
    March 13, 2003 at $3.50 per share. 

62



---



##### Table of Contents





|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(4) | Options become exercisable over a four year
    period beginning July 27, 2002 at $3.08 per share. The term
    of the option is ten years.                                                                                                                                                                                                                                                                                                                                                               
|   
|(5) | Two ten year grants: (i) 80,000 options
    vesting annually over two years beginning September 11,
    2002 at $1.99 per share and (ii) 500 options vesting on
    March 13, 2003 at $3.50 per share.                                                                                                                                                                                                                                                                                                    
|   
|(6) | Based on an aggregate of 2,704,500 options
    granted to directors, officers and employees in fiscal 2002,
    including to any named executive officers.                                                                                                                                                                                                                                                                                                                                                
|   
|(7) | The exercise price per share of each option was
    equal to 100% of the fair market value of the common stock on
    the date of grant.                                                                                                                                                                                                                                                                                                                                                                  
|   
|(8) | The potential realizable value is calculated
    based on the term of the option at its time of grant (ten
    years). It is calculated assuming that the stock price on the
    date of grant appreciates at the indicated annual rate
    compounded annually for the entire term of the option and the
    option is exercised and sold on the last day of its term for the
    appreciated stock price. No gain to the optionee is possible
    unless the stock price increases over the option term.

Aggregated Option Exercises in Last Fiscal
Year and Fiscal Year End Option Values

The following table sets forth the number of
options exercised during the fiscal year ended June 1, 2002
and the number and value of unexercised options held by each of
the Named Executive Officers at June 1, 2002.

|                   |  |             |   |             |  |                     |   |                      |  |  |                 |  |  |   |            | 
|------------------ |  | ----------- | - | ----------- |  | ------------------- | - | -------------------- |  |  | --------------- |  |  | - | ---------- | 
|                   |  |             |   |             |  |                     |   | Value of Unexercised
|                   |  |             |   |             |  | Number of           |   | In-The-Money        
|                   |  | Shares      |   |             |  | Unexercised Options |   | Options             
|                   |  | Acquired    |   |             |  | at FY-End(#)        |   | at FY-End($)(1)     
|                   |  | On          |   | Value       |  | Exercisable/        |   | Exercisable/        
|Name               |  | Exercise(#) |   | Realized($) |  | Unexercisable       |   | Unexercisable       
|                   |  |             |   |             |  |                     |   |                     
|Richard J. Faubert |  |             |  |             |  |                     |  |                      |  |  | 312,000/308,500 |  |  | $ | 0/$203,625 | 
|J. Michael Dodson  |  |             |  |             |  |                     |  |                      |  |  | 90,000/146,500  |  |  | $ | 0/$102,025 | 
|Giovanni Nocerino  |  |             |  |             |  |                     |  |                      |  |  | 166,667/163,833 |  |  | $ | 0/$102,025 | 
|Saket Chadda       |  |             |  |             |  |                     |  |                      |  |  | 25,000/115,000  |  |  | $ | 0/$101,600 | 
|Robert Carey       |  |             |  |             |  |                     |  |                      |  |  | 0/80,500        |  |  | $ | 0/$189,225 | 



---



|    |                                                                                                                                                                                                                                                                                                                                                                                             
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Options are considered in the money
    if the fair market value of the underlying securities exceeds
    the exercise price of the options. These values are based on the
    June 1, 2002 closing price of our common stock of $4.35 per
    share on the Nasdaq National Market, less the per share exercise
    price, multiplied by the number of shares underlying such
    options.

Compensation of Directors

The Board of Directors currently consists of five
persons. The Companys non-employee directors each received
an annual retainer of $11,000. In addition, each non-employee
director received a fee of $1,000 for each Board meeting and
$500 for each committee meeting they attended through December
2001, at which time these payments were suspended as part of the
Companys cost control measures. Mr. Simone is paid an
annual salary of $120,000 for his service as Chairman of the
Board pursuant to an employment agreement. During fiscal 2002
Mr. Simones salary was reduced to $102,000 as a result of
cost reduction measures implemented by the Company. In addition,
each non-employee director receives an initial option grant to
purchase 15,000 shares of common stock and annually receives an
option to purchase 5,000 shares of common stock pursuant to the
1995 Stock Plan. Prior to October 13, 2000, these grants
vested over a four or five year period, beginning on the
one-year anniversary of the option grant. Effective
October 13, 2000, these grants are fully vested on the date
of grant. Additionally, on June 14, 2001,
Messrs. Bonke, Levy and Neun received an option grant to
purchase 90,000 shares of common stock at an exercise price of
$3.88 per share, pursuant to the 1995 Stock Plan. These grants
vest ratably over 18 months from the date of grant.
Additionally, on August 2, 2002, Messrs. Bonke, Levy,
Neun and Simone received an option grant to purchase 25,000
share of common stock at an exercise price of $2.84, pursuant to
the 1995 Stock Plan. These options vested immediately. All
directors are reimbursed for expenses incurred in connection
with attending Board and committee meetings.

63



---



##### Table of Contents



Agreements with Certain Officers

The Company has entered into employment
agreements with each of the Named Executive Officers. Under the
terms of the employment agreements, the executives receive the
following salaries: Mr. Faubert, $400,000; Mr. Dodson,
$200,000, Mr. Nocerino, $280,000, Mr. Chadda,
$200,000, and Mr. Carey, $250,000. The annual salaries are
reviewed and adjusted on an annual basis. The salaries may be
decreased after the first year; provided that such reduction is
incident to, and consistent with a general reduction in base
salaries of other executive officers. In fiscal 2002, the
Company instituted a 20% salary reduction for Mr. Faubert,
and a 15% salary reduction for Messrs. Dodson, Nocerino,
Chadda and Carey.

Additionally, each executive is eligible to
participate in the Companys annual incentive plan, under
which the executive is eligible to receive, subject to the
satisfaction of established milestones, annual bonuses equal to
a targeted percentage of the executives base salary. The
respective target percentages for each of the executives is as
follows: Mr. Faubert, 100% (with 200% maximum);
Mr. Dodson, 50% (with 100% maximum), Mr. Nocerino,
100% of performance criteria (with 200% maximum), and
Mr. Carey, 40%.

Upon execution of the original agreements the
executives were each granted options and became eligible to
participate in the Companys equity incentive plans.

If the executive is terminated without cause, he
will receive all annual salary accrued to date, plus one
years base salary, plus any bonus accrued to date.

The agreements also contain change in control
provisions. Generally, a change in control occurs for purposes
of these agreements upon the occurrence of the following:



| |   |                                                                                                                                                                                                                                                                                                                                                                                            
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | a business combination in which the shareholders
    immediately prior to the combination own less than a majority of
    the equity of the combined entity;                                                                                                                                                                                                                               
|
| |  | a sale, transfer, or other disposition of the
    assets or earning power aggregating more than 45% of the assets
    or operating revenues of the Company;                                                                                                                                                                                                                                
|
| |  | the liquidation of the Company;                                                                                                                                                                                                                                                                                                                                                            
|
| |  | any person or entity, other than a current
    shareholder or affiliate, becomes the beneficial owner of 40% or
    more of the outstanding capital stock; and                                                                                                                                                                                                                             
|
| |  | a change in control of the board of directors
    during any twelve month period, excluding any new director
    approved by a majority of the directors who were directors at
    the beginning of the period or any director elected or appointed
    at the request of an individual or entity acquiring 20% or more
    of the outstanding common stock or voting power of the Company.

If, in anticipation of and within 90 days
of, or during the one year period following, a change in
control, the executive is terminated or is subject to
constructive termination, the executive is entitled to receive
the following:



| |   |                                                                                                                                                                                           
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | immediate vesting of all outstanding but unvested
    stock options;                                                                                                                      
|
| |  | all of his annual salary accrued to date; and                                                                                                                                             
|
| |  | a single payment equal to 200% (100% for
    Messrs. Chadda and Carey) of the sum of the
    executives then current annual base salary and annual
    incentive award pro rated to date.

The term constructive termination
will mean the voluntary termination of employment by the
executive following: (i) a significant reduction in the
nature or scope of the executives authority or duties;
(ii) a reduction in annual base salary or exclusion from
participation in any equity incentive plan or program; or
(iii) a change in location of the executives
principal place of employment of more than 50 miles.

Finally, the agreements contain a non-compete
provision restricting the executives from competing with the
Company during the term of their employment and for a period of
two years thereafter.

64



---



##### Table of Contents



COMPENSATION COMMITTEE INTERLOCKS AND INSIDER
PARTICIPATION

The compensation committee consisted of Messrs.,
Bonke and Levy, with Mr. Bonke serving as chairman of the
committee. During fiscal 2002, Richard Hill, a former director
served on the compensation committee through March, 2002 at
which time he resigned from the board of directors.
Mr. Levy resigned from the compensation committee in June,
2002. Messrs. Levy and Hill have not been replaced on the
compensation committee. There were no interlocking relationships
between SpeedFam-IPEC and other entities that might affect the
determination of the compensation of our executive officers.

REPORT OF THE COMPENSATION COMMITTEE ON
EXECUTIVE COMPENSATION

The following report of the compensation
committee does not constitute soliciting material and should not
be deemed filed or incorporated by reference into any other
filing under the Securities Act of 1933 or the Securities
Exchange Act of 1934 that we make, except to the extent we
specifically incorporate this report.

The duties of the compensation committee are to
provide a general review of the Companys compensation and
benefit plans to ensure that they meet corporate objectives.
Specifically, the compensation committee, after consultation
with senior management: (i) determines compensation for all
officers of the Company, (ii) grants awards to officers
under the Companys compensation and benefit plans, and
(iii) adopts major Company compensation policies and
practices. We believe that the compensation programs for the
executive officers should reflect the Companys performance
and the value created for its shareholders. In addition, the
compensation programs should support the goals and values of
SpeedFam-IPEC and should reward individual contributions to the
Companys success.

General Compensation Policy and
Philosophy.Our executive compensation
policies are intended to enable the Company to attract and
retain qualified executives through a compensation program
consisting of base salary, annual incentives, and stock options.
The level of compensation for the executive officers are
generally intended to be competitive with those of other
executives in similar positions and companies in the
semiconductor equipment manufacturing business and other high
technology-related companies, based upon the relative size of
those companies and the scope of the executives
responsibilities. It is our policy to target both base salaries
and stock option awards at a competitive level with this group.
Annual incentive opportunities are set slightly above the
competitive group. This competitive group of companies is
similar to, but not identical to, those companies used in the
Peer Group Index described on page 67 of this Annual Report.

After determining the level of compensation for
each executive officer as compared with such persons
counterparts, the compensation committee weighs the
individuals performance and considers such officers
contribution to the financial and other objectives of the
Company. The goals and objectives are established in advance of
the performance period, and may reflect specific individual
objectives for the officer, financial, or other objectives for
the Company, or a combination of these factors. Among the
criteria used by the Company in making pay decisions both for
salary actions and incentive awards are revenues, earnings,
results of operations and special projects and the overall
financial performance of the Company from year to year. Further,
we may adjust awards to an individual based on the specific
achievements of the individual officer.

Base Salary.Each
executive officers base salary is based upon an employment
agreement between the executive officer and the Company. These
agreements, however, provide for annual reviews and increases of
that base salary. Any increase is based upon our recommendation
with the input of the Chief Executive Officer. Factors in
formulating base salary recommendations include the level of an
executives compensation in relation to other executives in
the Company with the same, more and less responsibilities, the
performance of the particular executives business unit or
department in relation to established strategic plans and the
executive officers personal performance in helping the
Company meet its goals, the Companys operating budget for
the year and the overall performance of the Company.

In fiscal 2002, we reviewed each officers
performance evaluation and the recommendations of the
Companys Chief Executive Officer as to the achievements of
the Companys and individual officers

65



---



##### Table of Contents



performance goals. Based upon these reviews, the
compensation committee determined the annual base salary
reflected in the Summary Compensation Table included in this
proxy statement.


Bonuses and Stock Based
Incentives.For each executive
officer, bonuses and stock based incentives are awarded based
upon our recommendation with the input of the Chief Executive
Officer. An executives potential bonus and stock based
incentive package is related to the Companys operating
results and the financial performance of an executives
division or department. We believe that stock ownership by
management encourages management to maximize shareholder value.
Stock options granted to executives and other employees of the
Company give optionees the right to purchase shares of the
Companys common stock.

CEO Compensation.The Chief Executive Officers
compensation is based upon an employment agreement between the
CEO and the Company. The agreement provides for an annual review
and increase of that base salary. Any increase is determined by
our recommendation and is based largely on the same criteria as
that referred to for the other executive officers of the
Company, including the performance of the Company, as well as
the value created for its shareholders. We considered the
compensation packages for chief executives of comparable
companies in similar industries in determining
Mr. Fauberts salary package for fiscal 2002.

Compliance with Internal Revenue Code
Section 162(m).Section 162(m) of the Internal Revenue Code limits the
deductibility of executive compensation paid by publicly held
corporations to $1 million for each executive officer named
in this proxy statement. The $1 million limitation
generally does not apply to compensation that is considered
performance-based. Non-performance-based compensation paid to
SpeedFam-IPECs executive officers for the 2002 fiscal year
did not exceed the $1 million limit per employee.
SpeedFam-IPEC believes that its compensation policy satisfies
162(m). As a result, the Company believes that the compensation
paid under this policy is not subject to limits of
deductibility. However, there can be no assurance that the
Internal Revenue Service would reach the same conclusion.
Moreover, the Company has change in control arrangements with a
number of its executive officers, including its Chief Executive
Officer. The Company will not be entitled to a deduction with
respect to payments that are contingent upon a change in control
if such payments are deemed to constitute excess parachute
payments pursuant to Section 280G of the Code and do
not qualify as reasonable compensation pursuant to that Section;
such payments will subject the recipients to a 20% excise tax.

COMPENSATION COMMITTEE

Kenneth Levy


Neil R. Bonke, Chairman


66



---



##### Table of Contents






STOCK PRICE PERFORMANCE GRAPH

The following graph compares the five year
cumulative total return on the common stock to the five year
cumulative total returns on the Nasdaq Market Index and the Peer
Group Index. This measurement period begins on the date the
common stock began trading and ends on the last trading date of
the Companys last completed fiscal year. The Company
designs, develops, manufactures, markets and services chemical
mechanical planarization, or CMP, systems used in the
fabrication of semiconductor devices. The Company also markets
and distributes parts used in CMP and precision surface
processing. The Peer Group Index used by the Company consists of
six companies that the Company believes engage in a similar
business and serve similar markets as that of the Company. The
companies in the Peer Group Index are as follows: Applied
Materials Inc., FSI International, Inc., Lam Research Corp.,
Novellus Systems Inc., PRI Automation, Inc., and Semitool, Inc.
The Peer Group Index includes PRI Automation, Inc. through the
year ended 6/2/01. PRI Automation, Inc. merged with Brooks
Automation, Inc. on May 14, 2002 and accordingly in not
included in fiscal 2002 data.

In the case of the Nasdaq Market Index and the
Peer Group Index, a $100 investment made on June 1, 1997,
and reinvestment of all dividends are assumed. In the case of
the Company, a $100 investment made on June 1, 1997, is
assumed (the Company paid no dividends in fiscal years 1998,
1999, 2000, 2001 or 2002).

(Stock Price Performance Graph)






|         |                                                                   
|-------- | ------------------------------------------------------------------
|Item 12. | Security Ownership of Certain Beneficial
    Owners and Management

Disclosure with Respect to the Companys
Equity Compensation Plans

The Company maintains the 1991 Employee Incentive
Stock Option Plan (the 1991 Plan), the IPEC 1992
Stock Option Plan (the 1992 Plan), the 1995 Stock
Plan (the 1995 Plan), the 2001 Nonstatutory Stock
Option Plan (the 2001 Plan) and the 1995 Employee
Stock Purchase Plan (the ESPP), pursuant to which it
may grant equity awards to eligible persons. Additionally, it
has entered into an individual arrangement outside of the equity
plans with Peter J. Simone, providing for the award of an
option to purchase Company common stock.

67



---



##### Table of Contents



The following table gives information about
equity awards under the Companys 1991 Plan, the 1992 Plan,
the 1995 Plan, the 2001 Plan, the ESPP and
Mr. Simones equity arrangement.

|                                                                               |  |                         |           |                   |  |                                |      |  |  |  |           |       
|------------------------------------------------------------------------------ |  | ----------------------- | --------- | ----------------- |  | ------------------------------ | ---- |  |  |  | --------- | ------
|                                                                               |  | (a)                     |           | (b)               |  | (c)                           
|                                                                               |  |                         |           |                   |  |                               
|                                                                               |  | Number of securities    |           | Weighted-average  |  | Number of securities remaining
|                                                                               |  | to be issued upon       |           | exercise price of |  | available for future issuance 
|                                                                               |  | exercise of outstanding |           | outstanding       |  | under equity compensation     
|                                                                               |  | options, warrants and   |           | options, warrants |  | plans (excluding securities   
|Plan category                                                                  |  | rights                  |           | and rights        |  | reflected in column (a))      
|                                                                               |  |                         |           |                   |  |                               
|Equity compensation plans approved by security
    holders(1)                  |  |                         | 2,579,326 |                   |  | $                              | 9.55 |  |  |  | 3,716,427 | (2)(3)
|Equity compensation plans not approved by
    security
    holders(4)(5)(6)(7) |  |                         | 2,290,525 |                   |  | $                              | 3.83 |  |  |  | 1,024,839 |       
|Total                                                                          |  |                         |           |                   |  |                                |      |  |  |  |           |       



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Issued under the 1991 Plan and 1995 Plan.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   
|(2) | The ESPP incorporates an evergreen formula
    pursuant to which the maximum number of shares of the
    Companys stock which shall be made available for sale
    under the Plan shall be 1,300,000 shares plus an annual increase
    to be added on June 1 of each year (beginning June 1,
    2001) equal to the lesser of (i) 1,000,000 shares,
    (ii) 1% of the outstanding shares of the Company, or
    (iii) a number of shares determined by the Board of
    Directors of the Company. In 2002 and 2001, 306,720 and 301,164
    shares were added to the plan, respectively.                                                                                                                      
|   
|(3) | Of these shares, 480,518 remain available for
    purchase under the ESPP.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   
|(4) | Issued under the 2001 Plan                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   
|(5) | The Company has 797,105 stock options outstanding
    under the 1992 Stock Option Plan of Integrated Process Equipment
    Corporation (IPEC) which were assumed as part of the
    merger of IPEC and the Company on April 6, 1999. These
    stock options are held by 102 former employees and consultants
    of IPEC are exercisable for 797,105 shares of Company
    common stock (after getting effect to the exchange ratio
    provided in the merger). These options have a weighted average
    exercise price of $19.03 per share. No further awards will
    be made under the IPEC 1992 Stock Option Plan. Statistics
    regarding the assumed options are not included in the above
    table.
|   
|(6) | These statistics include a non-Plan option
    granted to Mr. Simone on June 18, 2001 to purchase
    360,000 shares of Company common stock at an exercise price
    of $3.65 per share. The shares subject to this option
    vested at the rate of one-eighteenth per month for
    18 months. As of July 31, 2002, 259,997 shares
    underlying this option are vested and remain outstanding. There
    are 100,003 unvested shares. The option held by Mr. Simone
    may be exercised after termination of employment for a period of
    ninety days following the effective date of
    Mr. Simones termination of employment. The option
    expires on June 18, 2004.                               
|   
|(7) | Please see Note 18 of our Notes to
    Consolidated Financial Statements for a description of our 2001
    Nonstatutory Stock Option Plan, which does not require approval
    of and has not been approved by our stockholders.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 

OWNERSHIP OF SPEEDFAM-IPEC, INC. COMMON
STOCK

BY PRINCIPAL SHAREHOLDERS AND
MANAGEMENT


The following table sets forth certain
information known to us with respect to beneficial ownership of
our outstanding common stock as of July 31, 2002 by
(i) each shareholder who is known by us to own beneficially
more than 5% of our outstanding common stock, (ii) each of
our directors, (iii) each Named Executive Officer and
(iv) all directors and Named Executive Officers as a group.
Except as otherwise indicated, the Company believes that the
beneficial owners of the common stock listed below, based on
information furnished by such owners, have sole investment and
voting power with respect to such shares, subject to community
property laws where applicable. Information with respect to
State of Wisconsin Investment Board,

68



---



##### Table of Contents



Dimensional Fund Advisors Inc., Gardner Lewis
Asset Management, Candlewood Capital Management, L.L.C., and
A.R. Schmeidler & Company is based solely on each such
entitys respective public filings made with the Securities
and Exchange Commission pursuant to the Exchange Act.


|                                                                |                                 |                      |           |         |  |  |      |   | 
|--------------------------------------------------------------- | ------------------------------- | -------------------- | --------- | ------- |  |  | ---- | - | 
|                                                                |                                 |                     
|                                                                |                                 | Beneficial Ownership
|                                                                |                                 |                     
|Name And Address                                                |                                 | Number               |           | Percent
|                                                                |                                 |                      |           |        
|Five percent shareholders                                       |                                 |                      |           |         |  |  |      |  
|State of Wisconsin Investment Board                             |                                 |                      | 5,950,640 |         |  |  | 19.2 | %
|                                                                | 121 East Wilson Street          |                      |           |         |  |  |      |   | 
|                                                                | Madison, Wisconsin 53702        |                      |           |         |  |  |      |   | 
|Dimensional Fund Advisors Inc.                                  |                                 |                      | 2,465,943 |         |  |  | 7.9  | %
|                                                                | 1299 Ocean Avenue               |                      |           |         |  |  |      |   | 
|                                                                | Santa Monica, California 90401  |                      |           |         |  |  |      |   | 
|Gardner Lewis Asset Management                                  |                                 |                      | 2,211,800 |         |  |  | 7.1  | %
|                                                                | 285 Wilmington                  |                      |           |         |  |  |      |   | 
|                                                                | Chadds Ford, Pennsylvania 19317 |                      |           |         |  |  |      |   | 
|Candlewood Capital Management, L.L.C.                           |                                 |                      | 2,022,685 |         |  |  | 6.5  | %
|                                                                | 17 Hulfish Street               |                      |           |         |  |  |      |   | 
|                                                                | Princeton, New Jersey 08542     |                      |           |         |  |  |      |   | 
|A.R. Schmeidler & Company                                       |                                 |                      | 2,022,485 |         |  |  | 6.5  | %
|                                                                | 555 Fifth Street                |                      |           |         |  |  |      |   | 
|                                                                | New York, New York 10017        |                      |           |         |  |  |      |   | 
|                                                               
|Directors and executive officers                                |                                 |                      |           |         |  |  |      |  
|Richard Faubert(1)                                              |                                 |                      | 422,367   |         |  |  | 1.3  | %
|Neil R. Bonke(2)                                                |                                 |                      | 113,499   |         |  |  | *    |  
|Kenneth Levy(3)                                                 |                                 |                      | 149,123   |         |  |  | *    |  
|J. Michael Dodson(4)                                            |                                 |                      | 132,778   |         |  |  | *    |  
|Giovanni Nocerino(5)                                            |                                 |                      | 250,746   |         |  |  | *    |  
|Carl Neun(6)                                                    |                                 |                      | 96,999    |         |  |  | *    |  
|Peter J. Simone(7)                                              |                                 |                      | 299,997   |         |  |  | *    |  
|Saket Chadda(8)                                                 |                                 |                      | 60,731    |         |  |  | *    |  
|Robert Carey(9)                                                 |                                 |                      | 40,000    |         |  |  | *    |  
|All directors and executive officers as a group
    (9 persons) |                                 |                      | 1,566,240 |         |  |  | 4.8  | %



---



| |   |                       
| | - | ----------------------
| | * | Less than one percent.



| |     |                                                                                                                                                                                          
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) | Includes 368,000 shares subject to issuance to
    Mr. Faubert upon the exercise of certain stock options.                                                                               
|
| | (2) | Includes 108,999 shares subject to issuance to
    Mr. Bonke upon the exercise of certain stock options.                                                                                 
|
| | (3) | All such shares are subject to issuance to
    Mr. Levy upon the exercise of certain stock options.                                                                                      
|
| | (4) | Includes 6,000 shares beneficially owned by
    Mr. Dodsons children. Also includes 110,000 shares
    subject to issuance to Mr. Dodson upon the exercise of
    certain stock options.
|
| | (5) | Includes 186,667 shares subject to issuance to
    Mr. Nocerino upon the exercise of certain stock options.                                                                              
|
| | (6) | Includes 94,999 shares subject to issuance to
    Mr. Neun upon the exercise of certain stock options.                                                                                   
|
| | (7) | All such shares are subject to issuance to
    Mr. Simone upon the exercise of certain stock options.                                                                                    
|
| | (8) | Includes 45,000 shares subject to issuance
    to Mr. Chadda upon the exercise of certain stock options.                                                                                 
|
| | (9) | All such shares are subject to issuance to
    Mr. Carey upon the exercise of certain stock options.                                                                                     

69



---



##### Table of Contents








|         |                                                   
|-------- | --------------------------------------------------
|Item 13. | Certain Relationships and Related
    Transactions

Certain Relationships and Related
Transactions

During fiscal 2002, the Company had purchases of
raw materials of approximately $0.3 million from Berkeley
Process Controls, a California-based Company that is affiliated
with a former board member of the Company.

On June 21, 2002, the Company completed a
sale-leaseback transaction of its corporate headquarters and
research and development facilities in Chandler, Arizona. The
Company was assisted by a national real estate consulting firm,
which obtained 12 qualified offers from across the United States
on behalf of the Company. The winning offer was made by Phoenix
Industrial Investment Partners, L.P., a firm controlled by
Kenneth Levy, a director of the Company. The offer was approved
by the Companys independent directors, based in large part
on the opinion of the Companys outside real estate
consulting firm that it was superior to all other offers. In
this regard, the buyers $25.0 million cash purchase
price offered the highest net proceeds and the most favorable
net present value. Moreover, the offer did not require a
financing contingency. In connection with the sale of the
buildings, the Company has simultaneously entered into a 15-year
lease for the buildings. The lease contains provisions for three
five-year extensions and requires minimum annual rental payments
of $3.0 million.




PART IV






|         |                                                                      
|-------- | ---------------------------------------------------------------------
|Item 14. | Exhibits, Financial Statement Schedules,
    and Reports on Form 8-K.

(a)(1) Financial Statements:

See Part II, Item 8.

(2) Financial Statement Schedules:

|                             |  |      |    | 
|---------------------------- |  | ---- | -- | 
|                             |  | Page
|                             |  |     
|Independent Auditors Report |  |      | 72 | 
|Schedule II                  |  |      | 73 | 

(3) Exhibits filed:

See Exhibit Index.

(b) Reports filed on Form 8-K:

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

70



---



##### Table of Contents






SIGNATURES

Pursuant to the requirements of
Section 13 or 15(d) of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.



| |                                          
| | -----------------------------------------
| | SPEEDFAM-IPEC, INC.                      
|
| | /s/ J. MICHAEL DODSON                    
| |                                          
| | J. Michael Dodson                        
| | Chief Financial Officer and
    Secretary
| | (Principal Financial Officer)            
|
| | /s/ G. MICHAEL LATTA                     
| |                                          
| | G. Michael Latta                         
| | Corporate Controller                     
| | (Principal Accounting Officer)           

POWER OF ATTORNEY

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

Pursuant to the requirements of the Securities
Exchange Act of 1934, this report signed below by the following
persons on behalf of the Registrant and in the capacities and on
the dates indicated.

|                                         |  |                                                                         |  |        
|---------------------------------------- |  | ----------------------------------------------------------------------- |  | -------
|Name                                     |  | Title                                                                   |  | Date   
|                                         |  |                                                                         |  |        
|/s/ PETER J. SIMONEPeter J. Simone       |  | Executive Chairman                                                      |  | 8/23/02
|                                        
|/s/ RICHARD J. FAUBERTRichard J. Faubert |  | President, Chief Executive Officer and Director                         |  | 8/23/02
|                                        
|/s/ J. MICHAEL DODSONJ. Michael Dodson   |  | Secretary and Chief Financial Officer
    (Principal Financial Officer) |  | 8/23/02
|                                        
|/s/ NEIL R. BONKENeil R. Bonke           |  | Director                                                                |  | 8/23/02
|                                        
|/s/ KENNETH LEVYKenneth Levy             |  | Director                                                                |  | 8/23/02
|                                        
|/s/ CARL NEUNCarl Neun                   |  | Director                                                                |  | 8/23/02

71



---



##### Table of Contents



INDEPENDENT AUDITORS REPORT

The Board of Directors

SpeedFam-IPEC, Inc.:


Under date of June 28, 2002, we reported on
the consolidated balance sheets of SpeedFam-IPEC, Inc. and
subsidiaries as of June 1, 2002 and June 2, 2001, and
the related consolidated statements of operations,
stockholders equity and comprehensive income, and cash
flows for each of the three fiscal years in the period from
June 1, 1999 through June 1, 2002, which are included
in this Form 10-K. In connection with our audits of the
aforementioned consolidated financial statements, we also
audited the related consolidated financial statement schedule as
listed in Item 14(a)(2) of this Form 10-K. This
financial statement schedule is the responsibility of the
Companys management. Our responsibility is to express an
opinion on this financial statement schedule based on our audits.

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



| |         
| | --------
| | KPMG LLP

Chicago, Illinois

June 28, 2002


72



---



##### Table of Contents



Schedule II

SPEEDFAM-IPEC, INC.

VALUATION AND QUALIFYING ACCOUNTS

For each of the years in the three-year period
ended June 1, 2002


|                                 |      |                |   |          |  |                |  |              |  |         |  |   |  |  |  |       |  |  |   |       | 
|-------------------------------- | ---- | -------------- | - | -------- |  | -------------- |  | ------------ |  | ------- |  | - |  |  |  | ----- |  |  | - | ----- | 
|                                 |      |                |   |          |  | Charged to     |  |              |  |        
|                                 |      |                |   |          |  | Other Accounts |  |              |  |        
|                                 |      |                |   | Charged  |  | (Translation   |  | Deductions   |  |        
|                                 |      | Balance at     |   | to Costs |  | Adjustments    |  | (Write-offs  |  | Balance
|                                 |      | Beginning      |   | and      |  | and            |  | and          |  | at End 
|Description                      |      | of Year        |   | Expense  |  | Recoveries)    |  | Adjustments) |  | of Year
|                                 |      |                |   |          |  |                |  |              |  |        
|                                 |      |               
|                                 |      | (In thousands)
|Allowance for doubtful accounts: |      |                |   |          |  |                |  |              |  |         |  |   |  |  |  |       |  |  |   |      
|                                 | 2000 |                | $ | 5,600    |  |                |  | 82           |  |         |  |  |  |  |  | 3,133 |  |  | $ | 2,549 | 
|                                 | 2001 |                | $ | 2,549    |  |                |  | 558          |  |         |  |  |  |  |  | 200   |  |  | $ | 2,907 | 
|                                 | 2002 |                | $ | 2,907    |  |                |  | 60           |  |         |  |  |  |  |  | 308   |  |  | $ | 2,659 | 

73



---



##### Table of Contents






EXHIBIT INDEX

|        |        |             |  |                                                                                                                                                                                                                                                                                                                                                
|------- | ------ | ----------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |        |            
|Number  |        | Description
|        |        |            
|        | *2.1   |             |  | Agreement and Plan of Merger dated
    November 19, 1998. (incorporated by reference to
    Exhibit 2.1 to the Registrants Form S-4 filed on
    February 5, 1999 (Registration No. 333-71897)).                                                                                                                                              
|        | *2.2   |             |  | Agreement and Plan of Merger dated
    August 11, 2002. (incorporated by reference to
    Exhibit 2.1 to the Registrants Current Report on From
    8-K filed on August 13, 2002(File No. 0-26784)).                                                                                                                                          
|        | *3.1   |             |  | Articles of Incorporation of SpeedFam-IPEC, Inc.
    (incorporated by reference to Exhibit 3.1 to the
    Registrants Form 10-Q for the quarter ended
    March 2, 2002 (File No. 0-26784)).                                                                                                                                                  
|        | *3.2   |             |  | By-laws of SpeedFam-IPEC, Inc. (incorporated by
    Reference to Exhibit 3.2 to the Registrants
    Form 10-Q for the quarter ended March 2, 2002 (File
    No. 0-26784))                                                                                                                                                                     
|        | *4.1   |             |  | Warrant Certificate, dated as of
    December 16, 1996, issued by IPEC to Fletcher.
    (Incorporated by reference to Exhibit 99.1 to IPECs
    Current Report on Form 8-K for reporting date
    December 16, 1996 and filed on December 30, 1996 (File
    No. 0-20470)).                                                                   
|        | *4.2   |             |  | Indenture between IPEC and State Street Bank and
    Trust Company of California, N.A., dated as of
    September 15, 1997. (incorporated by reference to
    Exhibit 10.2 to IPECs Quarterly Report on
    Form 10-Q filed on November 13, 1997 for the Quarter
    ended September 30, 1997 (File No. 0-20470)).                            
|        | *4.3   |             |  | First Supplemental Indenture by and among the
    Registrant, IPEC and State Street Bank and Trust Company of
    California, N.A., as Trustee, dated April 6, 1999
    (incorporated by reference to Exhibit 4.1 to
    Registrants Form 10-Q for the quarter ended
    February 28, 1999 (File No. 0-26784)).                               
|        | *4.4   |             |  | Registration Rights Agreement between IPEC and
    the Initial Purchasers, dated September 15, 1997.
    (incorporated by Reference to Exhibit 4.12 to IPECs
    Registration Statement on Form S-3 filed on
    December 16, 1997 (File No. 333-42369)).                                                                                     
|        | *4.5   |             |  | Specimen of 6 1/4% Convertible Subordinated
    Note due 2004 issued by IPEC on September 17, 1997 in the
    amount of $115,000,000. (incorporated by reference to
    Exhibit 10.4 to IPECs September 30, 1997
    Form 10-Q).                                                                                                              
|        | *10.1  |             |  | Employment Agreement between the Registrant and
    Richard J. Faubert (incorporated by reference to
    Exhibit 10.2 to the Registrants Form S-4 filed
    on February 5, 1999 (Registration No. 333-71897)).                                                                                                                                
|        | *10.2  |             |  | Employment Agreement between the Registrant and
    J. Michael Dodson (incorporated by reference to
    Exhibit 10.19 to the Registrants Form 10-K for
    the fiscal year ended May 31, 1999 (File No. 0-26784)).                                                                                                                            
|        | *10.3  |             |  | Employment Agreement between the Registrant and
    Giovanni Nocerino (incorporated by reference to
    Exhibit 10.36 to the Registrants Form 10-K for
    the fiscal year ended June 3, 2000 (File No. 0-26784)).                                                                                                                            
|        | *10.4  |             |  | Employment Agreement between the Registrant and
    Robert Carey (incorporated by reference to Exhibit 10.1 to
    the Registrants Form 10-Q for the quarter ended
    December 1, 2001 (File No. 0-26784)).                                                                                                                                  
|        | **10.5 |             |  | Employment Agreement between the Registrant and
    Peter J. Simone.                                                                                                                                                                                                                                                                           
|        | **10.6 |             |  | Employment Agreement between the Registrant and
    Saket Chadda.                                                                                                                                                                                                                                                                              
|        | *10.7  |             |  | 1991 Employee Incentive Stock Option Plan as
    amended and restated July 27, 1995 and as further amended
    as of May 22, restated July 27, 1995 and as further
    amended as of May 22, 1997 (incorporated by reference to
    Exhibit 10.10 to the Registrants Form 10-K for
    the fiscal year ended May 31, 1997 (File No. 0-26784)).
|        | *10.8  |             |  | 1995 Stock Plan for Employees and Director of
    SpeedFam-IPEC, Inc., as amended and restated as of July 27,
    2001 (incorporated by reference to Exhibit 10.38 to the
    Registrants Form 10-K for the fiscal year ended
    June 2, 2001, File No. 0-26784).                                                                            



---



##### Table of Contents



|        |        |             |  |                                                                                                                                                                                                                                                                    
|------- | ------ | ----------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |        |            
|Number  |        | Description
|        |        |            
|        | **10.9 |             |  | Registrants 1995 Employee Stock Purchase
    Plan, as amended and restated                                                                                                                                                                                        
|        | *10.10 |             |  | 2001 Nonstatutory Stock Option Plan of
    SpeedFam-IPEC, Inc. (incorporated by reference to
    Exhibit 4.1 to the Registrants Form S-8, filed
    June 6, 2001 (File No. 333-62384))                                                                            
|        | *10.11 |             |  | SpeedFam Employees Savings and Profit
    Sharing Plan and Trust, as amended and restated June 1,
    1989 (incorporated by Reference to Exhibit 4.1 to the
    Registrants Registration Statement on Form S-8, filed
    November 27, 1996 (File No. 333-16891).
|        | *10.12 |             |  | Lease Agreement between Seldin Properties and
    IPEC, dated December 26, 1996. (Incorporated by reference
    to Exhibit 10.1 to IPECs Quarterly Report on
    Form 10-Q filed on February 14, 1997 for the quarter
    ended December 31, 1996).               
|        | *10.13 |             |  | Confidentiality Agreement, dated
    November 23, 1999, between the Company and Fujimi
    Incorporated (incorporated by reference to Exhibit 10.2 to
    the Registrants Form 8-K filed on December 7,
    1999 (File No. 0-26784)).                             
|        | *10.14 |             |  | No-Hire Agreement, dated November 23, 1999,
    between the Company and Fujimi Incorporated (incorporated by
    reference to Exhibit 10.2 to the Registrants
    Form 8-K filed on December 7, 1999 (File
    No. 0-26784)).                                     
|        | *10.15 |             |  | Form of Indemnification Agreement (incorporated
    by reference to Exhibit 10.41 to the Registrants
    Form 10-K for the fiscal year ended June 2, 2001
    (Exchange Act File No. 0-26784)).                                                                   
|        | *10.16 |             |  | Purchase and Sale Agreement dated May 31,
    2002 between the Company and Phoenix Industrial Investment
    Partners, L.P. (incorporated by reference to Exhibit 10.1
    to the Registrants Form 8-K filed on June 27,
    2002 (File No. 0-26784))             
|        | *10.17 |             |  | Lease dated June 21, 2002 between the
    Company and Phoenix Industrial Investment Partners, L.P.
    (incorporated by reference to Exhibit 10.2 to the
    Registrants Form 8-K filed on June 27, 2002
    (File No. 0-26784))                                  
|        | **21.1 |             |  | Subsidiaries of the Registrant                                                                                                                                                                                                                                     
|        | **23.1 |             |  | Consent of KPMG LLP.                                                                                                                                                                                                                                               
|        | **24.1 |             |  | Power of Attorney.                                                                                                                                                                                                                                                 
|        | **99.1 |             |  | Certification of Chief Executive Officer and
    Chief Financial Officer pursuant to 18 U.S.C. Section 1350,
    as adopted pursuant to Section 906 of the Sarbanes-Oxley
    Act of 2002.                                                                         



---

* Previously filed.

** Filed herewith.