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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 2, 2001

Commission file number 0-26784


SpeedFam-IPEC, Inc.

(Exact name of registrant as specified in its
charter)

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

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 
x  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.  x

State the aggregate market value of the voting and non-voting
stock held by non-affiliates of the registrant: $63,173,009 as
of July 31, 2001.

Indicate the number of shares outstanding of each of the
issuers classes of common stock: 30,317,636 as of
July 31, 2001.

Documents incorporated by reference:

Portions of the definitive Proxy Statement for SpeedFam-IPEC,
Inc.s Annual Meeting of Shareholders to be held on
October 12, 2001 are incorporated by reference into
Part III of this Form 10-K.



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|              |                                                                                                |  |  |  |  |  |  | 
|------------- | ---------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|              | Item 1. Business                                                                              
|              | Item 2. Properties.                                                                           
|              | Item 3. Legal Proceedings.                                                                    
|              | Item 4. Submission of Matters to a Vote of Security Holders.                                  
|              | 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, 11, 12 and 13.                                                                       
|PART IV      
|              | Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K. X                  
|SIGNATURES   
|EXHIBIT INDEX
|EX-3.3       
|EX-10.37     
|EX-10.38     
|EX-10.41     
|EX-21.1      
|EX-23.1      



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TABLE OF CONTENTS

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	Financial Condition and Results of Operations |  |              | 11 | 
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	Market Risk                            |  |              | 24 | 
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	Accounting and Financial Disclosure  |  |              | 53 | 
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|         | 10. |         |  | Directors and Executive Officers of the Company                                        |  |              | 53 | 
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|         | 11. |         |  | Executive Compensation                                                                 |  |              | 53 | 
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	and Management                        |  |              | 53 | 
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|         | 14. |         |  | Exhibits, Financial Statement Schedules, and
	Reports on Form 8-K                      |  |              | 53 | 
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|         |     |         |  | Signatures                                                                             |  |              | 54 | 
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|         |     |         |  | List of Exhibits                                                                       |  | EXHIBITINDEX

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Item 1.  Business

SpeedFam-IPEC, Inc. (the Company) is a leading global supplier
of chemical mechanical planarization (CMP) systems featuring the
worlds largest installed base. 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.

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 and thin film memory disk
polishing products. Under the terms of a distributor agreement
signed on August 31, 2000, the Company continues to act as
a direct distributor in the United States and Europe for the
wafer and disk polishing products manufactured by Obara.

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.

Industry Background

The semiconductor industry has experienced significant growth
over the past decade due to increased demand for electronic
products and the increased semiconductor content in electronics
products. The demand for personal computers; the expansion of
the telecommunications industry (especially wireless
communications); and the emergence of new applications within
consumer electronics continues to drive the demand for faster,
smaller and cheaper integrated circuit devices.

Although the semiconductor market has experienced significant
growth, it is cyclical by nature, characterized by short-term
periods of either under or over supply for both memory and logic
devices. When demand decreases, semiconductor manufacturers slow
their purchasing of capital equipment; conversely, when demand
increases, so does capital spending. The late 1990s also
saw the emergence of a new trend, driven by the increasingly
rapid pace with which the size of the circuitry on the chip is
decreasing. When chips decrease in size, circuits can operate
more quickly. With size reduction, more chips can also be
produced on a given wafer size, and the yield per manufacturing
machine increases. So, with decreasing chip size, more chips can
be produced per machine, and the need to build new manufacturing
plants decreases, in particular, for pure capacity expansion.
New equipment featuring the latest technological advances,
however, must often be purchased to manufacture the
smaller-sized chips and in many cases is retrofitted into
existing manufacturing facilities.

Products

The Company offers the broadest range of CMP systems currently
available to the semiconductor industry. CMP is a process used
during the semiconductor manufacturing process to planarize
individual layers in complex integrated circuits to specific
parameters. It is a complex science, often involving multiple

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Orbital CMP Systems.

The Companys 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 orbital polishing technology in
conjunction with other enhancements offered on the
Companys orbital platforms provides customers with
improved polish flexibility in a smaller footprint tool.
Moreover, the Companys 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.



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The 676 product features four independent heads, allowing
	simultaneous polishing of four wafers and offers one of the
	industrys smallest footprints. This system is capable of
	polishing either oxide or metal layers. The 676 was
	initially designed solely to planarize metal layers and has been
	adopted for this purpose in volume production by a majority of
	the customers that have purchased the system.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|
| |  | The 776 product 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 Momentum product is a highly flexible, universal tool
	that processes copper, low k, direct shallow trench isolation
	(STI), tungsten and oxide. Momentum was developed to
	address the industrys growing need for an advanced level
	of process capability for geometry shrinks to 0.13 micron
	and below. The tool features a new polishing system that
	combines SpeedFam-IPECs industry proven rotational and
	orbital technologies. The system enables productivity and yield
	management by integrating three advanced technologies: adaptive
	planarization technology (APT) with an innovative carrier
	design; a stable, highly flexible new polishing technique
	(Next) which combines an advanced hard platen with orbital
	motion; and Intelligent In-line Inspection technology (I3)
	with closed-loop control metrology for maximum effective
	throughput and reduced cost of ownership. The Momentum was
	chosen as the Grand Award winner in Semiconductor
	Internationalmagazines 2000 Editors Choice
	Best Product Competition.
|
| |  | The Momentum300 product, announced in July 2001, is a
	third generation CMP tool which flexibly delivers 0.13 micron
	and below process metrics for copper, low k, direct STI,
	tungsten and oxide. Momentum300 offers uniform velocity
	with solid polish support through an orbital hard platen. Its
	pressure-controlled Hexazone multi-channel carrier is the
	industrys only adaptive 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 the smallest 300 millimeter tool footprint, 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 Momentum 300 provides direct transfer of
	process from 200 millimeter to 300 millimeter geometries.            

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Rotational CMP Systems.



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The Avanti® 472, introduced in 1994, is a fully automated,
	single wafer planarization system for polishing oxide or metal
	layers on silicon wafers from four to eight inches in diameter.
	In addition to the planarization of oxide layers, the system
	planarizes layers of metal interconnects, including tungsten and
	aluminum.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|
| |  | The Companys Auriga system is a five head, two
	polishing table CMP system capable of processing 50-60 wafers
	per hour. The Auriga system, which began shipping
	commercially in November 1996, is used for oxide and metal
	(tungsten)  applications. The system incorporates full
	cassette-to-cassette automation. Robotics remove the wafers from
	the cassette and places them into the buffer tray. The wafers
	are then staged for batch pickup by the polishing heads. Once
	secured by the polishing heads, the wafers are moved onto the
	primary polishing pad and the process is initiated. The
	polishing table, covered with a flat polishing pad, rotates at a
	variable speed throughout the polishing cycle. Upon completion
	of the initial polish, the wafers are transported either to a
	rinsing station or to a second polishing table for an additional
	polishing or buffing step.
|
| |  | In 1998, the Company introduced the Auriga-C, which
	integrates cleaning and drying technology into the
	Companys CMP system thereby providing a complete
	dry-in/dry-out system. The design of the Auriga-C is based
	upon the replacement of the automation module on the
	Auriga with a new automation module, which incorporates
	the cleaning technology.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|
| |  | The Auriga Vision is the latest tool derived from the
	industry proven Auriga platform and provides complete
	dry-in/ dry-out CMP processing in a high throughput tool. This
	systems integrates five Olympian carriers with advanced
	cleaning capability, computer integrated manufacturing
	automation and in-line metrology capability.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                

Thin Film Memory Disk Media Polishing Products.The
Company sells polishing machines, pre-deposition cleaning
machines and grinding machines for producing aluminum,
nickel-plated and alternative substrates for the thin film
memory disk media market.

Semiconductor Wafer Polishing Products.The Company
supplies chemical mechanical polishing, double-sided lapping and
edge polishing systems to the semiconductor substrates or
silicon wafer market.

The Companys 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.

The Company also sells chemical mechanical polishing 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.
The Company markets and distributes edge polishing systems
manufactured by Obara Corporation in Japan, the Companys
former Far East Joint Venture partner.

General Industrial Products.The Company offers 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.

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Customers

The Company sells its products to leading manufacturers of
semiconductor devices, thin film memory disks, semiconductor
wafers and various general industrial applications. During the
last three years, the majority of the Companys total
revenue has been derived from the sale of CMP products and
services. In 2001, 2000 and 1999, sales to semiconductor device
manufacturers were 81.4%, 84.0%, and 74.2% of total revenue,
respectively. In 2001, 2000 and 1999, sales to thin film memory
disk media and silicon wafer manufacturers were 10.9%, 10.6% and
19.6% of total revenue, respectively. In 2001, 2000 and 1999,
sales to manufacturers of general industrial components were
7.7%, 5.4% and 6.2% of total revenue, respectively.

Sales to three customers in 2001 accounted for 15%, 11% and 10%
of the Companys total revenue. In 2000, sales to two
customers accounted for 12% and 11% of the Companys total
revenue and in 1999, sales to two customers accounted for 11%
each of the Companys total revenue. No other customer
accounted for 10% or more of the Companys total revenue
during these periods. The Companys ten largest customers
accounted for 60%, 65% and 61% of the Companys total
revenue in 2001, 2000 and 1999, respectively.

Sales and Marketing

Due to the highly technical nature of its products, the Company
markets and sells its products worldwide directly to all the
industries it serves. In addition, the Company uses one
distributor in Europe for its CMP product lines and a network of
regional distributors for its general industrial product lines.

The Companys sales strategy emphasizes direct interaction
with customers focused on building long-term relationships,
particularly in the semiconductor device, silicon wafer and
memory disk industries, where ongoing customer support and
service are critical. The Companys direct sales force is
divided into focused units for each of the industries it serves.

The Companys 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 anticipated market
demand for integrated circuits, the development of new
technologies and global economic conditions.

The Companys sales offices are in Chandler, Arizona;
Austin, Texas; Portland, Oregon; Des Plaines, Illinois; the
United Kingdom; Germany; Taiwan; Korea; Singapore; Malaysia and
Japan.

The Companys marketing strategy includes involvement with
SEMATECH, Inc., a consortium of major semiconductor
manufacturers and equipment suppliers, attendance at Semicon,
Diskcon, IMTS and other trade shows worldwide and participation
in technical conferences, which include the presentation of
technical papers written by customers, university scientists and
the Companys own senior technologists. The Company
believes these initiatives serve to promote acceptance of the
Companys products and process technologies in the
semiconductor, thin film memory disk and other industries.

Service and Support

The Company believes that providing highly responsive support
infrastructure with standard and customized support programs is
an essential factor in providing customers a competitive
operational advantage in the marketplace. In order to provide
customers with experienced service and support personnel, the
Company has structured its service operations into distinct
service units responsible for each of the semiconductor device,
thin film memory disk media, semiconductor wafer and general
industrial products industries. Elements of the Companys
service and support program include system installation and
process certification, process support, machine repair,
maintaining spare parts inventories, internal training programs,
external customer training, documentation and formation of
customer user groups

The Company generally provides a one-year warranty on all
equipment it sells and in certain instances provides 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 in place at certain customer
locations

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Backlog

Backlog of orders for capital equipment, parts and consumables
was approximately $40.0 million on July 31, 2001, compared
to $93.1 million on July 31, 2000. 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, the Companys backlog consists mostly of orders
for capital equipment. The Company includes in its backlog only
those customer orders for which it has 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 can be no
assurance that orders will not be canceled by customers or that
the Company 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, occasional
cancellation of orders and delays in product shipments, the
Companys 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 the Company
competes, is characterized by rapid technological development
and product innovation. The Companys research and
development efforts are currently focused on enhanced
performance for finer geometries in oxide and tungsten
applications while developing new process capabilities for STI,
copper, and 300 millimeter applications. The Companys
research and development expenditures during 2001, 2000 and 1999
were approximately $64.0 million, $53.7 million and $61.8
million, respectively.

Because of the complex and highly specialized design, testing,
and manufacturing requirements of the Company, research and
development employees must be experienced in a wide range of
engineering disciplines. 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. The Company
believes that this approach provides flexibility and allows the
Company to shorten time to market for new products and processes.

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

During 2000, the Company developed its advanced CMP system,
which combines SpeedFam-IPECs industry-proven rotational
and orbital technologies. The Momentum product was
developed to address the industrys growing need for an
advanced level of process capability, continued geometry shrinks
to 0.13 micron and below, and CMP challenges for applications
such as copper and STI in advanced semiconductor device
manufacturing. Momentum is a highly flexible system, which
can be configured to provide world-class process results for
oxide, tungsten, copper and STI. In addition, the Company
developed the Auriga Vision which extends the capabilities
of the Auriga system down to 0.13 micron, with a new
carrier, end-point detection, enhanced cleaner and
computer-integrated manufacturing automation. These systems were
both introduced in July 2000.

During 2001, the Company developed Momentum300, a 300
millimeter tool which delivers 0.13 micron and below process
metrics for copper, low k, direct STI, tungsten and oxide. Its
pressure-controlled Hexazone multi-channel carrier is the
industrys only adaptive polish carrier for optimized
removal rate and

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Manufacturing

The Company generally assembles its 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 the Companys specifications. All final assembly
and system tests are performed within the Companys
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 the Companys products sold to manufacturers of general
industrial components are manufactured in its Illinois facility.
Substantially all of the Companys products sold to the
thin film memory disk media and silicon wafer markets are
manufactured by Obara. The Companys CMP system development
and manufacturing operations are located at the Companys
headquarters in Chandler, Arizona and in June 2000, the
Company completed the expansion of this CMP manufacturing
facility, which nearly doubled the overall manufacturing space.

Competition

The Company competes in several distinct markets. These markets
include the semiconductor device equipment market (specifically
for CMP), the thin film memory disk media equipment market, 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.

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. 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. In the thin film memory disk
slurry market, the Company competes primarily with Praxair, a
large chemical company that manufactures and sells its own
products.

Employees

As of July 31, 2001, the Company had approximately 880 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.

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Intellectual Property

The Company currently holds 156 United States patents and 154
foreign patents in Asian and European countries. As of
July 31, 2001, the Company has 150 United States
patent applications pending and 281 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.

Executive Officers of the Company

|                                                          |  |     |    |              |  |                        |      |  |  |                                                                                                                                                                       
|--------------------------------------------------------- |  | --- | -- | ------------ |  | ---------------------- | ---- |  |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                          |  |     |    | Held Present |  | Other Positions Held  
|Name and Position                                         |  | Age |    | Office Since |  | During Past Five Years
|                                                          |  |     |    |              |  |                       
|Richard J. Faubert                                        |  |     | 53 |              |  |                        | 1999 |  |  | Vice President of the T.V. and                                                                                                                                        
|President and Chief Executive Officer                     |  |     |    |              |  |                        |      |  |  | Telecommunications Test Business Unit of
	Tektronix, Inc.                                                                                                             
|                                                         
|                                                         
|                                                         
|                                                         
|J. Michael Dodson                                         |  |     | 40 |              |  |                        | 1999 |  |  | Vice President, Corporate                                                                                                                                             
|Chief Financial Officer and Secretary                     |  |     |    |              |  |                        |      |  |  | Controller and Chief Accounting Officer of
	Novellus Systems, Inc.                                                                                                    
|                                                         
|                                                         
|                                                         
|                                                         
|Giovanni N. Nocerino                                      |  |     | 49 |              |  |                        | 2000 |  |  | Executive Vice President of                                                                                                                                           
|Executive Vice President of Sales,
	Marketing and Service |  |     |    |              |  |                        |      |  |  | CVC, Inc. (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                                              |  |     | 35 |              |  |                        | 2000 |  |  | Senior Section Manager at                                                                                                                                             
|Vice President and Chief Technical Officer                |  |     |    |              |  |                        |      |  |  | Atmel Corporation; Project Manager at OnTrak
	Systems, Inc; Senior Development Engineer Specialist at Philips
	Semiconductors                                         
|                                                         
|                                                         
|                                                         
|                                                         
|Robert R. Smith                                           |  |     | 57 |              |  |                        | 1974 |  |  |                                                                                                                                                                       
|Managing Director of SpeedFam-IPEC, U.K.                  |  |     |    |              |  |                        |      |  |  |                                                                                                                                                                       

7



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##### Table of Contents






Item 2.  Properties.

The Companys operations are conducted primarily in three
buildings in Chandler, Arizona and one building in Des Plaines,
Illinois. Two of the Chandler buildings are owned by the Company
and consist of approximately 250,000 square feet. The other
building is leased and is approximately 39,000 square feet.
These buildings 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. In June 2000,
the Company completed the expansion of its CMP manufacturing
facility, which nearly doubled the overall manufacturing space.
The Des Plaines, Illinois building, which houses the Industrial
Applications Group, is owned by the Company and consists of
approximately 40,000 square feet.

The Company also leases 22,000 square feet in Portland, Oregon,
which houses the northwest field service operation. The central
region field service operation is housed in a 8,300 square foot
leased facility in Austin, Texas.

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. SpeedFam-IPEC GmbH
leases 2,000 square feet of office space in Ingelfingen, Germany.

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

The Company is currently seeking sub-lessees for or has
subleased certain of the properties 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 believes that its current properties will be
sufficient to meet the Companys requirements for the
foreseeable future.




Item 3.  Legal Proceedings.

MEMC Electronics Materials Litigation

On December 20, 1999, MEMC Electronics Materials, Inc.
(MEMC) filed an action against IPEC Precision, Inc.,
Integrated Process Equipment Corporation, and the Company in the
Circuit Court for St. Charles County, State of Missouri. An
amended petition was filed on May 3, 2001 alleging causes
of action for breach of contract and quantum meruit/unjust
enrichment arising out of a joint development agreement between
MEMC and IPEC Precision, Inc. The plaintiff alleges that the
defendants failed to fulfill their obligations required by the
joint development agreement and is seeking damages of
approximately $7.4 million plus interest and attorneys
fees. On July 11, 2001, the court denied defendants
motions to dismiss the amended petition. A trial is scheduled to
begin September 24, 2001. The Company believes it has
meritorious defenses to the action and intends to pursue them
vigorously.

Raytheon Aircraft Company Litigation

On October 4, 2000, Raytheon Aircraft Company (Raytheon)
filed an action against Integrated Process Equipment
Corporation, IPEC Planar, Inc. and SpeedFam-IPEC, Inc. in the
United States District Court for the District of Kansas. In the
action, Raytheon alleges damages arising from its purchase of a
wire cutting system from Gaard Automation Inc.,
predecessor-in-interest to the Company and is seeking
approximately $6.5 million. The Company answered Raytheons
claims on behalf of all defendants on February 5, 2001
asserting that the wire cutting system performed properly under
the terms of the contract. Alternatively, the Company contends
that the problems experienced by Raytheon, if any, were caused
by failure of a major component of the system not manufactured
by the Company. As a result, on June 4, 2001, the Company
brought a Third Party Complaint against Spectrum Technologies
PLC (Spectrum), the United Kingdom-based manufacturer of this
major component. Spectrums response to the Complaint was
due by July 31, 2001. Discovery has just commenced. The
Court issued a Scheduling Order on March 31, 2001, where

8



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##### Table of Contents





The Company is subject to various other legal proceedings and
claims, either asserted or unasserted, that arise in the
ordinary course of business.




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

None

PART II




Item 5.  Market for Common Equity and
Related Stockholder Matters.

|                           |  |                 |     | 
|-------------------------- |  | --------------- | --- | 
|                           |  | Number of      
|                           |  | Stockholders of
|                           |  | Record as of   
|Title of Class             |  | July 31, 2001  
|                           |  |                
|Common Stock, no par value |  |                 | 167 | 

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 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 3/8   |  |  | $ | 8 11/16 | 
|    
|    
|    
|    
|     | Second Quarter                      |      |   | 14 3/8   |  |  |   | 9 9/16  | 
|    
|    
|    
|    
|     | Third Quarter                       |      |   | 29 7/8   |  |  |   | 10      | 
|    
|    
|    
|    
|     | Fourth Quarter                      |      |   | 29 1/8   |  |  |   | 11 1/8  | 
|2001 |                                     |      |   |          |  |  |   |        
|    
|    
|    
|    
|     | First Quarter                       |      | $ | 22 1/4   |  |  | $ | 13 7/8  | 
|    
|    
|    
|    
|     | Second Quarter                      |      |   | 18 13/16 |  |  |   | 5 3/16  | 
|    
|    
|    
|    
|     | Third Quarter                       |      |   | 9 5/8    |  |  |   | 4 3/16  | 
|    
|    
|    
|    
|     | Fourth Quarter                      |      |   | 8 1/8    |  |  |   | 4 1/2   | 
|2002 |                                     |      |   |          |  |  |   |        
|    
|    
|    
|    
|     | First Quarter through July 31, 2001 |      | $ | 4 7/8    |  |  | $ | 2 15/16 | 

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.




Item 6.  Selected Financial Data.

SELECTED CONSOLIDATED FINANCIAL DATA

The selected consolidated financial data presented below 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.

9



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##### Table of Contents



|                                                                                      |                   |                                       |          |       |   |      |         |      |   |      |          |   |  |   |         |   |  |   |         |   | 
|------------------------------------------------------------------------------------- | ----------------- | ------------------------------------- | -------- | ----- | - | ---- | ------- | ---- | - | ---- | -------- | - |  | - | ------- | - |  | - | ------- | - | 
|                                                                                      |                   |                                      
|                                                                                      |                   | Fiscal Year Ended                    
|                                                                                      |                   | ?                                    
|                                                                                      |                   |                                      
|                                                                                      |                   | 2001                                  |          | 2000  |   | 1999 |         | 1998 |   | 1997
|                                                                                      |                   |                                       |          |       |   |      |         |      |   |     
|                                                                                      |                   |                                      
|                                                                                      |                   | (in thousands, except per share data)
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|Consolidated Statements of Operations
	Data:                                          |                   |                                       |          |       |   |      |         |      |   |      |          |   |  |   |         |   |  |   |         |  
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|Net sales                                                                             |                   | $                                     | 267,080  |       |   | $    | 274,048 |      |   | $    | 216,425  |   |  | $ | 374,268 |   |  | $ | 318,112 |  
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|Net income (loss) from continuing operations                                          |                   |                                       | (97,946  | )     |   |      | (14,178 | )    |   |      | (139,775 | ) |  |   | (18,818 | ) |  |   | 15,037  |  
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|Loss from discontinued operations                                                     |                   |                                       |         |       |   |      |        |      |   |      |         |   |  |   | (10,578 | ) |  |   | (28,564 | )
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|Cumulative effect of accounting change(1)                                             |                   |                                       | (36,542  | )     |   |      |        |      |   |      |         |   |  |   |        |   |  |   |        |  
|                                                                                      |                   |                                       |          |       |   |      |         |      |   |      |          |   |  |   |         |   |  |   |         |  
|Net loss(2)                                                                           |                   |                                       | (134,488 | )     |   |      | (14,178 | )    |   |      | (139,775 | ) |  |   | (29,396 | ) |  |   | (13,527 | )
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|Cumulative dividend on preferred stock                                                |                   |                                       |         |       |   |      |        |      |   |      | (174     | ) |  |   | (244    | ) |  |   | (284    | )
|                                                                                      |                   |                                       |          |       |   |      |         |      |   |      |          |   |  |   |         |   |  |   |         |  
|Net loss attributable to common stockholders                                          |                   | $                                     | (134,488 | )     |   | $    | (14,178 | )    |   | $    | (139,949 | ) |  | $ | (29,640 | ) |  | $ | (13,811 | )
|                                                                                      |                   |                                       |          |       |   |      |         |      |   |      |          |   |  |   |         |   |  |   |         |  
|Net income (loss) per common
	share:                                                  |                   |                                       |          |       |   |      |         |      |   |      |          |   |  |   |         |   |  |   |         |  
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|Basic:                                                                                |                   |                                       |          |       |   |      |         |      |   |      |          |   |  |   |         |   |  |   |         |  
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|From continuing operations                                                            |                   | $                                     | (3.27    | )     |   | $    | (0.48   | )    |   | $    | (4.84    | ) |  | $ | (0.69   | ) |  | $ | 0.67    |  
|                                                                                      |                   |                                       |          |       |   |      |         |      |   |      |          |   |  |   |         |   |  |   |         |  
|From discontinued operations                                                          |                   | $                                     | (1.22    | )     |   | $    |        |      |   | $    |         |   |  | $ | (0.39   | ) |  | $ | (1.27   | )
|                                                                                      |                   |                                       |          |       |   |      |         |      |   |      |          |   |  |   |         |   |  |   |         |  
|Net income (loss) attributable to common
	stockholders                                |                   | $                                     | (4.49    | )     |   | $    | (0.48   | )    |   | $    | (4.84    | ) |  | $ | (1.08   | ) |  | $ | (0.62   | )
|                                                                                      |                   |                                       |          |       |   |      |         |      |   |      |          |   |  |   |         |   |  |   |         |  
|Diluted:                                                                              |                   |                                       |          |       |   |      |         |      |   |      |          |   |  |   |         |   |  |   |         |  
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|From continuing operations                                                            |                   | $                                     | (3.27    | )     |   | $    | (0.48   | )    |   | $    | (4.84    | ) |  | $ | (0.69   | ) |  | $ | 0.62    |  
|                                                                                      |                   |                                       |          |       |   |      |         |      |   |      |          |   |  |   |         |   |  |   |         |  
|From discontinued operations                                                          |                   | $                                     |         |       |   | $    |        |      |   | $    |         |   |  | $ | (0.39   | ) |  | $ | (1.19   | )
|                                                                                      |                   |                                       |          |       |   |      |         |      |   |      |          |   |  |   |         |   |  |   |         |  
|From cumulative effect of accounting change                                           |                   | $                                     | (1.22    | )     |   | $    |        |      |   | $    |         |   |  | $ |        |   |  | $ |        |  
|                                                                                      |                   |                                       |          |       |   |      |         |      |   |      |          |   |  |   |         |   |  |   |         |  
|Net income (loss) attributable to common
	stockholders                                |                   | $                                     | (4.49    | )     |   | $    | (0.48   | )    |   | $    | (4.84    | ) |  | $ | (1.08   | ) |  | $ | (0.57   | )
|                                                                                      |                   |                                       |          |       |   |      |         |      |   |      |          |   |  |   |         |   |  |   |         |  
|Weighted average shares used in per share
	calculations:                              |                   |                                       |          |       |   |      |         |      |   |      |          |   |  |   |         |   |  |   |         |  
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|Basic                                                                                 |                   |                                       | 29,961   |       |   |      | 29,503  |      |   |      | 28,890   |   |  |   | 27,469  |   |  |   | 22,441  |  
|                                                                                      |                   |                                       |          |       |   |      |         |      |   |      |          |   |  |   |         |   |  |   |         |  
|Diluted                                                                               |                   |                                       | 29,961   |       |   |      | 29,503  |      |   |      | 28,890   |   |  |   | 27,469  |   |  |   | 24,088  |  
|                                                                                      |                   |                                       |          |       |   |      |         |      |   |      |          |   |  |   |         |   |  |   |         |  
|Consolidated Balance Sheet Data:                                                      |                   |                                       |          |       |   |      |         |      |   |      |          |   |  |   |         |   |  |   |         |  
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|Working capital                                                                       |                   | $                                     | 140,110  |       |   | $    | 238,196 |      |   | $    | 243,735  |   |  | $ | 374,426 |   |  | $ | 205,918 |  
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|Total assets                                                                          |                   |                                       | 314,885  |       |   |      | 435,080 |      |   |      | 443,778  |   |  |   | 575,653 |   |  |   | 404,565 |  
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|Long-term debt, less current maturities                                               |                   |                                       | 115,124  |       |   |      | 115,162 |      |   |      | 116,129  |   |  |   | 117,078 |   |  |   | 19,818  |  
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|Amounts as if the accounting change related to
	revenue was applied retroactively(3): |                   |                                       |          |       |   |      |         |      |   |      |          |   |  |   |         |   |  |   |         |  
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|Net loss                                                                              |                   | $                                     | (97,946  | )     |   | $    | (36,183 | )    |   |      |          |   |  |   |         |   |  |   |         |  
|                                                                                      |                   |                                       |          |       |   |      |         |      |   |      |          |   |  |   |         |   |  |   |         |  
|Net loss per share:                                                                   |                   |                                       |          |       |   |      |         |      |   |      |          |   |  |   |         |   |  |   |         |  
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                      | Basic and diluted |                                       | $        | (3.27 | ) |      | $       | 1.22 | ) |      |          |   |  |   |         |   |  |   |         |   | 
|                                                                                      |                   |                                       |          |       |   |      |         |      |   |      |          |   |  |   |         |   |  |   |         |  




|    |                                                                                                                                                                                                            
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Fiscal year 2001 reflects the adoption of the Securities and
	Exchange Commissions Staff Accounting Bulletin
	No. 101 (SAB  101), Revenue Recognition in
	Financial Statements, which resulted in a non-

10



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| |                                                                                                                                                                       
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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, $2.8
	million and $5.5 million for the 2001 through 1997 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) | Data is not available in sufficient detail to show pro forma
	information for 1999, 1998 and 1997 for the impact of
	SAB 101.                                                                                                                                                                                                                                      




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

Overview

SpeedFam-IPEC, Inc. (the Company) is a leading global supplier
of chemical mechanical planarization (CMP) systems featuring the
worlds largest installed base. The Company designs,
develops, manufactures, markets and supports CMP systems which
are used in the fabrication of semiconductor devices. In
addition to CMP systems, the Company markets high-throughput
precision surface processing equipment, manufactures and markets
systems for the general industrial applications markets, and
markets and distributes parts and consumables used in surface
processing. The Companys total revenue consists of net
sales of the products described above and service revenues, as
well as revenue derived from the distribution by the Company in
the U.S. and Europe of products manufactured by the former
SpeedFam-IPEC, Co., Ltd. (the Far East Joint Venture). The
Company distributes such products throughout the U.S. and Europe
acting as sales agent, and related costs to import this
equipment are recorded as cost of goods sold to the Company.

The Company sells its products and services to three market
segments: (1) semiconductor device manufacturers (CMP
Group), (2) thin film memory disk media and silicon wafer
manufacturers (Surface Technology Group or STG Group), and
(3) manufacturers of general industrial components
(Industrial Applications Group or IAG Group). Over the last
three years, the majority of the Companys total revenue
has been derived from the sales of products and services by the
CMP Group. In 2001, 2000 and 1999, sales to semiconductor device
manufacturers were 81.4%, 84.0% and 74.2% of total revenue,
respectively.

In 2001, 2000 and 1999, 60.9%, 69.6% and 37.4%, respectively, of
the Companys total revenue was attributable to sales
outside of the United States. In 2001, 23.2% of the
Companys total revenue was attributable to sales in Europe
and 37.7% was attributable to sales in the Far East. In 2000,
26.6% of the Companys total revenue was attributable to
sales in Europe and 42.1% was attributable to sales in the Far
East. In 1999, 12.4% of the Companys total revenue was
attributable to sales in Europe and 22.9% was attributable to
sales in the Far East.

During 2001, 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, the Company recorded significant inventory
write-downs, charges related to asset impairments and severance
costs in connection with across-the-board headcount reductions.
Furthermore, the Company implemented measures to reduce
discretionary spending. Due to the continuation and severity of
the industry-wide downturn, the Company has implemented
additional cost-cutting measures during the first quarter of
2002 which includes further decreases in discretionary spending
and reductions in worldwide headcount.

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

11



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##### Table of Contents





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
billable is recorded as revenue and title is transferred. The
remainder is recorded as deferred revenue and recognized as
revenue upon customer acceptance. Revenue related to non-CMP
systems and spare parts for all segments 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 sellers price is fixed or determinable and
collectibility is reasonably assured. The cumulative effect of
the change in accounting principal discussed above includes
system revenue, cost of sales and certain expenses that will be
recognized when the conditions for revenue recognition have been
met.

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

The Companys fiscal year consists of 52 or 53 weeks
ending on the Saturday nearest May 31. Accordingly, the
2001 fiscal year ended on June 2 and contained
52 weeks, the 2000 fiscal year ended on June 3 and
contained 53 weeks and the 1999 fiscal year ended on
May 31 and contained 52 weeks. All references to years
relate to fiscal years unless otherwise noted.

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Results of Operations

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

|                                                   |  |      |       |      |  |      |       |    |  |  |       |   
|-------------------------------------------------- |  | ---- | ----- | ---- |  | ---- | ----- | -- |  |  | ----- | --
|                                                   |  | 2001 |       | 2000 |  | 1999
|                                                   |  |      |       |      |  |     
|Net sales                                          |  |      | 100.0 |      |  |      | 100.0 |    |  |  | 100.0 |   
|                                                  
|                                                  
|                                                  
|                                                  
|Cost of sales                                      |  |      | 85.6  |      |  |      | 67.3  |    |  |  | 90.1  |   
|                                                   |  |      |       |      |  |      |       |    |  |  |       |   
|Gross margin                                       |  |      | 14.4  |      |  |      | 32.7  |    |  |  | 9.9   |   
|                                                  
|                                                  
|                                                  
|                                                  
|Operating expenses:                                |  |      |       |      |  |      |       |    |  |  |       |   
|                                                  
|                                                  
|                                                  
|                                                  
|Research, development and engineering              |  |      | 24.0  |      |  |      | 19.6  |    |  |  | 28.6  |   
|                                                  
|                                                  
|                                                  
|                                                  
|Selling, general and administrative                |  |      | 19.6  |      |  |      | 19.1  |    |  |  | 31.5  |   
|                                                  
|                                                  
|                                                  
|                                                  
|Merger, integration and restructuring              |  |      | 3.2   |      |  |      |      |    |  |  | 18.6  |   
|                                                   |  |      |       |      |  |      |       |    |  |  |       |   
|Operating loss                                     |  |      | (32.4 | )    |  |      | (6.0  | )  |  |  | (68.8 | ) 
|                                                  
|                                                  
|                                                  
|                                                  
|Other income (expense), net                        |  |      | (0.3  | )    |  |      | (0.2  | )  |  |  | 2.0   |   
|                                                  
|                                                  
|                                                  
|                                                  
|Gain (loss) on disposal of investment in affiliate |  |      | (4.0  | )    |  |      | 2.2   |    |  |  |      |   
|                                                  
|                                                  
|                                                  
|                                                  
|Equity in net earnings (loss) of affiliates        |  |      |      |      |  |      | (1.2  | )  |  |  | 0.4   |   
|                                                   |  |      |       |      |  |      |       |    |  |  |       |   
|Loss before income taxes                           |  |      | (36.7 | )    |  |      | (5.2  | )  |  |  | (66.4 | ) 
|                                                  
|                                                  
|                                                  
|                                                  
|Income tax benefit                                 |  |      |      |      |  |      |      |    |  |  | (1.8  | ) 
|                                                   |  |      |       |      |  |      |       |    |  |  |       |   
|Loss before cumulative effect of accounting change |  |      | (36.7 | )    |  |      | (5.2  | )  |  |  | (64.6 | ) 
|                                                  
|                                                  
|                                                  
|                                                  
|Cumulative effect of accounting change             |  |      | (13.7 | )    |  |      |      |    |  |  |      |   
|                                                   |  |      |       |      |  |      |       |    |  |  |       |   
|Net loss                                           |  |      | (50.4 | )%   |  |      | (5.2  | )% |  |  | (64.6 | )%
|                                                   |  |      |       |      |  |      |       |    |  |  |       |   

2001 Compared with 2000

Net Sales. Net sales for 2001 were $267.1 million, down
2.5% from net sales of $274.0 million in 2000. Sales of CMP
systems totaled $217.4 million, or 81.4% of net sales, down 5.6%
from $230.2 million, or 84.0% 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 7.8% 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 of thin film memory and silicon wafer products in 2001
remained unchanged at $29.2 million, or 10.9% of net sales, as
compared to $29.2 million, or 10.6% of net sales, in 2000. With
the dissolution of the Far East Joint Venture, the Company has
exited from the manufacturing of silicon wafer and thin film
memory disk 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 wafer
and disk polishing products manufactured by Obara. During 2001,
thin film memory disk manufacturers continued to experience
manufacturing over-capacity which in turn reduced capital
spending. In addition, this over-capacity situation has created
a larger market for used equipment making it even more difficult
to sell new equipment. While the Company continues to actively
pursue sales of consumable products, the Company does not
foresee a return of high volume equipment sales to this market.
The silicon wafer market has also experienced continued softness
in demand due to ongoing manufacturing over-capacity caused by
various factors including available capacity and increased
production efficiencies due to the fact that more chips could be
produced on a given wafer.

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Sales of products for general industrial applications increased
to $20.6 million, or 7.7% of net sales, in 2001 compared with
$14.7 million, or 5.4% 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 27.6% of net sales,
compared to $89.5 million, or 32.7% 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 27.0% of net sales.

The Companys gross margin has significantly fluctuated in
past and will continue to fluctuate based on several factors
including the severity and duration of the current industry
downturn, revenue recognition under SAB 101, product mix,
overhead absorption levels and costs associated with the
introduction of new products.

Research, Development and Engineering. In 2001, research,
development and engineering expense increased to $64.0 million,
or 24.0% of net sales, compared to $53.7 million, or 19.6% of
net sales, in 2000. The increase was primarily due to asset
impairment charges during 2001 of approximately $6.0 million
related 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 addition, the Company has incurred
incremental hardware, software and process engineering costs
related to the design and development of the
Momentum300TM 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 19.6% of net sales from $52.4 million, or 19.1% 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
Vision. 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.
During 2001 the Company recorded $4.7 million in asset
impairment charges and paid out cash related to restructuring
activities of $3.4 million. The remaining restructuring accrual
is approximately $0.5 million which the Company believes is
adequate to cover the remaining cash outlays.

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

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Other Income (Expense). Other income
(expense) decreased to ($0.8) million in 2001 from ($0.5)
million in 2000. This decrease 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, offset by
a $1.8 million gain on sale of land.

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 (loss) 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 earnings 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.

2000 Compared with 1999

Net Sales. Net sales for 2000 were $274.0 million, up
26.6% from net sales of $216.4 million in 1999. Sales of CMP
systems totaled $230.2 million, or 84.0% of net sales, up 43.3%
from the $160.6 million of CMP system sales in 1999. Sales of
CMP systems increased significantly in 2000 as a reflection of
strong demand for semiconductor manufacturing equipment, which
was caused by an increasing demand from semiconductor device
manufacturers. Sales volume was higher in 2000 than in 1999
because the semiconductor and semiconductor manufacturing
equipment industries recovered from a severe industry downturn
(that started in 1998) and entered a new period of growth,
driven by customer investments in both capacity and advanced
technology to meet rising demand.

Sales of thin film memory and silicon wafer products in 2000
accounted for $29.2 million, or 10.6% of net sales, as compared
to $42.4 million, or 19.6% of net sales in 1999. During 2000,
thin film memory disk manufacturers continued to experience
manufacturing over-capacity which in turn reduced capital
spending. In addition, this over-capacity situation created a
larger market for used equipment making it even more difficult
to sell new equipment. The silicon wafer market also experienced
continued softness in demand due to

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Sales of products for general industrial applications increased
to $14.7 million, or 5.4% of net sales in 2000 compared with
$13.3 million, or 6.2% of net sales in 1999, due to increased
shipments in European markets.

Included in net sales are commissions from affiliates which
increased to $2.9 million in 2000, compared to $2.2 million in
1999, due to an increase in the Companys distribution in
the U.S. and Europe of products manufactured by the Far East
Joint Venture.

Gross Margin. In 2000, gross margin was $89.5 million, or
32.7% of net sales, compared to $21.4 million, or 9.9% of net
sales, in 1999. Gross margin, both in dollars and as a
percentage of total revenue, was up year over year primarily due
to an increase in total revenue during 2000 compared to the
prior year period, as well as increased production efficiencies
as a merged Company. In addition, during 1999 the Company wrote
down inventory in the amount of $13.6 million in connection with
the merged Companys new strategic plan to discontinue
certain product lines and also increased its allowance for
excess inventory and obsolescence. In 1999, the Company faced
significant competition in the sale of its products from other
equipment manufacturers, in addition to increased customer
demands to meet changing process requirements and develop new
technologies. As these factors grew in significance in 1999, the
Company determined that additional excess and obsolescence
reserves were necessary considering the weakness in order
activity and lower demand for the Companys products that
became apparent in the fourth quarter of 1999.

Research, Development and Engineering. In 2000, research,
development and engineering expense decreased to $53.7 million,
or 19.6% of net sales, compared to $61.8 million, or 28.6% of
net sales, in 1999. The decrease in research, development and
engineering expense was due to managements efforts to
realign the Companys research and development efforts
around critical and key programs while eliminating duplicate
projects.

Selling, General and Administrative. In 2000, selling,
general and administrative expense decreased to $52.4 million,
or 19.1% of net sales, from $68.2 million, or 31.5% of net
sales, in 1999. The decrease in selling, general and
administrative expense, both in dollars and as a percentage of
total revenue, resulted primarily from managements efforts
to control expenses which included eliminating functional
duplications throughout the merged Company.

Merger, Integration and Restructuring. In the fourth
quarter of 1999, the Company recorded the following merger,
integration and restructuring costs totaling $53.9 million: $6.9
million direct merger costs; $16.9 million lease termination
costs including $2.3 million in lease improvement write-offs;
$4.2 million write-down of equipment and $19.4 million
write-down of inventory due to certain discontinued product
lines; $4.7 million related to severance costs and $1.8 million
related to other merger, integration and restructuring
write-offs and costs. In 1999, merger, integration and
restructuring expenses included in operating expenses were $40.3
million, or 18.6% of total revenue. These charges were incurred
primarily to close duplicate facilities, record transaction
costs, account for certain employee termination benefits and
record adjustments and accruals resulting from strategic
decisions to discontinue certain product lines and sales and
marketing activities as a merged Company. The 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. Notification of the planned severance and the amount
of the related benefits were made to employees prior to
May 31, 1999.

During 2000, the Company completed the majority of its
restructuring activities in accordance with its previously
established and announced plans. Through June 3, 2000, the
Company incurred $27.0 million in asset write-downs and paid and
charged to the liability $17.7 million. The remaining
restructuring accrual for lease termination, severance and other
expenses associated with the merger was approximately $9.2
million as of June 3, 2000. During 2000, lease terminations
payments on certain vacated facilities (which were included in
the restructuring charge) primarily related to remaining rent,
related utilities and common area maintenance on the closed
Phoenix, Arizona manufacturing and administrative facility. The
Company also estimated

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Other Income (Expense). Other income
(expense) increased to $0.5 million in 2000 from $4.3
million in 1999. In the first quarter of 1999, the Company
recorded a gain arising from the collection of insurance
proceeds for a CMP tool, which was destroyed in transit. Other
income in 1999 also included an increase in interest income due
to the Companys decision in the first quarter of 1999 to
transfer a significant portion of the Companys short-term
investments to higher yielding taxable securities.

Equity in Net Earnings (Loss) of Affiliates. Equity in
net loss of affiliates was $3.3 million in 2000 compared to
equity in net earnings of $0.9 million in 1999. This decline
compared to the prior year was due to significantly decreased
sales revenue of the Far East Joint Venture. Investments by
manufacturers of both silicon wafers and thin film memory disks
continued to weaken in 2000. Also during 2000, the Far East
Joint Venture recorded a charge for certain asset impairments,
severance costs and other reorganization charges 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.

During 2000, the Companys share of the net loss of the Far
East Joint Venture was $3.8 million compared with the
Companys share of the net earnings of the Far East Joint
Venture of $0.1 million in 1999. Historically, the Far East
Joint Venture has not paid significant dividends, although in
1999, the Far East Joint Venture paid $0.5 million in dividends
to the Company.

Provision for Income Taxes. At the end of 1999, as well
as at the end of 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 2000 was zero. Income tax
benefit was $3.9 million for 1999. The effective tax benefit
rate for 1999 was approximately 2.7%. In 1999, the expected tax
benefit computed by applying the statutory rate to the current
year loss was offset by a $51.5 million increase to the
Companys deferred tax valuation allowance. The deferred
tax valuation allowance fully offsets the Companys net
deferred tax assets at June 3, 2000 and May 31, 1999.

Liquidity and Capital Resources

As of June 2, 2001, the Company had $60.8 million in cash,
cash equivalents and short-term investments compared to $100.3
million at June 3, 2000. The Company used $30.0 million of
cash in operating activities during 2001 compared to $45.2
million in 2000. During 2001, $3.5 million in cash was used for
working capital requirements. The net loss of $134.5 million
included non-cash items totaling $107.8 million: fixed asset
impairments and the non-cash portion of restructuring charges of
$56.4 million; cumulative effect of change in accounting
principle of $36.5 million; depreciation and amortization
expense of $17.0 million, offset by gain on sale of assets of
$2.0 million and equity in net earnings of affiliates of $0.1
million.

Net cash provided by investing activities totaled $4.3 million
in 2001 compared with $18.4 million in 2000. The Company
incurred capital expenditures of $15.3 million and $15.1 million
in 2001 and 2000, respectively. The majority of the cash was
used to fund building improvements, software and equipment
purchases in 2001. During 2001, cash was also used to purchase
short-term investments of $24.7 million offset by proceeds of
maturing investments totaling $39.9 million. In addition, the
Company received proceeds of $8.1 million primarily related to
the sale of approximately 30 acres of land in Chandler, Arizona.

Financing activities provided $1.7 million and $2.3 million
during 2001 and 2000, respectively. The sale of stock to
employees and the exercise of stock options generated proceeds
of $3.4 million during each year. Principal payments on capital
lease obligations amounted to $1.7 million in 2001 compared to
$1.2 million in 2000. Total long-term debt was $115.1 million at
June 2, 2001 compared to $115.2 million in the prior year.

The Company has incurred operating losses of $86.5 million,
$16.5 million, and $148.9 million in 2001, 2000 and 1999,
respectively. Coinciding with these operating losses, the
Company has incurred a decrease in its cash and investment
balances of $39.4 million, $46.7 million, and $78.3 million in
2001, 2000 and 1999, respectively.

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During 2001, 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 has implemented additional cost-cutting
measures during the first quarter of 2002 which include further
decreases in discretionary spending and reductions in worldwide
headcount. Despite the expected continuation of the
industry-wide downturn and uncertainty associated with the
introduction of new products, and taking into account the
Companys actions to restructure and downsize the Company,
management believes that the Companys current cash and
investment balances along with net cash generated through
operations will be sufficient to meet the Companys
anticipated cash needs for working capital and capital
expenditures at least through the year ended June 1, 2002.
However, due to significant uncertainties related to the
duration and severity of the semiconductor industry downturn,
overall economic conditions and potential litigation costs, the
Company is currently evaluating additional sources of funds in
order to strengthen its working capital position. Based on
discussions with various lenders, the Company believes that the
sources of funds available include, but are not limited to,
mortgage loan financing, a line of credit facility and term
debt. If the Company were to raise additional funds through the
issuance of equity securities, the percentage ownership of the
Companys 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.

Impact of Recently Issued Accounting Standards

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. The Company adopted SFAS 133
and SFAS 138 as of June 3, 2001 and the transition
adjustment was not material. Subsequent to fiscal year end 2001,
all of the Companys derivative financial instruments are
recorded at their fair value on the consolidated balance sheet.

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. The local currency is the functional
currency for all foreign operations. Accordingly, translation
gains or losses related to the foreign subsidiaries are included
as a component of accumulated other comprehensive income and are
not hedged.

The Company uses derivative financial instruments such as
forward exchange contracts and currency option contracts to
hedge certain forecasted foreign currency denominated
transactions expected to occur within the next 12 months.
In accordance with SFAS 133 and 138, these hedges related to
anticipated transactions are designated and documented at the
inception of the hedge as cash flow hedges, and will be
evaluated for effectiveness quarterly. The effective portion of
the gain or loss on these hedges will be reported

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Forward exchange contracts are used to hedge certain foreign
currency denominated liabilities. These derivatives do not
qualify for SFAS 133 hedge accounting treatment. Accordingly,
changes in the fair value of these hedges are recorded
immediately in earnings to offset the changes in the fair value
of the liabilities being hedged.

In July 2001, the Financial Accounting Standards Board
issued SFAS No. 141, Business
Combinations. SFAS No. 141 supersedes prior guidance
and requires that all business combinations in the scope of this
statement be accounted for using the purchase method. The
provisions of this statement apply to all business combinations
initiated after June 30, 2001, as well as all business
combinations accounted for using the purchase method for which
the date of acquisition is July 1, 2001 or later. The
Company adopted this statement as required on July 1, 2001.

In July 2001, the Financial Accounting Standards Board
issued 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 is required to adopt SFAS No. 142 in
2002 and is in the process of determining the impact of this
adoption. There can be no assurance that the adoption of SFAS
No. 142 will not have a material impact on the
Companys financial position and results of operations.

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

This report contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. Actual
results could differ materially from those projected in the
forward-looking statements because of a number of factors, risks
and uncertainties, including the risk factors described in this
discussion and elsewhere in this report. Such forward-looking
statements include, but are not limited to, statements that
relate to the Companys future revenue, product
development, product backlog, customers, demand, acceptance,
market share, competitiveness, gross margins, levels of research
and development and operating expenses, intellectual property,
managements plans and objectives for current and future
operations of the Company, the effects of the Companys
reorganization of the Far East Joint Venture, and the markets in
which the Company does business. In addition, the words
anticipate, expect, intend,
believe and similar expressions generally identify
forward-looking statements. The information included in this
report is as of the filing date with the Securities and Exchange
Commission and future events or circumstances could differ
significantly from the forward-looking statements included
herein.

CERTAIN FACTORS AFFECTING THE COMPANYS BUSINESS

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

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

19



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

The Companys current business model is predicated on
closing and fulfilling expected orders for its Momentum
and Momentum300 products.A significant portion of the
Companys projected revenue depends on sales of its
Momentum product. Although initial customer reaction to
Momentum has been positive, this response may not
translate into sales of Momentum on the scale or on the
time frame the Company anticipates. For instance, market
conditions in the semiconductor industry have caused and may
continue to cause potential purchasers of Momentum to
delay investment in new equipment, which could reduce demand for
Momentum. If the Company is unable to close anticipated
orders or fulfill orders for the Momentum product, the
Companys revenue will be adversely affected.

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

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



| |   |                                                                                                                                                 
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------
| |  | industry demand for capital equipment, which depends on economic
	conditions in the semiconductor, memory disk and silicon wafer
	markets       
|
| |  | timing of new product introductions                                                                                                             
|
| |  | ability to develop and implement new technologies                                                                                               
|
| |  | timing, cancellation or delay of customer orders, shipments and
	acceptance                                                                     
|
| |  | unexpected costs associated with sales and service of the CMP
	tools and processes                                                              
|
| |  | foreign currency exchange rates                                                                                                                 
|
| |  | announcements regarding restructuring, technological
	innovations, departures of key officers or employees, or the
	introduction of new products

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

If the market price of the Companys stock is adversely
affected, the Company may experience difficulty in raising
capital or making acquisitions. In addition, the Company may
become the object of securities class

20



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



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

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

Lost revenue from semiconductor industry downturn, general
economic slowdown and/or increased competition could continue to
lead to operating losses. If the Company experiences
continued reductions in revenue from lost sales or price
reductions for its products for any reason, including a
continued downturn in the semiconductor industry, a general
economic slowdown in the United States or increased competition,
the Companys gross margins will continue to be reduced and
could lead to further operating losses.

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



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

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

The Company depends on a small number of major customers.
Currently, and for the foreseeable future, the Company expects
that it will sell machines to a limited number of major
customers. To date, the CMP process has been used primarily to
fabricate advanced semiconductors, which accounts for only a

21



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Orders in backlog may not result in future revenue if customers
cancel or reschedule orders. The Company includes in backlog
only those customer orders for which it has accepted purchase
orders. Expected revenue may be lower if customers cancel or
reschedule orders, which they can generally do without penalty.

The Companys success depends on international sales,
particularly in Asia and Europe. International sales
accounted for 61% of the Companys total revenue for 2001,
70% for 2000 and 37% for 1999. The Company expects that
international sales will continue to account for a significant
portion of total revenue in future periods.

International sales are subject to risks, including:



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

The Company derives a substantial portion of its revenues
from customers in Asian countries, particularly Taiwan and
Korea. Economic developments in late 1997 and early 1998
resulted in decreased capital investments by Asian customers.
Recent economic developments indicate that the economies of
Taiwan, Korea and other Asian countries have recovered somewhat
from 1997 and 1998 levels. Any negative economic developments or
delays in the economic recovery of Asian countries could result
in the cancellation or delay of orders for the Companys
products from Asian customers, thus damaging the Companys
business.

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



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

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

The success of the Companys CMP operations in Asia
after the reorganization depends upon its ability to retain key
employees. None of the key employees in Asia have long-term
employment contracts. The Company does not have any direct
experience managing operations in Asia. Some employees may
decide to leave after the reorganization for this and other
reasons. This may negatively affect the Companys
operations in Asia, which represent a large portion of the
Companys total revenue.

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

22



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If the Company is unable to protect its intellectual
property, its business could suffer. The Companys
intellectual property portfolio is very important to its
success. However, the Company may not be able to protect its
technology because:



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

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



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

Third parties hold many patents relating to CMP machines and
processes. In the event the Company loses any of its
intellectual property rights or otherwise determines that it
needs to obtain licenses to third party intellectual property,
there is no assurance that the Company will be able to obtain
such licenses on reasonable terms, if at all. The Company
currently licenses the right to manufacture CMP machines
employing an orbital motion in its 676, 776, 876 and
Momentum and Momentum 300 from a semiconductor
manufacturer.

The Company may be subject to risks associated with
acquisitions and dispositions. The Company continually
evaluates strategic acquisitions of other businesses and
dispositions of portions of its business that it determines are
not complementary to its strategy. If the Company were to
consummate an acquisition or disposition, the Company would be
subject to a number of risks, including the following:



| |   |                                                                                                                                    
| | - | -----------------------------------------------------------------------------------------------------------------------------------
| |  | difficulty in assimilating the acquired operations and retaining
	acquired personnel                                               
|
| |  | limits on the Companys ability to retain acquired
	distribution channels and customers                                            
|
| |  | disruption of the Companys ongoing business                                                                                       
|
| |  | limits on the Companys ability to successfully incorporate
	acquired technology and rights into its product and service
	offerings
|
| |  | maintenance of uniform standards, controls, procedures and
	policies                                                               

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

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

The Company is subject to risks of non-compliance with
environmental regulations. The Company is subject to
environmental regulations in connection with its business
operations, including but not limited to regulations related to
the development, manufacturing and use of its products. From
time to time, the

23



---



##### Table of Contents





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




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 and long-term debt
obligations. 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. The long-term debt was primarily incurred
in connection with the Companys issuance of convertible
debenture bonds.

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 2,   
|                            |                       | 2002 |        | 2003 |   | 2004 |    | 2005 |   | 2006 |         | Thereafter |   | Total |    | 2001      
|                            |                       |      |        |      |   |      |    |      |   |      |         |            |   |       |    |           
|Cash equivalents            |                       | $    | 47,344 |      |   |      |   |      |   |      |        |            |   |       |   |            |   |  |  |   |  |  |  |   |  | $ | 47,344  |      |   | $ | 47,344 | 
|                           
|                           
|                           
|                           
|                            | Average interest rate |      |        | 3.96 | % |      |    |     |   |      |         |           |   |       |    |           |   |  |   |  |  |  |   |  |  |   |         | 3.96 | % |   |        |  | 
|                           
|                           
|                           
|                           
|Short-term investments      |                       | $    | 13,471 |      |   |      |   |      |   |      |        |            |   |       |   |            |   |  |  |   |  |  |  |   |  | $ | 13,471  |      |   | $ | 13,495 | 
|                           
|                           
|                           
|                           
|                            | Average interest rate |      |        | 5.36 | % |      |    |     |   |      |         |           |   |       |    |           |   |  |   |  |  |  |   |  |  |   |         | 5.36 | % |   |        |  | 
|                           
|                           
|                           
|                           
|Total investment securities |                       | $    | 60,815 |      |   |      |   |      |   |      |        |            |   |       |   |            |   |  |  |   |  |  |  |   |  | $ | 60,815  |      |   | $ | 60,839 | 
|                           
|                           
|                           
|                           
|                            | Average interest rate |      |        | 4.31 | % |      |    |     |   |      |         |           |   |       |    |           |   |  |   |  |  |  |   |  |  |   |         | 4.31 | % |   |        |  | 
|                           
|                           
|                           
|                           
|Long term debt              |                       | $    | 229    |      |   |      | 67 |      |   |      | 115,042 |            |   |       | 15 |            |   |  |  |   |  |  |  |   |  | $ | 115,353 |      |   | $ | 52,900 | 
|                           
|                           
|                           
|                           
|                            | Average interest rate |      |        | 7.87 | % |      |    | 5.45 | % |      |         | 8.79       | % |       |    | 4.08       | % |  |   |  |  |  |   |  |  |   |         | 6.25 | % |   |        |  | 

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 2001, 2000 and
1999, 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

24



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##### Table of Contents





The following table provides information as of June 2, 2001
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.

|                                             |                         |                                                |   |               |   |            |  |        |  |  |   |        |  
|-------------------------------------------- | ----------------------- | ---------------------------------------------- | - | ------------- | - | ---------- |  | ------ |  |  | - | ------ | -
|                                             |                         | Notional                                       |   | Average       |   | Estimated 
|June 2, 2001                                 |                         | Amount                                         |   | Contract Rate |   | Fair Value
|                                             |                         |                                                |   |               |   |           
|                                             |                         |                                               
|                                             |                         | In thousands, except for average contract rate
|                                            
|                                            
|                                            
|                                            
|Foreign currency forward exchange contracts: |                         |                                                |   |               |   |            |  |        |  |  |   |       
|                                            
|                                            
|                                            
|                                            
|                                             | Japanese yen, purchases |                                                | $ | (5,232        | ) |            |  | 106.64 |  |  | $ | (4,722 | )
|                                            
|                                            
|                                            
|                                            
|                                             | Japanese yen, sales     |                                                | $ | 5,153         |   |            |  | 107.31 |  |  | $ | 4,681  |  

25



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##### Table of Contents






Item 8.  Financial Statements and
Supplementary Data.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

|                                                                                                             |  |      |    | 
|------------------------------------------------------------------------------------------------------------ |  | ---- | -- | 
|                                                                                                             |  | Page
|                                                                                                             |  |     
|SPEEDFAM-IPEC, INC. AND CONSOLIDATED
	SUBSIDIARIES                                                           |  |      |    | 
|                                                                                                            
|                                                                                                            
|                                                                                                            
|                                                                                                            
|Independent Auditors Report                                                                                 |  |      | 27 | 
|                                                                                                            
|                                                                                                            
|                                                                                                            
|                                                                                                            
|Consolidated Balance Sheets 
	June 2, 2001 and June 3, 2000.                                                |  |      | 28 | 
|                                                                                                            
|                                                                                                            
|                                                                                                            
|                                                                                                            
|Consolidated Statements of Operations 
	Years Ended June 2, 2001, June 3, 2000 and May 31,
	1999.           |  |      | 29 | 
|                                                                                                            
|                                                                                                            
|                                                                                                            
|                                                                                                            
|Consolidated Statements of Stockholders
	Equity  Years Ended June 2, 2001, June 3,
	2000 and May 31, 1999. |  |      | 30 | 
|                                                                                                            
|                                                                                                            
|                                                                                                            
|                                                                                                            
|Consolidated Statements of Cash Flows 
	Years Ended June 2, 2001, June 3, 2000 and May 31,
	1999.           |  |      | 31 | 
|                                                                                                            
|                                                                                                            
|                                                                                                            
|                                                                                                            
|Notes to Consolidated Financial Statements                                                                   |  |      | 32 | 

26



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##### 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 consolidated subsidiaries as of
June 2, 2001 and June 3, 2000, 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, 1998 through
June 2, 2001. 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 consolidated financial statements referred
to above present fairly, in all material respects, the financial
position of SpeedFam-IPEC, Inc. and consolidated subsidiaries as
of June 2, 2001 and June 3, 2000, and the results of
their operations and their cash flows for each of the three
fiscal years in the period from June 1, 1998 through
June 2, 2001 in conformity with accounting principles
generally accepted in the United States of America.

KPMG LLP

Chicago, Illinois



27



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##### Table of Contents



SPEEDFAM-IPEC, INC.

CONSOLIDATED BALANCE SHEETS

June 2, 2001 and June 3, 2000


|                                      |                                                                                                                                                        |                                            |        |          |         |  |        |          |         | 
|------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------ | ------------------------------------------ | ------ | -------- | ------- |  | ------ | -------- | ------- | 
|                                      |                                                                                                                                                        | 2001                                       |        | 2000    
|                                      |                                                                                                                                                        |                                            |        |         
|                                      |                                                                                                                                                        |                                           
|                                      |                                                                                                                                                        | (in thousands)                            
|                                     
|                                     
|                                     
|                                     
|ASSETS                                |                                                                                                                                                        |                                            |        |          |         |  |        |         
|                                     
|                                     
|                                     
|                                     
|Current assets:                       |                                                                                                                                                        |                                            |        |          |         |  |        |         
|                                     
|                                     
|                                     
|                                     
|                                      | Cash and cash equivalents                                                                                                                              |                                            | $      | 47,344   |         |  | $      | 72,060   |        
|                                     
|                                     
|                                     
|                                     
|                                      | Short-term investments                                                                                                                                 |                                            |        | 13,495   |         |  |        | 28,236   |        
|                                     
|                                     
|                                     
|                                     
|                                      | Trade accounts receivable, less allowance for
	doubtful accounts of $2,907 in 2001 and $2,549 in 2000.                                                 |                                            |        | 60,619   |         |  |        | 129,102  |        
|                                     
|                                     
|                                     
|                                     
|                                      | Inventories                                                                                                                                            |                                            |        | 88,059   |         |  |        | 81,192   |        
|                                     
|                                     
|                                     
|                                     
|                                      | Shipped systems pending acceptance                                                                                                                     |                                            |        | 13,953   |         |  |        |         |        
|                                     
|                                     
|                                     
|                                     
|                                      | Prepaid expenses and other current assets                                                                                                              |                                            |        | 4,549    |         |  |        | 3,301    |        
|                                      |                                                                                                                                                        |                                            |        |          |         |  |        |         
|                                      |                                                                                                                                                        | Total current assets                       |        |          | 228,019 |  |        |          | 313,891 | 
|                                     
|                                     
|                                     
|                                     
|Investments in affiliates             |                                                                                                                                                        |                                            |       |          |         |  | 19,810 |         
|                                     
|                                     
|                                     
|                                     
|Property, plant, and equipment, net   |                                                                                                                                                        |                                            | 75,241 |          |         |  | 87,913 |         
|                                     
|                                     
|                                     
|                                     
|Other assets                          |                                                                                                                                                        |                                            | 11,625 |          |         |  | 13,466 |         
|                                      |                                                                                                                                                        |                                            |        |          |         |  |        |         
|                                      |                                                                                                                                                        | Total assets                               |        | $        | 314,885 |  |        | $        | 435,080 | 
|                                      |                                                                                                                                                        |                                            |        |          |         |  |        |         
|LIABILITIES AND STOCKHOLDERS
	EQUITY |                                                                                                                                                        |                                            |        |          |         |  |        |         
|                                     
|                                     
|                                     
|                                     
|Current liabilities:                  |                                                                                                                                                        |                                            |        |          |         |  |        |         
|                                     
|                                     
|                                     
|                                     
|                                      | Current portion of long-term debt                                                                                                                      |                                            | $      | 229      |         |  | $      | 1,077    |        
|                                     
|                                     
|                                     
|                                     
|                                      | Accounts payable                                                                                                                                       |                                            |        | 23,314   |         |  |        | 43,982   |        
|                                     
|                                     
|                                     
|                                     
|                                      | Due to affiliates                                                                                                                                      |                                            |        |         |         |  |        | 7,372    |        
|                                     
|                                     
|                                     
|                                     
|                                      | Deferred systems revenue                                                                                                                               |                                            |        | 46,281   |         |  |        |         |        
|                                     
|                                     
|                                     
|                                     
|                                      | Accrued liabilities                                                                                                                                    |                                            |        | 18,085   |         |  |        | 23,264   |        
|                                      |                                                                                                                                                        |                                            |        |          |         |  |        |         
|                                      |                                                                                                                                                        | Total current liabilities                  |        |          | 87,909  |  |        |          | 75,695  | 
|                                      |                                                                                                                                                        |                                            |        |          |         |  |        |         
|Long-term liabilities:                |                                                                                                                                                        |                                            |        |          |         |  |        |         
|                                     
|                                     
|                                     
|                                     
|                                      | Long-term debt                                                                                                                                         |                                            |        | 115,124  |         |  |        | 115,162  |        
|                                     
|                                     
|                                     
|                                     
|                                      | Other liabilities                                                                                                                                      |                                            |        | 5,911    |         |  |        | 7,253    |        
|                                      |                                                                                                                                                        |                                            |        |          |         |  |        |         
|                                      |                                                                                                                                                        | Total long-term liabilities                |        |          | 121,035 |  |        |          | 122,415 | 
|                                      |                                                                                                                                                        |                                            |        |          |         |  |        |         
|Stockholders equity:                 |                                                                                                                                                        |                                            |        |          |         |  |        |         
|                                     
|                                     
|                                     
|                                     
|                                      | Common stock, no par value, 60,000 shares
	authorized, 30,116 and 29,703 shares issued and outstanding at
	June 2, 2001 and June 3, 2000, respectively |                                            |        | 1        |         |  |        | 1        |        
|                                     
|                                     
|                                     
|                                     
|                                      | Additional paid-in capital                                                                                                                             |                                            |        | 434,090  |         |  |        | 430,706  |        
|                                     
|                                     
|                                     
|                                     
|                                      | Retained earnings (deficit)                                                                                                                            |                                            |        | (328,977 | )       |  |        | (194,489 | )      
|                                     
|                                     
|                                     
|                                     
|                                      | Accumulated comprehensive income                                                                                                                       |                                            |        | 827      |         |  |        | 752      |        
|                                      |                                                                                                                                                        |                                            |        |          |         |  |        |         
|                                      |                                                                                                                                                        | Total stockholders equity                 |        |          | 105,941 |  |        |          | 236,970 | 
|                                      |                                                                                                                                                        |                                            |        |          |         |  |        |         
|                                      |                                                                                                                                                        | Total liabilities and stockholders equity |        | $        | 314,885 |  |        | $        | 435,080 | 
|                                      |                                                                                                                                                        |                                            |        |          |         |  |        |         

See accompanying notes to consolidated financial statements.

28



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##### Table of Contents



SPEEDFAM-IPEC, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

Years Ended June 2, 2001, June 3, 2000 and
May 31, 1999


|                                                                                               |                                        |                                                    |                                                    |        |       |          |         |        |       |         |         |        |       |          |  
|---------------------------------------------------------------------------------------------- | -------------------------------------- | -------------------------------------------------- | -------------------------------------------------- | ------ | ----- | -------- | ------- | ------ | ----- | ------- | ------- | ------ | ----- | -------- | -
|                                                                                               |                                        | 2001                                               |                                                    | 2000   |       | 1999    
|                                                                                               |                                        |                                                    |                                                    |        |       |         
|                                                                                               |                                        |                                                   
|                                                                                               |                                        | (in thousands, except per share data)             
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|Net sales                                                                                      |                                        | $                                                  | 267,080                                            |        |       | $        | 274,048 |        |       | $       | 216,425 |       
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|Cost of sales                                                                                  |                                        |                                                    | 228,545                                            |        |       |          | 184,527 |        |       |         | 194,989 |       
|                                                                                               |                                        |                                                    |                                                    |        |       |          |         |        |       |         |         |       
|                                                                                               |                                        |                                                    | Gross margin                                       |        |       | 38,535   |         |        |       | 89,521  |         |        |       | 21,436   |  
|                                                                                               |                                        |                                                    |                                                    |        |       |          |         |        |       |         |         |       
|Operating expenses:                                                                            |                                        |                                                    |                                                    |        |       |          |         |        |       |         |         |       
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                               | Research, development, and engineering |                                                    |                                                    | 64,026 |       |          |         | 53,714 |       |         |         | 61,817 |      
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                               | Selling, general, and administrative   |                                                    |                                                    | 52,436 |       |          |         | 52,356 |       |         |         | 68,237 |      
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                               | Merger, integration, and restructuring |                                                    |                                                    | 8,583  |       |          |         |       |       |         |         | 40,300 |      
|                                                                                               |                                        |                                                    |                                                    |        |       |          |         |        |       |         |         |       
|                                                                                               |                                        |                                                    | Total operating expenses                           |        |       | 125,045  |         |        |       | 106,070 |         |        |       | 170,354  |  
|                                                                                               |                                        |                                                    |                                                    |        |       |          |         |        |       |         |         |       
|                                                                                               |                                        |                                                    | Operating loss                                     |        |       | (86,510  | )       |        |       | (16,549 | )       |        |       | (148,918 | )
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|Other income (expense)                                                                         |                                        |                                                    | (783                                               | )      |       |          | (454    | )      |       |         | 4,297   |       
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|Gain (loss) on disposal of investments in
	affiliates                                          |                                        |                                                    | (10,763                                            | )      |       |          | 6,103   |        |       |         |        |       
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|Equity in net earnings (loss) of affiliates                                                    |                                        |                                                    | 110                                                |        |       |          | (3,278  | )      |       |         | 916     |       
|                                                                                               |                                        |                                                    |                                                    |        |       |          |         |        |       |         |         |       
|                                                                                               |                                        |                                                    | Loss before income taxes                           |        |       | (97,946  | )       |        |       | (14,178 | )       |        |       | (143,705 | )
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|Income tax benefit                                                                             |                                        |                                                    |                                                   |        |       |          |        |        |       |         | (3,930  | )     
|                                                                                               |                                        |                                                    |                                                    |        |       |          |         |        |       |         |         |       
|                                                                                               |                                        |                                                    | Loss before cumulative effect of accounting change |        |       | (97,946  | )       |        |       | (14,178 | )       |        |       | (139,775 | )
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|Cumulative effect of accounting change                                                         |                                        |                                                    | (36,542                                            | )      |       |          |        |        |       |         |        |       
|                                                                                               |                                        |                                                    |                                                    |        |       |          |         |        |       |         |         |       
|                                                                                               |                                        |                                                    | Net loss                                           |        |       | (134,488 | )       |        |       | (14,178 | )       |        |       | (139,775 | )
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|Cumulative dividend on preferred stock                                                         |                                        |                                                    |                                                   |        |       |          |        |        |       |         | (174    | )     
|                                                                                               |                                        |                                                    |                                                    |        |       |          |         |        |       |         |         |       
|                                                                                               |                                        |                                                    | Net loss attributable to common stockholders       |        | $     | (134,488 | )       |        | $     | (14,178 | )       |        | $     | (139,949 | )
|                                                                                               |                                        |                                                    |                                                    |        |       |          |         |        |       |         |         |       
|Net loss per common share:                                                                     |                                        |                                                    |                                                    |        |       |          |         |        |       |         |         |       
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                               | Basic and diluted:                     |                                                    |                                                    |        |       |          |         |        |       |         |         |        |      
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                               |                                        | Loss before cumulative effect of accounting change |                                                    | $      | (3.27 | )        |         | $      | (0.48 | )       |         | $      | (4.84 | )       
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                               |                                        | From cumulative effect of accounting change        |                                                    |        | (1.22 | )        |         |        |      |         |         |        |      |         
|                                                                                               |                                        |                                                    |                                                    |        |       |          |         |        |       |         |         |       
|                                                                                               |                                        | Net loss attributable to common stockholders       |                                                    | $      | (4.49 | )        |         | $      | (0.48 | )       |         | $      | (4.84 | )       
|                                                                                               |                                        |                                                    |                                                    |        |       |          |         |        |       |         |         |       
|Weighted average shares used in per share
	calculation:                                        |                                        |                                                    |                                                    |        |       |          |         |        |       |         |         |       
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                               | Basic and diluted                      |                                                    |                                                    | 29,961 |       |          |         | 29,503 |       |         |         | 28,890 |      
|                                                                                               |                                        |                                                    |                                                    |        |       |          |         |        |       |         |         |       
|Amounts as if the accounting change related to
	revenue recognition was applied retroactively: |                                        |                                                    |                                                    |        |       |          |         |        |       |         |         |       
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|Net loss                                                                                       |                                        | $                                                  | (97,946                                            | )      |       | $        | (36,183 | )      |       |         | *       |       
|                                                                                               |                                        |                                                    |                                                    |        |       |          |         |        |       |         |         |       
|Net loss per share:                                                                            |                                        |                                                    |                                                    |        |       |          |         |        |       |         |         |       
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                               | Basic and diluted                      |                                                    | $                                                  | (3.27  | )     |          | $       | (1.22  | )     |         |         | *      |      
|                                                                                               |                                        |                                                    |                                                    |        |       |          |         |        |       |         |         |       




|  |                                                                                            
|- | -------------------------------------------------------------------------------------------
|* | Data is not available in sufficient detail to provide pro forma
	information for this year.

See accompanying notes to consolidated financial statements.

29



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##### Table of Contents



SPEEDFAM-IPEC, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY AND

COMPREHENSIVE INCOME


Years ended June 2, 2001, June 3, 2000 and
May 31, 1999


|                                                             |                                                |                |    |            |  |           |         |               |  |       |          |          |   |   |      |       |   |   |          |          |  
|------------------------------------------------------------ | ---------------------------------------------- | -------------- | -- | ---------- |  | --------- | ------- | ------------- |  | ----- | -------- | -------- | - | - | ---- | ----- | - | - | -------- | -------- | -
|                                                             |                                                |                |    |            |  |           |         | Accumulated   |  |      
|                                                             |                                                |                |    |            |  |           |         | Other         |  |      
|                                                             |                                                |                |    | Additional |  | Retained  |         | Comprehensive |  |      
|                                                             |                                                | Common         |    | Paid-in    |  | Earnings  |         | Income        |  |      
|                                                             |                                                | Stock          |    | Capital    |  | (Deficit) |         | (Loss)        |  | Total
|                                                             |                                                |                |    |            |  |           |         |               |  |      
|                                                             |                                                |               
|                                                             |                                                | (in thousands)
|                                                            
|                                                            
|                                                            
|                                                            
|Balance at May 31, 1998                                      |                                                | $              | 3  |            |  | $         | 423,146 |               |  | $     | (38,026  | )        |   | $ | (987 | )     |   | $ | 384,136  |         
|                                                             |                                                |                |    |            |  |           |         |               |  |       |          |          |   |   |      |       |   |   |          |         
|Comprehensive income (loss):                                 |                                                |                |    |            |  |           |         |               |  |       |          |          |   |   |      |       |   |   |          |         
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             | Net earnings (loss)                            |                |    |           |  |           |         |              |  |       |          | (139,775 | ) |   |      |      |   |   |          | (139,775 | )
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             | Foreign currency translation adjustments       |                |    |           |  |           |         |              |  |       |          |         |   |   |      | 927   |   |   |          | 927      |  
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             | Net unrealized change in investment securities |                |    |           |  |           |         |              |  |       |          |         |   |   |      | (170  | ) |   |          | (170     | )
|                                                             |                                                |                |    |            |  |           |         |               |  |       |          |          |   |   |      |       |   |   |          |         
|Total comprehensive income (loss)                            |                                                |                |    |            |  |           |         |               |  |       |          |          |   |   |      |       |   |   | (139,018 | )       
|                                                            
|                                                            
|                                                            
|                                                            
|Conversion of Class A common stock to common
	stock          |                                                |                | (2 | )          |  |           | 2       |               |  |       |         |          |   |   |     |       |   |   |         |         
|                                                            
|                                                            
|                                                            
|                                                            
|June 1999 IPEC net income                                    |                                                |                |   |            |  |           |        |               |  |       | (2,232   | )        |   |   |     |       |   |   | (2,232   | )       
|                                                            
|                                                            
|                                                            
|                                                            
|Preferred stock dividends paid                               |                                                |                |   |            |  |           |        |               |  |       | (278     | )        |   |   |     |       |   |   | (278     | )       
|                                                            
|                                                            
|                                                            
|                                                            
|Unearned compensation, net                                   |                                                |                |   |            |  |           | 742     |               |  |       |         |          |   |   |     |       |   |   | 742      |         
|                                                            
|                                                            
|                                                            
|                                                            
|Exercise of stock options and employee stock plan
	purchases |                                                |                |   |            |  |           | 3,400   |               |  |       |         |          |   |   |     |       |   |   | 3,400    |         
|                                                             |                                                |                |    |            |  |           |         |               |  |       |          |          |   |   |      |       |   |   |          |         
|Balance at May 31, 1999                                      |                                                |                | 1  |            |  |           | 427,290 |               |  |       | (180,311 | )        |   |   | (230 | )     |   |   | 246,750  |         
|                                                             |                                                |                |    |            |  |           |         |               |  |       |          |          |   |   |      |       |   |   |          |         
|Comprehensive income (loss):                                 |                                                |                |    |            |  |           |         |               |  |       |          |          |   |   |      |       |   |   |          |         
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             | Net earnings (loss)                            |                |    |           |  |           |         |              |  |       |          | (14,178  | ) |   |      |      |   |   |          | (14,178  | )
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             | Foreign currency translation adjustments       |                |    |           |  |           |         |              |  |       |          |         |   |   |      | 1,299 |   |   |          | 1,299    |  
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             | Net unrealized change in investment securities |                |    |           |  |           |         |              |  |       |          |         |   |   |      | (317  | ) |   |          | (317     | )
|                                                             |                                                |                |    |            |  |           |         |               |  |       |          |          |   |   |      |       |   |   |          |         
|Total comprehensive income (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 earnings (loss)                                          |                                                |                |   |            |  |           |        |               |  |       | (134,488 | )        |   |   |     |       |   |   | (134,488 | )       
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             | Foreign currency translation adjustments       |                |    |           |  |           |         |              |  |       |          |         |   |   |      | (436  | ) |   |          | (436     | )
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             | Net unrealized change in investment securities |                |    |           |  |           |         |              |  |       |          |         |   |   |      | 511   |   |   |          | 511      |  
|                                                             |                                                |                |    |            |  |           |         |               |  |       |          |          |   |   |      |       |   |   |          |         
|Total comprehensive income (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  |         
|                                                             |                                                |                |    |            |  |           |         |               |  |       |          |          |   |   |      |       |   |   |          |         

See accompanying notes to consolidated financial statements.

30



---



##### Table of Contents



SPEEDFAM-IPEC, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

Years Ended June 2, 2001, June 3, 2000 and
May 31, 1999


|                                                |                                                                                              |                                                                           |                                           |                                           |        |         |         |         |        |         |         |          |        |         |         |  
|----------------------------------------------- | -------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------- | ----------------------------------------- | ----------------------------------------- | ------ | ------- | ------- | ------- | ------ | ------- | ------- | -------- | ------ | ------- | ------- | -
|                                                |                                                                                              | 2001                                                                      |                                           | 2000                                      |        | 1999   
|                                                |                                                                                              |                                                                           |                                           |                                           |        |        
|                                                |                                                                                              |                                                                          
|                                                |                                                                                              | (in thousands)                                                           
|                                               
|                                               
|                                               
|                                               
|Cash flows from operating activities:           |                                                                                              |                                                                           |                                           |                                           |        |         |         |         |        |         |         |         
|                                               
|                                               
|                                               
|                                               
|                                                | Net loss                                                                                     |                                                                           | $                                         | (134,488                                  | )      |         | $       | (14,178 | )      |         | $       | (139,775 | )     
|                                               
|                                               
|                                               
|                                               
|                                                | Adjustments to reconcile net loss to net cash
	used in operating activities:                 |                                                                           |                                           |                                           |        |         |         |         |        |         |         |          |       
|                                               
|                                               
|                                               
|                                               
|                                                |                                                                                              | June 1999 IPEC net income                                                 |                                           |                                           |       |         |         |         |       |         |         |          | (2,232 | )      
|                                               
|                                               
|                                               
|                                               
|                                                |                                                                                              | Equity in net (earnings) loss of affiliates                               |                                           |                                           | (110   | )       |         |         | 3,278  |         |         |          | (916   | )      
|                                               
|                                               
|                                               
|                                               
|                                                |                                                                                              | Depreciation and amortization                                             |                                           |                                           | 17,024 |         |         |         | 17,446 |         |         |          | 20,421 |        
|                                               
|                                               
|                                               
|                                               
|                                                |                                                                                              | (Gain) loss on disposal of investments in
	affiliates                     |                                           |                                           | 10,763 |         |         |         | (6,103 | )       |         |          |       |        
|                                               
|                                               
|                                               
|                                               
|                                                |                                                                                              | Non-cash portion of merger, integration,
	restructuring and other charges |                                           |                                           | 45,624 |         |         |         |       |         |         |          | 49,800 |        
|                                               
|                                               
|                                               
|                                               
|                                                |                                                                                              | Cumulative effect of change in accounting
	principle                      |                                           |                                           | 36,542 |         |         |         |       |         |         |          |       |        
|                                               
|                                               
|                                               
|                                               
|                                                |                                                                                              | Deferred income tax benefit                                               |                                           |                                           |       |         |         |         |       |         |         |          | (4,662 | )      
|                                               
|                                               
|                                               
|                                               
|                                                |                                                                                              | (Gain) loss on sales of assets                                            |                                           |                                           | (1,966 | )       |         |         | 54     |         |         |          | 5,268  |        
|                                               
|                                               
|                                               
|                                               
|                                                |                                                                                              | (Increase) decrease in assets:                                            |                                           |                                           |        |         |         |         |        |         |         |          |        |        
|                                               
|                                               
|                                               
|                                               
|                                                |                                                                                              |                                                                           | Trade accounts receivable                 |                                           |        | 69,524  |         |         |        | (52,703 | )       |          |        | 12,226  |        
|                                               
|                                               
|                                               
|                                               
|                                                |                                                                                              |                                                                           | Inventories                               |                                           |        | (40,442 | )       |         |        | (1,271  | )       |          |        | 20,459  |        
|                                               
|                                               
|                                               
|                                               
|                                                |                                                                                              |                                                                           | Shipped systems pending acceptance        |                                           |        | 7,357   |         |         |        |        |         |          |        |        |        
|                                               
|                                               
|                                               
|                                               
|                                                |                                                                                              |                                                                           | Prepaid expenses and other current assets |                                           |        | (1,200  | )       |         |        | 6,526   |         |          |        | 4,495   |        
|                                               
|                                               
|                                               
|                                               
|                                                |                                                                                              | Increase (decrease) in liabilities:                                       |                                           |                                           |        |         |         |         |        |         |         |          |        |        
|                                               
|                                               
|                                               
|                                               
|                                                |                                                                                              |                                                                           | Accounts payable and due to affiliates    |                                           |        | (20,468 | )       |         |        | 26,853  |         |          |        | (14,554 | )      
|                                               
|                                               
|                                               
|                                               
|                                                |                                                                                              |                                                                           | Accrued liabilities                       |                                           |        | (3,665  | )       |         |        | (25,131 | )       |          |        | (2,137  | )      
|                                               
|                                               
|                                               
|                                               
|                                                |                                                                                              |                                                                           | Deferred systems revenue                  |                                           |        | (14,475 | )       |         |        |        |         |          |        |        |        
|                                                |                                                                                              |                                                                           |                                           |                                           |        |         |         |         |        |         |         |         
|                                                |                                                                                              |                                                                           |                                           | Net cash used in operating activities     |        |         | (29,980 | )       |        |         | (45,229 | )        |        |         | (51,607 | )
|                                                |                                                                                              |                                                                           |                                           |                                           |        |         |         |         |        |         |         |         
|Cash flows from investing activities:           |                                                                                              |                                                                           |                                           |                                           |        |         |         |         |        |         |         |         
|                                               
|                                               
|                                               
|                                               
|                                                | Net proceeds from disposal of investment in
	affiliate                                       |                                                                           |                                           | 661                                       |        |         |         |        |        |         |         |         |       
|                                               
|                                               
|                                               
|                                               
|                                                | Purchases of short-term investments                                                          |                                                                           |                                           | (24,674                                   | )      |         |         | (64,340 | )      |         |         | (55,616  | )     
|                                               
|                                               
|                                               
|                                               
|                                                | Maturities of short-term investments                                                         |                                                                           |                                           | 39,924                                    |        |         |         | 85,808  |        |         |         | 90,369   |       
|                                               
|                                               
|                                               
|                                               
|                                                | Sales of short-term investments                                                              |                                                                           |                                           |                                          |        |         |         |        |        |         |         | 35,871   |       
|                                               
|                                               
|                                               
|                                               
|                                                | Capital expenditures                                                                         |                                                                           |                                           | (15,282                                   | )      |         |         | (15,060 | )      |         |         | (31,361  | )     
|                                               
|                                               
|                                               
|                                               
|                                                | Proceeds from sale of assets                                                                 |                                                                           |                                           | 8,125                                     |        |         |         |        |        |         |         |         |       
|                                               
|                                               
|                                               
|                                               
|                                                | Proceeds from the sale of Fujimi Corporation                                                 |                                                                           |                                           |                                          |        |         |         | 10,000  |        |         |         |         |       
|                                               
|                                               
|                                               
|                                               
|                                                | Proceeds from licensing technology and transfer
	of associated assets                        |                                                                           |                                           |                                          |        |         |         | 2,335   |        |         |         |         |       
|                                               
|                                               
|                                               
|                                               
|                                                | Dividends from affiliates                                                                    |                                                                           |                                           |                                          |        |         |         |        |        |         |         | 1,521    |       
|                                               
|                                               
|                                               
|                                               
|                                                | Other investing activities                                                                   |                                                                           |                                           | (4,430                                    | )      |         |         | (371    | )      |         |         | 719      |       
|                                                |                                                                                              |                                                                           |                                           |                                           |        |         |         |         |        |         |         |         
|                                                |                                                                                              |                                                                           |                                           | Net cash provided by investing activities |        |         | 4,324   |         |        |         | 18,372  |          |        |         | 41,503  |  
|                                                |                                                                                              |                                                                           |                                           |                                           |        |         |         |         |        |         |         |         
|Cash flows from financing activities:           |                                                                                              |                                                                           |                                           |                                           |        |         |         |         |        |         |         |         
|                                               
|                                               
|                                               
|                                               
|                                                | Repayment of notes payable                                                                   |                                                                           |                                           |                                          |        |         |         |        |        |         |         | (395     | )     
|                                               
|                                               
|                                               
|                                               
|                                                | Proceeds from exercise of stock options and
	employee stock purchases                        |                                                                           |                                           | 3,384                                     |        |         |         | 3,416   |        |         |         | 3,400    |       
|                                               
|                                               
|                                               
|                                               
|                                                | Payment of preferred stock dividends                                                         |                                                                           |                                           |                                          |        |         |         |        |        |         |         | (278     | )     
|                                               
|                                               
|                                               
|                                               
|                                                | Principal payments on long-term debt                                                         |                                                                           |                                           | (1,641                                    | )      |         |         | (1,165  | )      |         |         | (1,082   | )     
|                                                |                                                                                              |                                                                           |                                           |                                           |        |         |         |         |        |         |         |         
|                                                |                                                                                              |                                                                           |                                           | Net cash provided by financing activities |        |         | 1,743   |         |        |         | 2,251   |          |        |         | 1,645   |  
|                                                |                                                                                              |                                                                           |                                           |                                           |        |         |         |         |        |         |         |         
|Effect of foreign currency rate changes on cash |                                                                                              |                                                                           | (803                                      | )                                         |        |         | (337    | )       |        |         | 980     |         
|                                                |                                                                                              |                                                                           |                                           |                                           |        |         |         |         |        |         |         |         
|                                                |                                                                                              |                                                                           |                                           | Net decrease in cash and cash equivalents |        |         | (24,716 | )       |        |         | (24,943 | )        |        |         | (7,479  | )
|                                               
|                                               
|                                               
|                                               
|Cash and cash equivalents at beginning of year  |                                                                                              |                                                                           | 72,060                                    |                                           |        |         | 97,003  |         |        |         | 104,482 |         
|                                                |                                                                                              |                                                                           |                                           |                                           |        |         |         |         |        |         |         |         
|Cash and cash equivalents at end of year        |                                                                                              | $                                                                         | 47,344                                    |                                           |        | $       | 72,060  |         |        | $       | 97,003  |         
|                                                |                                                                                              |                                                                           |                                           |                                           |        |         |         |         |        |         |         |         
|Supplemental cash flow information              |                                                                                              |                                                                           |                                           |                                           |        |         |         |         |        |         |         |         
|                                               
|                                               
|                                               
|                                               
|                                                | Cash paid during the year for:                                                               |                                                                           |                                           |                                           |        |         |         |         |        |         |         |          |       
|                                               
|                                               
|                                               
|                                               
|                                                |                                                                                              | Interest                                                                  |                                           | $                                         | 7,245  |         |         | $       | 7,379  |         |         | $        | 7,463  |        
|                                               
|                                               
|                                               
|                                               
|                                                |                                                                                              | Income taxes                                                              |                                           | $                                         | 902    |         |         | $       | 435    |         |         | $        | 845    |        
|                                               
|                                               
|                                               
|                                               
|                                                | Non-cash financing activities  book
	value of common stock issued in a pooling of interests |                                                                           | $                                         |                                          |        |         | $       |        |        |         | $       | 126,992  |       

See accompanying notes to consolidated financial statements.

31



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##### 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 featuring the worlds largest installed base.
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
2001 fiscal year ended on June 2 and contained 52 weeks,
the 2000 fiscal year ended on June 3 and contained 53 weeks
and the 1999 fiscal year ended on May 31 and contained
52 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 market.

(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; furniture and fixtures, 3 to
5 years; and leasehold improvements, the shorter of
7 years or the lease term.

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SPEEDFAM-IPEC, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)

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 ended March 3, 2001, retroactive to June 4,
2000. Changes in the Companys revenue recognition policy
resulting from the implementation of SAB 101 (discussed
below) did not involve the restatement of prior financial
statements.

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
billable is recorded as revenue and title is transferred. The
remainder is recorded as deferred revenue and recognized as
revenue upon customer acceptance. Revenue related to non-CMP
systems and spare parts for all segments 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 sellers price is fixed or determinable and
collectibility 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 upon shipment for non-CMP systems and for
CMP systems in which revenue is recorded as a multiple-element
arrangement. A provision for the estimated costs of warranty is
recorded upon acceptance for systems in which revenue is
recorded upon acceptance.

33



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##### 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
exerciseable 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 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, Trademarks, and
Goodwill

Patents and trademarks included in other assets, in the net
amount of $4.4 million and $7.6 million at the end of 2001 and
2000, respectively, are amortized on a straight-line basis over
5 to 17 years for patents and 5 years for trademarks.

Goodwill included in other assets, in the net amount of $2.5
million at the end of 2001 and 2000, represents the excess cost
over the fair value of tangible and intangible assets acquired
and is amortized over 5 to 10 years using the straight-line
method.

(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
generally accepted accounting principles 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.

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##### Table of Contents



SPEEDFAM-IPEC, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)

(p)  Fair Value of Financial
Instruments

The Companys financial instruments at June 2, 2001
and June 3, 2000 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 5. The
carrying value of cash equivalents, trade receivables, and trade
payables approximates fair value because of the short maturity
of 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 2, 2001
and June 3, 2000. The fair value of the Companys
long-term debt is not materially different from its financial
statement carrying value at the end of 2001. The fair value of
the Companys long-term debt is approximately
$52.9 million as of the end of 2001. 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 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 2001, 2000 and 1999 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. 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

35



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##### Table of Contents



SPEEDFAM-IPEC, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)

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 2000 and 1999
financial statements to conform to the 2001 presentation.

(t)  Recent Accounting
Pronouncements

In July 2001, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards
(SFAS) No. 141, Goodwill and Other Intangible
Assets. SFAS No. 141 will supersede 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 is required to adopt SFAS No. 141 in 2002 and is in
the process of determining the impact of this adoption. There
can be no assurance that the adoption of SFAS No. 141 will
not have a material impact on the Companys financial
position and results of operations.

(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 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 $31.3 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.

During the fourth quarter of 2001, the Company completed the
majority of its restructuring activities in accordance with its
previously established and announced plans. To date, the Company
incurred $37.6 million in asset write-offs and paid and charged
to the liability $1.0 million. The remaining liability of $0.4
million relates primarily to lease termination costs, and is
expected to be paid out during the first two quarters of 2002.
The following table summarizes the components of the
restructuring and other charges (in thousands):

|                        |  |             |        |                         |  |              |       |         |  |  |        |  |  |   |     | 
|----------------------- |  | ----------- | ------ | ----------------------- |  | ------------ | ----- | ------- |  |  | ------ |  |  | - | --- | 
|                        |  |             |        |                         |  |             
|                        |  |             |        | Fourth Quarter Activity |  | Accrued     
|                        |  | Charges     |        |                         |  | Liability at
|                        |  | Recorded in |        | Cash                    |  | Asset        |       | June 2,
|                        |  | 2001        |        | Expenditures            |  | Write-offs   |       | 2001   
|                        |  |             |        |                         |  |              |       |        
|Inventory write-offs    |  | $           | 31,268 |                         |  |              |      |         |  |  | 31,268 |  |  | $ |    | 
|                       
|                       
|                       
|                       
|Asset impairments       |  |             | 4,358  |                         |  |              |      |         |  |  | 4,358  |  |  |   |    | 
|                       
|                       
|                       
|                       
|Lease termination costs |  |             | 1,666  |                         |  |              |      |         |  |  | 1,239  |  |  |   | 427 | 
|                       
|                       
|                       
|                       
|Severance costs         |  |             | 1,023  |                         |  |              | 1,023 |         |  |  |       |  |  |   |    | 
|                       
|                       
|                       
|                       
|Other costs             |  |             | 771    |                         |  |              | 3     |         |  |  | 750    |  |  |   | 18  | 
|                        |  |             |        |                         |  |              |       |         |  |  |        |  |  |   |     | 
|                        |  | $           | 39,086 |                         |  |              | 1,026 |         |  |  | 37,615 |  |  | $ | 445 | 
|                        |  |             |        |                         |  |              |       |         |  |  |        |  |  |   |     | 

36



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##### Table of Contents



SPEEDFAM-IPEC, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)

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 | 
|                                          |  |   |        | 

(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 Reorganization Agreement with
Obara, ownership of the CMP operations of the Far East Joint
Venture was transferred to the Company and specific personnel
involved in CMP efforts became employees of the Company. Obara
continues the non-CMP activities of the joint venture, which
include the manufacture of silicon wafer and thin film memory
disk polishing products.

Under the terms of a distributor agreement signed on
August 31, 2000, the Company continues to act as a direct
distributor in the United States and Europe for the wafer and
disk polishing products manufactured by Obara 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 is comprised of inventory write-downs of raw
materials and spare parts related to silicon wafer and thin film
memory disk polishing products; 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.

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 2, 2001. During 2001, the Company incurred $15.8
million in asset write-offs and paid and charged to the
liability $3.4 million. The following table summarizes the
components of the restructuring and other charges (in thousands):

|                               |  |                          |        |              |  |   |       | 
|------------------------------ |  | ------------------------ | ------ | ------------ |  | - | ----- | 
|                               |  |                         
|                               |  | Activity During the Year
|                               |  | Ended June 2, 2001      
|                               |  |                         
|                               |  | Assets                   |        | Cash        
|                               |  | Write-offs               |        | Expenditures
|                               |  |                          |        |             
|Loss on disposal of investment |  | $                        | 9,741  |              |  | $ | 1,022 | 
|                              
|                              
|                              
|                              
|Inventory write-downs          |  |                          | 3,351  |              |  |   |      | 
|                              
|                              
|                              
|                              
|Fixed asset impairments        |  |                          | 2,700  |              |  |   |      | 
|                              
|                              
|                              
|                              
|Severance costs                |  |                          |       |              |  |   | 1,191 | 
|                              
|                              
|                              
|                              
|Other costs                    |  |                          |       |              |  |   | 1,232 | 
|                               |  |                          |        |              |  |   |       | 
|                               |  | $                        | 15,792 |              |  | $ | 3,445 | 
|                               |  |                          |        |              |  |   |       | 

37



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##### Table of Contents



SPEEDFAM-IPEC, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)

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.

Through June 2, 2001, the Company incurred $27.0 million in
asset write-downs and paid and charged to the liability $20.3
million. The remaining restructuring accrual for lease
terminations associated with the merger is approximately $6.6
million which the Company believes is adequate to cover the
remaining costs. Lease termination costs on certain vacated
facilities (which were included in the restructuring charge)
primarily related to remaining rent, related utilities and
common area maintenance on the closed Phoenix, Arizona
manufacturing and administrative facility not recoverable
through sublease income. Sublease activity began in
May 2000 (as reflected in the remaining accrual) and is
projected to be carried out through the end of the
Companys lease term. The Companys management has
been and is currently in the process of securing additional
subleases or other negotiated agreements for the Phoenix,
Arizona manufacturing and administrative facility. The following
table summarizes the changes in the accrued liability for
merger, integration, and restructuring costs (in thousands):

|                        |  |              |       |               |  |              |       |         |  |  |   |  |  |   |       | 
|----------------------- |  | ------------ | ----- | ------------- |  | ------------ | ----- | ------- |  |  | - |  |  | - | ----- | 
|                        |  |              |       |               |  |             
|                        |  | Accrued      |       | 2001 Activity |  | Accrued     
|                        |  | Liability at |       |               |  | Liability at
|                        |  | June 3,      |       | Cash          |  | Asset        |       | June 2,
|                        |  | 2000         |       | Expenditures  |  | Write-downs  |       | 2001   
|                        |  |              |       |               |  |              |       |        
|Lease termination costs |  | $            | 8,565 |               |  | $            | 2,000 |         |  |  |  |  |  | $ | 6,565 | 
|                       
|                       
|                       
|                       
|Severance costs         |  |              | 372   |               |  |              | 372   |         |  |  |  |  |  |   |      | 
|                       
|                       
|                       
|                       
|Other costs             |  |              | 264   |               |  |              | 264   |         |  |  |  |  |  |   |      | 
|                        |  |              |       |               |  |              |       |         |  |  |   |  |  |   |       | 
|                        |  | $            | 9,201 |               |  | $            | 2,636 |         |  |  |  |  |  | $ | 6,565 | 
|                        |  |              |       |               |  |              |       |         |  |  |   |  |  |   |       | 

38



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##### Table of Contents



SPEEDFAM-IPEC, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)

|                           |  |              |        |               |  |              |        |         |  |   |     |  |  |   |       | 
|-------------------------- |  | ------------ | ------ | ------------- |  | ------------ | ------ | ------- |  | - | --- |  |  | - | ----- | 
|                           |  |              |        |               |  |             
|                           |  | Accrued      |        | 2000 Activity |  | Accrued     
|                           |  | Liability at |        |               |  | Liability at
|                           |  | May 31,      |        | Cash          |  | Asset        |        | June 3,
|                           |  | 1999         |        | Expenditures  |  | Write-downs  |        | 2000   
|                           |  |              |        |               |  |              |        |        
|Direct merger costs        |  | $            | 3,600  |               |  | $            | 3,600  |         |  | $ |    |  |  | $ |      | 
|                          
|                          
|                          
|                          
|Lease termination costs    |  |              | 14,600 |               |  |              | 6,035  |         |  |   |    |  |  |   | 8,565 | 
|                          
|                          
|                          
|                          
|Discontinued product lines |  |              | 100    |               |  |              | 100    |         |  |   |    |  |  |   |      | 
|                          
|                          
|                          
|                          
|Severance costs            |  |              | 4,200  |               |  |              | 3,828  |         |  |   |    |  |  |   | 372   | 
|                          
|                          
|                          
|                          
|Other costs                |  |              | 500    |               |  |              |       |         |  |   | 236 |  |  |   | 264   | 
|                           |  |              |        |               |  |              |        |         |  |   |     |  |  |   |       | 
|                           |  | $            | 23,000 |               |  | $            | 13,563 |         |  | $ | 236 |  |  | $ | 9,201 | 
|                           |  |              |        |               |  |              |        |         |  |   |     |  |  |   |       | 

The 1999 merger, integration, and restructuring costs were
classified in the statement of operations for the year ended
May 31, 1999 in cost of sales and in operating expenses.
The following table summarizes the classification of the merger
and integration charges (in thousands):

|                                             |  |   |        | 
|-------------------------------------------- |  | - | ------ | 
|                                            
|                                            
|                                            
|                                            
|Cost of sales                                |  | $ | 13,600 | 
|                                            
|                                            
|                                            
|                                            
|Merger, integration, and restructuring costs |  |   | 40,300 | 
|                                             |  |   |        | 
|                                             |  | $ | 53,900 | 
|                                             |  |   |        | 

(5)  Change in Accounting Principle

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 ended March 3, 2001, retroactive to June 4,
2000. Earnings for the quarter ended March 4, 2000 would
have been ($7.9) million or ($0.27) per share if the accounting
change related to revenue recognition required by SAB 101
had been applied to this quarter. Changes in the Companys
revenue recognition policy resulting from the implementation of
SAB 101 (discussed below) did not involve the restatement
of prior financial statements. However, in accordance with
Statement of Financial Accounting Standards 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 impact on loss before cumulative effect of accounting
change for 2001 was an increase of $5.4 million, or $0.18 per
share. The financial information for interim periods reported
prior to the change, in this case the first two quarters of
2001, have been adjusted to reflect the provisions of
SAB 101.

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
billable is recorded as revenue and title is transferred. The
remainder is recorded as deferred revenue and recognized as
revenue upon customer acceptance. Revenue related to non-CMP
systems and spare parts for all segments 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

39



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##### Table of Contents



SPEEDFAM-IPEC, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)

recognized when persuasive evidence of an arrangement exists,
delivery has occurred or services have been rendered, the
sellers price is fixed or determinable and collectibility
is reasonably assured. The cumulative effect of the change in
accounting principle discussed above includes system revenue,
cost of sales and certain expenses that will be recognized when
the conditions for revenue recognition have been met.

(6)  Short-term Investments

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 and 2000 (in thousands):

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

|                                    |  |      |        |            |  |            |   |             |  |   |      |   |  |   |        | 
|----------------------------------- |  | ---- | ------ | ---------- |  | ---------- | - | ----------- |  | - | ---- | - |  | - | ------ | 
|                                    |  |     
|                                    |  | 2000
|                                    |  |     
|                                    |  |      |        | Gross      |  | Gross      |   | Approximate
|                                    |  |      |        | Unrealized |  | Unrealized |   | Fair       
|                                    |  | Cost |        | Gains      |  | Losses     |   | Value      
|                                    |  |      |        |            |  |            |   |            
|Municipal and state governments     |  | $    | 20,511 |            |  | $          |  |             |  | $ | (394 | ) |  | $ | 20,117 | 
|                                   
|                                   
|                                   
|                                   
|Corporate debt securities and other |  |      | 8,212  |            |  |            |  |             |  |   | (93  | ) |  |   | 8,119  | 
|                                    |  |      |        |            |  |            |   |             |  |   |      |   |  |   |        | 
|                                    |  | $    | 28,723 |            |  | $          |  |             |  | $ | (487 | ) |  | $ | 28,236 | 
|                                    |  |      |        |            |  |            |   |             |  |   |      |   |  |   |        | 

(7)  Inventories

Inventories at the end of 2001 and 2000 are summarized as
follows (in thousands):

|                |                   |      |        |        |  |   |        |        | 
|--------------- | ----------------- | ---- | ------ | ------ |  | - | ------ | ------ | 
|                |                   | 2001 |        | 2000  
|                |                   |      |        |       
|Raw materials   |                   | $    | 49,081 |        |  | $ | 54,058 |       
|               
|               
|               
|               
|Work-in-process |                   |      | 19,706 |        |  |   | 21,396 |       
|               
|               
|               
|               
|Finished goods  |                   |      | 19,272 |        |  |   | 5,738  |       
|                |                   |      |        |        |  |   |        |       
|                | Total inventories |      | $      | 88,059 |  |   | $      | 81,192 | 
|                |                   |      |        |        |  |   |        |       

(8)  Property, Plant, and Equipment

Property, plant, and equipment at the end of 2001 and 2000 are
summarized as follows (in thousands):

|                                    |                                    |      |         |        |  |   |         |        | 
|----------------------------------- | ---------------------------------- | ---- | ------- | ------ |  | - | ------- | ------ | 
|                                    |                                    | 2001 |         | 2000  
|                                    |                                    |      |         |       
|Land                                |                                    | $    | 2,634   |        |  | $ | 8,547   |       
|                                   
|                                   
|                                   
|                                   
|Buildings and building improvements |                                    |      | 42,463  |        |  |   | 38,709  |       
|                                   
|                                   
|                                   
|                                   
|Machinery and equipment             |                                    |      | 70,075  |        |  |   | 70,539  |       
|                                   
|                                   
|                                   
|                                   
|Furniture and fixtures              |                                    |      | 607     |        |  |   | 4,324   |       
|                                   
|                                   
|                                   
|                                   
|Leasehold improvements              |                                    |      | 2,457   |        |  |   | 1,131   |       
|                                   
|                                   
|                                   
|                                   
|Construction in progress            |                                    |      | 2,946   |        |  |   | 7,882   |       
|                                    |                                    |      |         |        |  |   |         |       
|                                    |                                    |      | 121,182 |        |  |   | 131,132 |       
|                                   
|                                   
|                                   
|                                   
|Less accumulated depreciation       |                                    |      | (45,941 | )      |  |   | (43,219 | )     
|                                    |                                    |      |         |        |  |   |         |       
|                                    | Net property, plant, and equipment |      | $       | 75,241 |  |   | $       | 87,913 | 
|                                    |                                    |      |         |        |  |   |         |       

40



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##### Table of Contents



SPEEDFAM-IPEC, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)

Depreciation expense was $15.2 million, $15.4 million, and $19.1
million in 2001, 2000, and 1999, respectively.

(9)  Accrued Liabilities

Accrued liabilities at the end of 2001 and 2000 are summarized
as follows (in thousands):

|                                                      |                           |      |        |        |  |   |       |        | 
|----------------------------------------------------- | ------------------------- | ---- | ------ | ------ |  | - | ----- | ------ | 
|                                                      |                           | 2001 |        | 2000  
|                                                      |                           |      |        |       
|Accrued warranty and installation costs               |                           | $    | 3,536  |        |  | $ | 8,665 |       
|                                                     
|                                                     
|                                                     
|                                                     
|Accrued payroll and benefits                          |                           |      | 3,361  |        |  |   | 4,588 |       
|                                                     
|                                                     
|                                                     
|                                                     
|Accrued merger, integration, and restructuring
	costs |                           |      | 445    |        |  |   | 1,952 |       
|                                                     
|                                                     
|                                                     
|                                                     
|Other accrued liabilities                             |                           |      | 10,743 |        |  |   | 8,059 |       
|                                                      |                           |      |        |        |  |   |       |       
|                                                      | Total accrued liabilities |      | $      | 18,085 |  |   | $     | 23,264 | 
|                                                      |                           |      |        |        |  |   |       |       

(10)  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. The
Companys equity investment in the Joint Venture was $19.8
million at June 3, 2000. Summary financial information
relating to the Joint Venture is as follows:

Statements of Earnings (in thousands)

|                             |                                              |               |        |                       |  |      |         |         |   |   |         |      |  
|---------------------------- | -------------------------------------------- | ------------- | ------ | --------------------- |  | ---- | ------- | ------- | - | - | ------- | ---- | -
|                             |                                              |               |        |                      
|                             |                                              |               |        | Years Ended April 30,
|                             |                                              | May 1, 2000 - |        |                      
|                             |                                              | July 31, 2000 |        | 2000                  |  | 1999
|                             |                                              |               |        |                       |  |     
|Net sales                    |                                              | $             | 29,626 |                       |  | $    | 108,000 |         |   | $ | 136,232 |     
|                            
|                            
|                            
|                            
|Costs and operating expenses |                                              |               | 29,267 |                       |  |      | 118,922 |         |   |   | 135,378 |     
|                             |                                              |               |        |                       |  |      |         |         |   |   |         |     
|                             | Earnings (loss) before income taxes          |               |        | 359                   |  |      |         | (10,922 | ) |   |         | 854  |  
|                            
|                            
|                            
|                            
|Income taxes                 |                                              |               | (130   | )                     |  |      | (3,346  | )       |   |   | 1,332   |     
|                             |                                              |               |        |                       |  |      |         |         |   |   |         |     
|                             | Net earnings (loss) before minority interest |               |        | 229                   |  |      |         | (7,576  | ) |   |         | (478 | )
|                            
|                            
|                            
|                            
|Minority interest            |                                              |               | 9      |                       |  |      | 50      |         |   |   | 684     |     
|                             |                                              |               |        |                       |  |      |         |         |   |   |         |     
|                             | Net earnings (loss)                          |               | $      | 220                   |  |      | $       | (7,526  | ) |   | $       | 206  |  
|                             |                                              |               |        |                       |  |      |         |         |   |   |         |     

41



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##### Table of Contents



SPEEDFAM-IPEC, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)

In November 1999, the Company sold its 50% interest in the joint
venture, Fujimi Corporation, to its 50% partner, Fujimi
Incorporated. Total proceeds from the sale were $10.0 million,
resulting in a gain of $6.1 million. Summary financial
information relating to Fujimi Corporation is as follows:

Statements of Earnings (in thousands)

|                             |                              |                   |         |              |  |   |         |       | 
|---------------------------- | ---------------------------- | ----------------- | ------- | ------------ |  | - | ------- | ----- | 
|                             |                              | June 1, 1999 -    |         | Year Ended  
|                             |                              | November 30, 1999 |         | May 31, 1999
|                             |                              |                   |         |             
|Net sales                    |                              | $                 | 11,629  |              |  | $ | 22,746  |      
|                            
|                            
|                            
|                            
|Costs and operating expenses |                              |                   | (10,629 | )            |  |   | (20,028 | )    
|                             |                              |                   |         |              |  |   |         |      
|                             | Earnings before income taxes |                   |         | 1,000        |  |   |         | 2,718 | 
|                            
|                            
|                            
|                            
|Income taxes                 |                              |                   | (400    | )            |  |   | (1,039  | )    
|                             |                              |                   |         |              |  |   |         |      
|                             | Net earnings                 |                   | $       | 600          |  |   | $       | 1,679 | 
|                             |                              |                   |         |              |  |   |         |      

(11)  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):

|        |       |      |          |         |   |      |         |         |   |   |          |          |  
|------- | ----- | ---- | -------- | ------- | - | ---- | ------- | ------- | - | - | -------- | -------- | -
|        |       | 2001 |          | 2000    |   | 1999
|        |       |      |          |         |   |     
|U.S     |       | $    | (102,675 | )       |   | $    | (15,322 | )       |   | $ | (145,521 | )       
|       
|       
|       
|       
|Non-U.S |       |      | 4,729    |         |   |      | 1,144   |         |   |   | 1,816    |         
|        |       |      |          |         |   |      |         |         |   |   |          |         
|        | Total |      | $        | (97,946 | ) |      | $       | (14,178 | ) |   | $        | (143,705 | )
|        |       |      |          |         |   |      |         |         |   |   |          |         

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

|          |                        |                              |   |      |   |      |   |   |   |  |        |        |        |  
|--------- | ---------------------- | ---------------------------- | - | ---- | - | ---- | - | - | - |  | ------ | ------ | ------ | -
|          |                        | 2001                         |   | 2000 |   | 1999
|          |                        |                              |   |      |   |     
|Current:  |                        |                              |   |      |   |      |   |   |   |  |        |       
|         
|         
|         
|         
|          | U.S. Federal           |                              | $ |     |   |      | $ |  |   |  | $      |       |       
|         
|         
|         
|         
|          | State                  |                              |   |     |   |      |   |  |   |  |        | 22     |       
|         
|         
|         
|         
|          | Non-U.S                |                              |   |     |   |      |   |  |   |  |        | 710    |       
|          |                        |                              |   |      |   |      |   |   |   |  |        |       
|          |                        |                              |  |      |   |      |  |   |   |  | 732    |       
|          |                        |                              |   |      |   |      |   |   |   |  |        |       
|Deferred: |                        |                              |   |      |   |      |   |   |   |  |        |       
|         
|         
|         
|         
|          | U.S. Federal and state |                              |   |     |   |      |   |  |   |  |        | (4,622 | )     
|         
|         
|         
|         
|          | Non-U.S                |                              |   |     |   |      |   |  |   |  |        | (40    | )     
|          |                        |                              |   |      |   |      |   |   |   |  |        |       
|          |                        |                              |  |      |   |      |  |   |   |  | (4,662 | )     
|          |                        |                              |   |      |   |      |   |   |   |  |        |       
|          |                        | Income tax expense (benefit) |   | $    |  |      |   |   |  |  |        | $      | (3,930 | )
|          |                        |                              |   |      |   |      |   |   |   |  |        |       

42



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##### Table of Contents



SPEEDFAM-IPEC, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)

The tax effects of temporary differences that give rise to the
deferred tax assets (liabilities) at the end of 2001 and 2000
are attributable to (in thousands):

|                          |                                                 |                            |         |          |     |   |        |         |     |  
|------------------------- | ----------------------------------------------- | -------------------------- | ------- | -------- | --- | - | ------ | ------- | --- | -
|                          |                                                 | 2001                       |         | 2000    
|                          |                                                 |                            |         |         
|Deferred tax assets:      |                                                 |                            |         |          |     |   |        |        
|                         
|                         
|                         
|                         
|                          | Deferred revenue, net                           |                            | $       | 12,931   |     |   | $      |        |    
|                         
|                         
|                         
|                         
|                          | Financial valuation accounts                    |                            |         | 18,516   |     |   |        | 13,781  |    
|                         
|                         
|                         
|                         
|                          | Expenses not currently deductible               |                            |         | 3,065    |     |   |        | 3,683   |    
|                         
|                         
|                         
|                         
|                          | Merger, integration, and restructuring accruals |                            |         | 2,804    |     |   |        | 3,680   |    
|                         
|                         
|                         
|                         
|                          | Net operating loss and tax credit carryforwards |                            |         | 105,673  |     |   |        | 75,003  |    
|                         
|                         
|                         
|                         
|                          | Other                                           |                            |         | 366      |     |   |        | 366     |    
|                          |                                                 |                            |         |          |     |   |        |        
|                          |                                                 |                            | 143,355 |          |     |   | 96,513 |        
|                         
|                         
|                         
|                         
|                          | Valuation allowance                             |                            |         | (142,698 | )   |   |        | (95,856 | )  
|                          |                                                 |                            |         |          |     |   |        |        
|                          |                                                 |                            | 657     |          |     |   | 657    |        
|                         
|                         
|                         
|                         
|Deferred tax liabilities: |                                                 |                            |         |          |     |   |        |        
|                         
|                         
|                         
|                         
|                          | Depreciation and amortization differences       |                            |         | (668     | )   |   |        | (668    | )  
|                          |                                                 |                            |         |          |     |   |        |        
|                          |                                                 | Net deferred tax liability |         | $        | (11 | ) |        | $       | (11 | )
|                          |                                                 |                            |         |          |     |   |        |        

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

The Company has in excess of $250 million of Federal net
operating loss carryforwards at June 2, 2001 which expire
between 2002 and 2019. The Company also has $7.0 million of
Federal research and development tax credit carryforwards
available. These carryforwards begin to expire in 2011.

The valuation allowance for deferred taxes was increased by
$46.8 million and $4.3 million during 2001 and 2000,
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:

|                                                                                                    |  |      |     |      |  |      |     |    |  |  |     |   
|--------------------------------------------------------------------------------------------------- |  | ---- | --- | ---- |  | ---- | --- | -- |  |  | --- | --
|                                                                                                    |  | 2001 |     | 2000 |  | 1999
|                                                                                                    |  |      |     |      |  |     
|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  | )    |  |      | (22 | )  |  |  | (2  | ) 
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                   
|Disposition of investments                                                                          |  |      |    |      |  |      | 14  |    |  |  |    |   
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                   
|Non-deductible expenses, including purchased
	research and development and amortization of goodwill |  |      | 9   |      |  |      | 8   |    |  |  | 1   |   
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                   
|Change in beginning of year valuation allowance                                                     |  |      | 33  |      |  |      | 39  |    |  |  | 36  |   
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                   
|Other                                                                                               |  |      |    |      |  |      | 1   |    |  |  | 2   |   
|                                                                                                    |  |      |     |      |  |      |     |    |  |  |     |   
|Effective income tax rate                                                                           |  |      | 0   | %    |  |      | 0   | %  |  |  | (3  | )%
|                                                                                                    |  |      |     |      |  |      |     |    |  |  |     |   

43



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##### Table of Contents



SPEEDFAM-IPEC, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)

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 2001, there was
approximately $13.9 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.

(12)  Line of Credit

SpeedFam-IPEC Limited in the United Kingdom, a wholly owned
subsidiary of the Company, has a £950,000 ($1.4 million)
multi-currency revolving line of credit with the London branch
of a U.S. 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 2.0% above the banks base
rate (5.25% at June 2, 2001). As of June 2, 2001 and
June 3, 2000, no amounts were outstanding under the line of
credit.

(13)  Long-term Debt

Long-term debt at June 2, 2001 and June 3, 2000
consists of the following (in thousands):

|                                                                      |                                        |      |         |         |  |   |         |         | 
|--------------------------------------------------------------------- | -------------------------------------- | ---- | ------- | ------- |  | - | ------- | ------- | 
|                                                                      |                                        | 2001 |         | 2000   
|                                                                      |                                        |      |         |        
|Convertible subordinated notes                                        |                                        | $    | 115,000 |         |  | $ | 115,000 |        
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|Capital lease obligations, interest rates ranging
	from 4.08% to 9.8% |                                        |      | 353     |         |  |   | 1,239   |        
|                                                                      |                                        |      |         |         |  |   |         |        
|                                                                      |                                        |      | 115,353 |         |  |   | 116,239 |        
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|Less current portion                                                  |                                        |      | 229     |         |  |   | 1,077   |        
|                                                                      |                                        |      |         |         |  |   |         |        
|                                                                      | Long term debt, net of current portion |      | $       | 115,124 |  |   | $       | 115,162 | 
|                                                                      |                                        |      |         |         |  |   |         |        

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
|      |       |       
|2002  |       | $      | 229     |        
|     
|     
|     
|     
|2003  |       |        | 67      |        
|     
|     
|     
|     
|2004  |       |        | 115,042 |        
|     
|     
|     
|     
|2005  |       |        | 15      |        
|      |       |        |         |        
|      | Total |        | $       | 115,353 | 
|      |       |        |         |        

44



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##### Table of Contents



SPEEDFAM-IPEC, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)

(14)  Stockholders Equity

Common Stock

The Company has 60.0 million shares of common stock authorized
for issuance, at no par value. There were 30.1 million and 29.7
million shares issued and outstanding as of June 2, 2001
and June 3, 2000, respectively.

Preferred Stock

The holders of Series B preferred stock were entitled to an
annual cumulative dividend amounting to $5.59 per share, payable
semiannually on December 31 and June 30, commencing
June 30, 1994. Each share of the Series B-1 preferred
stock, Series B-2 preferred stock, and Series B-3
preferred stock was converted into 8.90, 8.10, and 10.65 shares
of common stock, respectively, in connection with the merger.
There are 21,478 shares authorized for each of the
series B-1, B-2 and B-3 preferred stocks and no shares were
issued and outstanding as of June 2, 2001 or June 3,
2000.

Common Stock

Each share of Class A common stock is entitled to four
votes and can be converted into one share of the Companys
common stock. Each share of common stock is entitled to one
vote. There are 2.5 million shares authorized but no shares were
issued and outstanding as of June 2, 2001 or June 3,
2000.

(15)  Commitments and Contingencies

MEMC Electronics Materials Litigation

On December 20, 1999, MEMC Electronics Materials, Inc.
(MEMC) filed an action against IPEC Precision, Inc.,
Integrated Process Equipment Corporation, and the Company in the
Circuit Court for St. Charles County, State of Missouri. An
amended petition was filed on May 3, 2001 alleging causes
of action for breach of contract and quantum meruit/ unjust
enrichment arising out of a joint development agreement between
MEMC and IPEC Precision, Inc. The plaintiff alleges that the
defendants failed to fulfill their obligations required by the
joint development agreement and is seeking damages of
approximately $7.4 million plus interest and attorneys
fees. On July 11, 2001, the court denied defendants
motions to dismiss the amended petition. A trial is scheduled to
begin September 24, 2001. The Company believes it has
meritorious defenses to the action and intends to pursue them
vigorously.

Raytheon Aircraft Company Litigation

On October 4, 2000 Raytheon Aircraft Company (Raytheon)
filed an action against Integrated Process Equipment
Corporation, IPEC Planar, Inc. and SpeedFam-IPEC, Inc. in the
United States District Court for the District of Kansas. In the
action, Raytheon alleges damages arising from its purchase of a
wire cutting system from Gaard Automation Inc., predecessor in
interest to the Company and is seeking approximately $6.5
million. The Company answered Raytheons claims on behalf
of all defendants on February 5, 2001 asserting that the
wire cutting system performed properly under the terms of the
contract. Alternatively, the Company contends that the problems
experienced by Raytheon, if any, were caused by failure of a
major component of the system not manufactured by the Company.
As a result, on June 4, 2001, the Company brought a Third
Party Complaint against Spectrum Technologies PLC (Spectrum),
the United Kingdom-based manufacturer of this major component.
Spectrums response to the Complaint was due by
July 31, 2001. Discovery has just commenced. The Court
issued a Scheduling Order on March 31, 2001, where
discovery was to be completed by October 19, 2001 and trial
was to take place on or after March 2002. However, with the
addition of Spectrum as a party to the lawsuit, these deadlines
will most likely be extended. The Company believes it has
meritorious defenses to the action and intends to pursue them
vigorously.

45



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##### Table of Contents



SPEEDFAM-IPEC, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)

The Company is subject to various other legal proceedings and
claims, either asserted or unasserted, that arise in the
ordinary course of business.

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 $3.4 million, $3.0
million, and $6.2 million in 2001, 2000, and 1999, respectively.

Future minimum lease payments for all noncancelable operating
leases having remaining terms in excess of one year at the end
of 2001, excluding the lease termination payments relating to
the former IPEC Planar facility which are classified as
restructuring costs (refer to Note 4), are as follows (in
thousands):

|      |  |        |       | 
|----- |  | ------ | ----- | 
|Year  |  | Amount
|      |  |       
|2002  |  | $      | 2,450 | 
|     
|     
|     
|     
|2003  |  |        | 1,294 | 
|     
|     
|     
|     
|2004  |  |        | 1,040 | 
|     
|     
|     
|     
|2005  |  |        | 828   | 
|     
|     
|     
|     
|2006  |  |        | 290   | 
|      |  |        |       | 
|Total |  | $      | 5,902 | 
|      |  |        |       | 

(16)  Forward Exchange Contracts

The notional amounts of foreign exchange contracts as of
June 2, 2001 and June 3, 2000 were as follows (in
thousands):

|                                                     |  |      |       |      |  |   |       | 
|---------------------------------------------------- |  | ---- | ----- | ---- |  | - | ----- | 
|                                                     |  | 2001 |       | 2000
|                                                     |  |      |       |     
|Forward exchange contracts to buy foreign currency   |  | $    | 5,232 |      |  | $ | 1,981 | 
|                                                     |  |      |       |      |  |   |       | 
|Forward exchange contracts to sell foreign
	currency |  | $    | 5,153 |      |  | $ | 1,197 | 
|                                                     |  |      |       |      |  |   |       | 

All currency forward contracts outstanding at June 2, 2001
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. Total Company
contributions aggregated to $1.2 million, $1.1 million, and $1.0
million in 2001, 2000, and 1999, respectively.

The Company granted to an officer 50,000 shares of common stock
which vested monthly from September 1997 through
February 2000. At the merger date, all unvested shares
became fully vested. The Company deferred the related
compensation of $1.3 million and amortized the cost over the
vesting period. Compensation expense of $0.9 million was
recorded in 1999.

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 lessor 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. On
June 1, 2001, 301,164 shares were added to the Plan.
Payroll deductions for the purchase of stock may not exceed 10%
of an employees base compensation or $25,000. The employee
stock purchase plan provides that eligible employees

46



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##### Table of Contents



SPEEDFAM-IPEC, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)

may purchase stock at 85% of its fair value on specified dates.
Under the plan, the Company sold approximately 330,000, 67,000
and 198,000 shares in 2001, 2000, and 1999, 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.

The following table summarizes option activity and related
information:

|                        |                     |         |           |                 |   |          |              |              |  |   |       |       | 
|----------------------- | ------------------- | ------- | --------- | --------------- | - | -------- | ------------ | ------------ |  | - | ----- | ----- | 
|                        |                     |         |           |                 |   | Weighted
|                        |                     |         |           |                 |   | Average 
|                        |                     |         |           |                 |   | Exercise
|                        |                     | Options |           | Price Per Share |   | Price   
|                        |                     |         |           |                 |   |         
|Balance at May 31, 1998 |                     |         | 3,979,307 |                 |   | $        | 2.04 - 59.00 |              |  | $ | 22.32 |      
|                       
|                       
|                       
|                       
|                        | Granted             |         |           | 758,512         |   |          |              | 8.70 - 16.38 |  |   |       | 11.64 | 
|                       
|                       
|                       
|                       
|                        | Exercised           |         |           | (186,790        | ) |          |              | 2.04 - 15.32 |  |   |       | 3.26  | 
|                       
|                       
|                       
|                       
|                        | Canceled or expired |         |           | (737,190        | ) |          |              | 2.04 - 56.25 |  |   |       | 26.23 | 
|                        |                     |         |           |                 |   |          |              |              |  |   |       |      
|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 |      
|                        |                     |         |           |                 |   |          |              |              |  |   |       |      

47



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##### Table of Contents



SPEEDFAM-IPEC, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)

The following table summarizes information about stock options
outstanding at June 2, 2001:

|                |               |             |  |             |           |           |  |             |     |           |  |   |       |  |  |  |           |  |  |   |       | 
|--------------- | ------------- | ----------- |  | ----------- | --------- | --------- |  | ----------- | --- | --------- |  | - | ----- |  |  |  | --------- |  |  | - | ----- | 
|                |               |             |  | Weighted    |           |           |  |             |     |          
|                |               | Options     |  | Average     |           |           |  | Options     |     |          
|                |               | Outstanding |  | Remaining   |           | Weighted- |  | Exercisable |     | Weighted-
|                |               | at          |  | Contractual |           | Average   |  | At          |     | Average  
|Range of        |               | June 2,     |  | Life        |           | Exercise  |  | June 2,     |     | Exercise 
|Exercise Prices |               | 2001        |  | (Years)     |           | Price     |  | 2001        |     | Price    
|                |               |             |  |             |           |           |  |             |     |          
|$               | 2.04 -  5.90  |             |  |             | 1,380,466 |           |  |             | 9.2 |           |  | $ | 4.47  |  |  |  | 428,760   |  |  | $ | 4.19  | 
|$               | 5.91 - 11.80  |             |  |             | 1,128,700 |           |  |             | 8.1 |           |  |   | 9.31  |  |  |  | 396,650   |  |  |   | 9.62  | 
|$               | 11.81 - 17.70 |             |  |             | 1,162,027 |           |  |             | 8.3 |           |  |   | 12.91 |  |  |  | 426,014   |  |  |   | 12.99 | 
|$               | 17.71 - 23.60 |             |  |             | 1,168,090 |           |  |             | 5.3 |           |  |   | 19.67 |  |  |  | 1,039,693 |  |  |   | 19.66 | 
|$               | 23.61 - 29.50 |             |  |             | 22,281    |           |  |             | 6.7 |           |  |   | 24.78 |  |  |  | 16,065    |  |  |   | 24.68 | 
|$               | 29.51 - 35.40 |             |  |             | 6,935     |           |  |             | 6.6 |           |  |   | 34.06 |  |  |  | 6,575     |  |  |   | 34.12 | 
|$               | 35.41 - 41.30 |             |  |             | 505,978   |           |  |             | 6.7 |           |  |   | 37.44 |  |  |  | 406,478   |  |  |   | 37.44 | 
|$               | 41.31 - 47.20 |             |  |             | 2,380     |           |  |             | 5.7 |           |  |   | 45.71 |  |  |  | 1,500     |  |  |   | 45.67 | 
|$               | 47.21 - 53.10 |             |  |             | 800       |           |  |             | 6.3 |           |  |   | 51.00 |  |  |  | 480       |  |  |   | 51.00 | 
|$               | 53.11 - 59.00 |             |  |             | 17,450    |           |  |             | 6.3 |           |  |   | 55.44 |  |  |  | 10,470    |  |  |   | 55.44 | 
|                |               |             |  |             |           |           |  |             |     |           |  |   |       |  |  |  |           |  |  |   |       | 
|$               | 2.04 - 59.00  |             |  |             | 5,395,107 |           |  |             | 7.7 |           |  | $ | 13.77 |  |  |  | 2,739,185 |  |  | $ | 17.60 | 
|                |               |             |  |             |           |           |  |             |     |           |  |   |       |  |  |  |           |  |  |   |       | 

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 value at the grant date for awards
in 2001, 2000 and 1999, 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):

|                                                           |  |      |          |      |  |      |         |   |  |  |          |  
|---------------------------------------------------------- |  | ---- | -------- | ---- |  | ---- | ------- | - |  |  | -------- | -
|                                                           |  | 2001 |          | 2000 |  | 1999
|                                                           |  |      |          |      |  |     
|Net loss attributable to common stockholders
	as
	reported |  | $    | (134,488 | )    |  | $    | (14,178 | ) |  |  | (139,949 | )
|                                                          
|                                                          
|                                                          
|                                                          
|Pro forma net loss attributable to common
	stockholders    |  |      | (144,343 | )    |  |      | (23,588 | ) |  |  | (148,630 | )
|                                                          
|                                                          
|                                                          
|                                                          
|Basic and diluted loss per share as reported               |  |      | (4.49    | )    |  |      | (0.48   | ) |  |  | (4.84    | )
|                                                          
|                                                          
|                                                          
|                                                          
|Basic and diluted pro forma loss per share                 |  |      | (4.82    | )    |  |      | (0.80   | ) |  |  | (5.14    | )
|                                                           |  |      |          |      |  |      |         |   |  |  |          |  

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 2001, 2000, and 1999.

|                        |  |      |      |      |  |      |      |   |  |  |      |  
|----------------------- |  | ---- | ---- | ---- |  | ---- | ---- | - |  |  | ---- | -
|                        |  | 2001 |      | 2000 |  | 1999
|                        |  |      |      |      |  |     
|Dividend yield          |  |      | None |      |  |      | None |   |  |  | None |  
|                       
|                       
|                       
|                       
|Expected volatility     |  |      | 94   | %    |  |      | 85   | % |  |  | 66   | %
|                       
|                       
|                       
|                       
|Risk-free interest rate |  |      | 4.55 |      |  |      | 6.60 |   |  |  | 5.63 |  
|                       
|                       
|                       
|                       
|Expected lives in years |  |      | 3    |      |  |      | 3    |   |  |  | 3    |  
|                        |  |      |      |      |  |      |      |   |  |  |      |  

The weighted average fair value of options granted was $3.34 per
share, $6.88 per share, and $7.82 per share for 2001, 2000, and
1999, 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

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SPEEDFAM-IPEC, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)

surface processing equipment used in thin film memory disk
media; 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 2001, 2000, and 1999 is as follows (in thousands):

|                                                    |                               |                                       |         |         |         |      |         |         |         |   |         |         |          |  
|--------------------------------------------------- | ----------------------------- | ------------------------------------- | ------- | ------- | ------- | ---- | ------- | ------- | ------- | - | ------- | ------- | -------- | -
|                                                    |                               | 2001                                  |         | 2000    |         | 1999
|                                                    |                               |                                       |         |         |         |     
|Net sales to customers:                             |                               |                                       |         |         |         |      |         |         |         |   |         |        
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | CMP Group                     |                                       | $       | 217,358 |         |      | $       | 230,191 |         |   | $       | 160,639 |         
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Surface Technology Group      |                                       |         | 29,159  |         |      |         | 29,155  |         |   |         | 42,440  |         
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Industrial Applications Group |                                       |         | 20,563  |         |      |         | 14,702  |         |   |         | 13,346  |         
|                                                    |                               |                                       |         |         |         |      |         |         |         |   |         |        
|                                                    |                               | Total net sales                       |         | $       | 267,080 |      |         | $       | 274,048 |   |         | $       | 216,425  |  
|                                                    |                               |                                       |         |         |         |      |         |         |         |   |         |        
|Segment operating profit (loss):                    |                               |                                       |         |         |         |      |         |         |         |   |         |        
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | CMP Group                     |                                       | $       | (58,535 | )       |      | $       | (1,157  | )       |   | $       | (89,527 | )       
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Surface Technology Group      |                                       |         | (2,119  | )       |      |         | (651    | )       |   |         | (30,429 | )       
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Industrial Applications Group |                                       |         | 3,173   |         |      |         | 2,341   |         |   |         | 1,186   |         
|                                                    |                               |                                       |         |         |         |      |         |         |         |   |         |        
|                                                    |                               | Total segment operating profit (loss) |         |         | (57,481 | )    |         |         | 533     |   |         |         | (118,770 | )
|                                                   
|                                                   
|                                                   
|                                                   
|General corporate expense                           |                               |                                       | (27,075 | )       |         |      | (16,336 | )       |         |   | (27,065 | )      
|                                                   
|                                                   
|                                                   
|                                                   
|Interest income (expense)                           |                               |                                       | (2,737  | )       |         |      | (1,200  | )       |         |   | 1,214   |        
|                                                   
|                                                   
|                                                   
|                                                   
|Gain (loss) on disposal of investment in
	affiliate |                               |                                       | (10,763 | )       |         |      | 6,103   |         |         |   |        |        
|                                                   
|                                                   
|                                                   
|                                                   
|Equity in net earnings (loss) of affiliates         |                               |                                       | 110     |         |         |      | (3,278  | )       |         |   | 916     |        
|                                                    |                               |                                       |         |         |         |      |         |         |         |   |         |        
|                                                    |                               | Loss before income taxes              |         | $       | (97,946 | )    |         | $       | (14,178 | ) |         | $       | (143,705 | )
|                                                    |                               |                                       |         |         |         |      |         |         |         |   |         |        
|Identifiable assets:                                |                               |                                       |         |         |         |      |         |         |         |   |         |        
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | CMP Group                     |                                       | $       | 169,830 |         |      | $       | 214,913 |         |   |         |         |         
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Surface Technology Group      |                                       |         | 13,141  |         |      |         | 25,799  |         |   |         |         |         
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Industrial Applications Group |                                       |         | 11,133  |         |      |         | 7,550   |         |   |         |         |         
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Investments in affiliates     |                                       |         |        |         |      |         | 19,810  |         |   |         |         |         
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Corporate assets              |                                       |         | 120,781 |         |      |         | 167,008 |         |   |         |         |         
|                                                    |                               |                                       |         |         |         |      |         |         |         |   |         |        
|                                                    |                               | Total identifiable assets             |         | $       | 314,885 |      |         | $       | 435,080 |   |         |         |          |  
|                                                    |                               |                                       |         |         |         |      |         |         |         |   |         |        
|Capital expenditures:                               |                               |                                       |         |         |         |      |         |         |         |   |         |        
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | CMP Group                     |                                       | $       | 11,489  |         |      | $       | 9,790   |         |   | $       | 29,825  |         
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Surface Technology Group      |                                       |         | 265     |         |      |         | 225     |         |   |         | 469     |         
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Industrial Applications Group |                                       |         |        |         |      |         |        |         |   |         | 45      |         
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Corporate                     |                                       |         | 3,528   |         |      |         | 5,045   |         |   |         | 1,022   |         
|                                                    |                               |                                       |         |         |         |      |         |         |         |   |         |        
|                                                    |                               | Total capital expenditures            |         | $       | 15,282  |      |         | $       | 15,060  |   |         | $       | 31,361   |  
|                                                    |                               |                                       |         |         |         |      |         |         |         |   |         |        

49



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SPEEDFAM-IPEC, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)

|                      |                               |                            |   |       |        |      |   |        |        |  |   |        |        | 
|--------------------- | ----------------------------- | -------------------------- | - | ----- | ------ | ---- | - | ------ | ------ |  | - | ------ | ------ | 
|                      |                               | 2001                       |   | 2000  |        | 1999
|                      |                               |                            |   |       |        |     
|Depreciation expense: |                               |                            |   |       |        |      |   |        |        |  |   |       
|                     
|                     
|                     
|                     
|                      | CMP Group                     |                            | $ | 9,885 |        |      | $ | 11,101 |        |  | $ | 16,226 |       
|                     
|                     
|                     
|                     
|                      | Surface Technology Group      |                            |   | 323   |        |      |   | 808    |        |  |   | 1,250  |       
|                     
|                     
|                     
|                     
|                      | Industrial Applications Group |                            |   | 127   |        |      |   | 176    |        |  |   | 321    |       
|                     
|                     
|                     
|                     
|                      | Corporate                     |                            |   | 4,840 |        |      |   | 3,283  |        |  |   | 1,305  |       
|                      |                               |                            |   |       |        |      |   |        |        |  |   |       
|                      |                               | Total depreciation expense |   | $     | 15,175 |      |   | $      | 15,368 |  |   | $      | 19,102 | 
|                      |                               |                            |   |       |        |      |   |        |        |  |   |       

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.

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

|                                                |               |                                |   |         |         |      |   |         |         |  |   |         |         | 
|----------------------------------------------- | ------------- | ------------------------------ | - | ------- | ------- | ---- | - | ------- | ------- |  | - | ------- | ------- | 
|                                                |               | 2001                           |   | 2000    |         | 1999
|                                                |               |                                |   |         |         |     
|Third party sales (by destination of shipment): |               |                                |   |         |         |      |   |         |         |  |   |        
|                                               
|                                               
|                                               
|                                               
|                                                | United States |                                | $ | 104,455 |         |      | $ | 83,461  |         |  | $ | 135,476 |        
|                                               
|                                               
|                                               
|                                               
|                                                | Europe        |                                |   | 61,948  |         |      |   | 72,876  |         |  |   | 26,851  |        
|                                               
|                                               
|                                               
|                                               
|                                                | Asia          |                                |   | 100,677 |         |      |   | 115,407 |         |  |   | 49,643  |        
|                                               
|                                               
|                                               
|                                               
|                                                | Other         |                                |   |        |         |      |   | 2,304   |         |  |   | 4,455   |        
|                                                |               |                                |   |         |         |      |   |         |         |  |   |        
|                                                |               | Consolidated net sales         |   | $       | 267,080 |      |   | $       | 274,048 |  |   | $       | 216,425 | 
|                                                |               |                                |   |         |         |      |   |         |         |  |   |        
|Long-lived assets:                              |               |                                |   |         |         |      |   |         |         |  |   |        
|                                               
|                                               
|                                               
|                                               
|                                                | United States |                                | $ | 85,097  |         |      | $ | 120,799 |         |  |   |         |        
|                                               
|                                               
|                                               
|                                               
|                                                | Europe        |                                |   | 320     |         |      |   | 390     |         |  |   |         |        
|                                               
|                                               
|                                               
|                                               
|                                                | Asia          |                                |   | 1,449   |         |      |   |        |         |  |   |         |        
|                                                |               |                                |   |         |         |      |   |         |         |  |   |        
|                                                |               | Consolidated long-lived assets |   | $       | 86,866  |      |   | $       | 121,189 |  |   |         |         | 
|                                                |               |                                |   |         |         |      |   |         |         |  |   |        

(20)  Significant Customers

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

|         |  |      |    |      |  |      |    |   |  |  |    |  
|-------- |  | ---- | -- | ---- |  | ---- | -- | - |  |  | -- | -
|Customer |  | 2001 |    | 2000 |  | 1999
|         |  |      |    |      |  |     
|A        |  |      | 15 | %    |  |      | 11 | % |  |  | 11 | %
|        
|        
|        
|        
|B        |  |      | 11 | %    |  |      | 12 | % |  |  | *  |  
|        
|        
|        
|        
|C        |  |      | *  |      |  |      | *  |   |  |  | 11 | %
|        
|        
|        
|        
|D        |  |      | 10 | %    |  |      | *  |   |  |  | *  |  



|  |               
|- | --------------
|* | Less than 10%.

50



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SPEEDFAM-IPEC, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)

(21)  Quarterly Financial Information (Unaudited)

Following is a summary of unaudited quarterly information (in
thousands except per share data). The amounts reported for each
of the quarters during the year ended June 2, 2001 reflect
the effect of the application of SAB 101. The amounts
reported for each of the quarters during the year ended
June 3, 2000 reflect the historical shipment method of
revenue recognition.

|                         |                                              |              |   |            |   |            |   |         |   |  |   |         |   |  |   |         |  
|------------------------ | -------------------------------------------- | ------------ | - | ---------- | - | ---------- | - | ------- | - |  | - | ------- | - |  | - | ------- | -
|                         |                                              | 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 attributable to common stockholders |              | $ | (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  1).                                                                                                          
|   
|(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 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 (refer to Note 2).                                                                                                                                                                                                   

|                         |                                                        |         |   |         |   |         |   |         |   |  |   |        |   |  |   |        | 
|------------------------ | ------------------------------------------------------ | ------- | - | ------- | - | ------- | - | ------- | - |  | - | ------ | - |  | - | ------ | 
|                         |                                                        | First   |   | Second  |   | Third   |   | Fourth 
|                         |                                                        | Quarter |   | Quarter |   | Quarter |   | Quarter
|                         |                                                        |         |   |         |   |         |   |        
|Year ended June 3, 2000: |                                                        |         |   |         |   |         |   |         |   |  |   |        |   |  |   |       
|                        
|                        
|                        
|                        
|                         | Net sales                                              |         | $ | 50,327  |   |         | $ | 55,777  |   |  | $ | 73,058 |   |  | $ | 94,886 | 
|                         |                                                        |         |   |         |   |         |   |         |   |  |   |        |   |  |   |       
|                         | Gross margin                                           |         | $ | 15,167  |   |         | $ | 18,040  |   |  | $ | 24,469 |   |  | $ | 31,845 | 
|                         |                                                        |         |   |         |   |         |   |         |   |  |   |        |   |  |   |       
|                         | Net income (loss) attributable to common
	stockholders |         | $ | (10,963 | ) |         | $ | (4,490  | ) |  | $ | (1,882 | ) |  | $ | 3,157  | 
|                         |                                                        |         |   |         |   |         |   |         |   |  |   |        |   |  |   |       
|                         | Basic and diluted net income (loss) per share          |         | $ | (0.37   | ) |         | $ | (0.15   | ) |  | $ | (0.06  | ) |  | $ | 0.10   | 
|                         |                                                        |         |   |         |   |         |   |         |   |  |   |        |   |  |   |       

(22)  Other Income (Expense)

Other income (expense) consisted of the following for 2001,
2000 and 1999 (in thousands):

|                                       |  |      |        |      |  |      |        |   |  |   |        |  
|-------------------------------------- |  | ---- | ------ | ---- |  | ---- | ------ | - |  | - | ------ | -
|                                       |  | 2001 |        | 2000 |  | 1999
|                                       |  |      |        |      |  |     
|Interest income                        |  | $    | 4,748  |      |  | $    | 6,808  |   |  | $ | 9,691  |  
|                                      
|                                      
|                                      
|                                      
|Interest expense                       |  |      | (7,825 | )    |  |      | (8,008 | ) |  |   | (8,477 | )
|                                      
|                                      
|                                      
|                                      
|Insurance recovery on damaged shipment |  |      |       |      |  |      |       |   |  |   | 2,500  |  
|                                      
|                                      
|                                      
|                                      
|Gain on sale of land                   |  |      | 1,799  |      |  |      |       |   |  |   |       |  
|                                      
|                                      
|                                      
|                                      
|Miscellaneous, net                     |  |      | 495    |      |  |      | 746    |   |  |   | 583    |  
|                                       |  |      |        |      |  |      |        |   |  |   |        |  
|                                       |  | $    | (783   | )    |  | $    | (454   | ) |  | $ | 4,297  |  
|                                       |  |      |        |      |  |      |        |   |  |   |        |  

51



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SPEEDFAM-IPEC, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)

(23)  Other Comprehensive Income

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

|                                                      |                              |      |   |       |   |      |   |       |   |  |   |      |  
|----------------------------------------------------- | ---------------------------- | ---- | - | ----- | - | ---- | - | ----- | - |  | - | ---- | -
|                                                      |                              | 2001 |   | 2000  |   | 1999
|                                                      |                              |      |   |       |   |     
|Foreign currency translation adjustments:             |                              |      |   |       |   |      |   |       |   |  |   |     
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      | Balance at beginning of year |      | $ | 1,239 |   |      | $ | (60   | ) |  | $ | (987 | )
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      | Adjustments for year         |      |   | (436  | ) |      |   | 1,299 |   |  |   | 927  |  
|                                                      |                              |      |   |       |   |      |   |       |   |  |   |     
|                                                      | Balance at end of year       |      | $ | 803   |   |      | $ | 1,239 |   |  | $ | (60  | )
|                                                      |                              |      |   |       |   |      |   |       |   |  |   |     
|Unrealized holding gains (losses) on
	securities:     |                              |      |   |       |   |      |   |       |   |  |   |     
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      | Balance at beginning of year |      | $ | (487  | ) |      | $ | (170  | ) |  | $ |     |  
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      | Adjustments for year         |      |   | 511   |   |      |   | (317  | ) |  |   | (170 | )
|                                                      |                              |      |   |       |   |      |   |       |   |  |   |     
|                                                      | Balance at end of year       |      | $ | 24    |   |      | $ | (487  | ) |  | $ | (170 | )
|                                                      |                              |      |   |       |   |      |   |       |   |  |   |     
|Total accumulated other comprehensive income
	(loss): |                              |      |   |       |   |      |   |       |   |  |   |     
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      | Balance at beginning of year |      | $ | 752   |   |      | $ | (230  | ) |  | $ | (987 | )
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      | Adjustments for year         |      |   | 75    |   |      |   | 982   |   |  |   | 757  |  
|                                                      |                              |      |   |       |   |      |   |       |   |  |   |     
|                                                      | Balance at end of year       |      | $ | 827   |   |      | $ | 752   |   |  | $ | (230 | )
|                                                      |                              |      |   |       |   |      |   |       |   |  |   |     

(24)  Related Party Transactions

During 2001, 2000 and 1999, the Company had purchases of raw
materials of approximately $6.2 million, $2.9 million and $5.9
million, respectively, from Berkeley Process Controls, a
California-based company, that is affiliated with a member of
the Companys Board of Directors.

(25)  Liquidity

The Company has incurred operating losses of $86.5 million,
$16.5 million, and $148.9 million in 2001, 2000 and 1999,
respectively. Coinciding with these operating losses, the
Company has incurred a decrease in its cash and investment
balances of $39.4 million, $46.7 million, and $78.3 million in
2001, 2000 and 1999, respectively.

During 2001, 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 has implemented additional cost-cutting
measures during the first quarter of 2002 which include further
decreases in discretionary spending and reductions in worldwide
headcount. Despite the expected continuation of the
industry-wide downturn and uncertainty associated with the
introduction of new products, and taking into account the
Companys actions to restructure and downsize the Company,
management believes that the Companys current cash and
investment balances along with net cash generated through
operations will be sufficient to meet the Companys
anticipated cash needs for working capital and capital
expenditures at least through the year ended June 1, 2002.
However, due to significant uncertainties related to the
duration and

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SPEEDFAM-IPEC, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)

severity of the semiconductor industry downturn, overall
economic conditions and potential litigation costs, the Company
is currently evaluating additional sources of funds in order to
strengthen its working capital position. Based on discussions
with various lenders, the Company believes that the sources of
funds available include, but are not limited to, mortgage loan
financing, a line of credit facility and term debt. If the
Company were to raise additional funds through the issuance of
equity securities, the percentage ownership of the
Companys 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.




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

None.




PART III




Item 10, 11, 12 and 13.

These items, constituting Part III of the Form 10-K, have
been omitted from this annual report pursuant to the provisions
of Instruction G to Form 10-K, because a definitive
proxy statement (which is incorporated herein by reference,
except for the report of the compensation committee of the board
of directors and the performance graph) will be filed within
120 days of the end of the Companys fiscal year ended
June 2, 2001. Information required for executive officers
is included in Part I, Item 1.




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 |  |      | S-1 | 
|                            
|                            
|                            
|                            
|Schedule II                  |  |      | S-2 | 

(3)  Exhibits filed:



| |                   
| | ------------------
| | See Exhibit Index.

(b)  Reports filed on Form 8-K:



| |     
| | ----
| | None

(c)  Exhibits filed:



| |                   
| | ------------------
| | See Exhibit Index.

(d)  Financial Statements Omitted from Annual Report to
Security Holders:



| |      
| | -----
| | None.

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##### 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                    
| | Secretary and Chief Financial Officer
| | (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                                                   |  | 8/23/01
|/s/ RICHARD J. FAUBERTRichard J. Faubert |  | President, Chief Executive Officer and Director                      |  | 8/23/01
|/s/ J. MICHAEL DODSONJ. Michael Dodson   |  | Secretary and Chief Financial Officer (Principal
	Financial Officer) |  | 8/23/01
|/s/ NEIL R. BONKENeil R. Bonke           |  | Director                                                             |  | 8/23/01
|/s/ SANJEEV CHITRESanjeev Chitre         |  | Director                                                             |  | 8/23/01

54



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##### Table of Contents



|                                   |  |          |  |        
|---------------------------------- |  | -------- |  | -------
|Name                               |  | Title    |  | Date   
|                                   |  |          |  |        
|/s/ JAMES N. FARLEYJames N. Farley |  | Director |  | 8/23/01
|/s/ RICHARD S. HILLRichard S. Hill |  | Director |  | 8/23/01
|/s/ MAKOTO KOUZUMAMakoto Kouzuma   |  | Director |  | 8/23/01
|/s/ KENNETH LEVYKenneth Levy       |  | Director |  | 8/23/01
|/s/ CARL NEUNCarl Neun             |  | Director |  | 8/23/01

55



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##### Table of Contents



INDEPENDENT AUDITORS REPORT

The Board of Directors



Under date of June 22, 2001, we reported on the
consolidated balance sheets of SpeedFam-IPEC, Inc. and
consolidated subsidiaries as of June 2, 2001 and
June 3, 2000, 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, 1998 through June 2, 2001, 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



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##### Table of Contents



Schedule II

SPEEDFAM-IPEC, INC.

VALUATION AND QUALIFYING ACCOUNTS

For each of the years in the three-year period ended
June 2, 2001


|                                 |      |                |   |          |  |                |  |              |  |         |  |    |   |  |  |       |  |  |   |       | 
|-------------------------------- | ---- | -------------- | - | -------- |  | -------------- |  | ------------ |  | ------- |  | -- | - |  |  | ----- |  |  | - | ----- | 
|                                 |      |                |   |          |  | 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: |      |                |   |          |  |                |  |              |  |         |  |    |   |  |  |       |  |  |   |      
|                                
|                                
|                                
|                                
|                                 | 1999 |                | $ | 4,487    |  |                |  | 3,598        |  |         |  | (1 | ) |  |  | 2,484 |  |  | $ | 5,600 | 
|                                
|                                
|                                
|                                
|                                 | 2000 |                | $ | 5,600    |  |                |  | 82           |  |         |  |   |   |  |  | 3,133 |  |  | $ | 2,549 | 
|                                
|                                
|                                
|                                
|                                 | 2001 |                | $ | 2,549    |  |                |  | 558          |  |         |  |   |   |  |  | 200   |  |  | $ | 2,907 | 

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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)).                                                                                                                  
|        | *3.1   |             |  | Articles of Incorporation of SpeedFam
	International, Inc. (incorporated by reference to Exhibit 3
	to the Registrants Form 10-Q for the quarter ended
	November 30, 1997 (Exchange Act File No. 0-26784)).                                                                                              
|        | *3.1a  |             |  | Amendment to the Articles of Incorporation.                                                                                                                                                                                                                                                               
|        | *3.2   |             |  | By-laws of SpeedFam International, Inc.
	(incorporated by Reference to Exhibit 3.2 to the
	Registrants Form 10-K for the fiscal year ended
	May 31, 1996 (Exchange Act File No.  0-26784)).                                                                                                              
|        | 3.3    |             |  | Amended and Restated By-laws of SpeedFam-IPEC,
	Inc.                                                                                                                                                                                                                                                      
|        | *4.2   |             |  | 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)).                                            
|        | *4.5   |             |  | 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)).     
|        | *4.6   |             |  | 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.                                                                                                                                            
|        | *4.7   |             |  | 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)).                                                           
|        | *10.1  |             |  | Employment Agreement between the Registrant and
	Richard J. Faubert.                                                                                                                                                                                                                                      
|        | *10.2  |             |  | Employment Agreement between the Registrant and
	J. Michael Dodson.                                                                                                                                                                                                                                       
|        | *10.8  |             |  | Employment Agreement between the Registrant and
	Robert R. Smith.                                                                                                                                                                                                                                         
|        | *10.9  |             |  | Form of Agreement between Registrant and SpeedFam
	Co., Ltd. with respect to services provided by Makoto Kouzuma.                                                                                                                                                                                         
|        | *10.19 |             |  | 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
	fiscal 1997, File No.  0-26784).
|        | *10.20 |             |  | 1995 Stock Plan for Employees and Director of
	SpeedFam International, Inc. as amended as of May 22, 1997
	(incorporated by reference to Exhibit 10.11 to the
	Registrants Form 10-K for fiscal 1997, File
	No. 0-26784).                                                                                
|        | *10.21 |             |  | Registrants 1995 Stock Purchase Plan
	(incorporated by Reference to Exhibit 10.11 to the
	Registrants Registration Statement on Form S-1, File
	No. 33-95628).                                                                                                                                          
|        | *10.22 |             |  | SpeedFam Employees Savings and Profit
	Sharing Plan and Trust, as amended and restated June 1,
	1989 (incorporated by Reference to Exhibit 10.12 to the
	Registrants Registration Statement on Form S-1, File
	No. 33-95628).                                                                           
|        | *10.24 |             |  | 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).                                                                  

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|        |        |             |  |                                                                                                                                                                                                                      
|------- | ------ | ----------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |        |            
|Number  |        | Description
|        |        |            
|        | *10.25 |             |  | 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).
|        | *10.26 |             |  | Amendment to the IPEC 1992 Stock Option Plan.                                                                                                                                                                        
|        | *10.27 |             |  | IPEC 1992 Stock Option Plan (as amended
	December 12, 1995). Incorporated by reference to
	Exhibit 10.1 to IPECs Quarterly Report on
	Form 10-Q for the quarter ended December 31, 1995
	(File No. 0-20470).        
|        | *10.28 |             |  | Second Amendment to the 1995 Stock Plan for
	Employees and Directors of SpeedFam International, Inc.                                                                                                                 
|        | *10.29 |             |  | First Amendment to the 1995 Stock Plan for
	Employees and Directors of SpeedFam International, Inc. (filed
	as Exhibit  4.1 to the Companys Form S-8
	(Registration No.  333-67847).                                
|        | *10.30 |             |  | 1995 Stock Plan for Employees and Directors of
	SpeedFam International, Inc. as amended as of May 22, 1997
	(filed as Exhibit 10.11 to the Companys
	Form 10-K for fiscal year 1997 (File No. 0-26784)).            
|        | *10.31 |             |  | Stock Purchase Agreement, dated November 23,
	1999, between the Company and Fujimi Incorporated.                                                                                                                     
|        | *10.32 |             |  | Confidentiality Agreement, dated
	November 23, 1999, between the Company and Fujimi
	Incorporated.                                                                                                                   
|        | *10.33 |             |  | No-Hire Agreement, dated November 23, 1999,
	between the Company and Fujimi Incorporated.                                                                                                                            
|        | *10.34 |             |  | No-Hire Agreement, dated November 23, 1999,
	between the Company and Fujimi Incorporated.                                                                                                                            
|        | *10.35 |             |  | Escrow Agreement, dated November 23, 1999,
	between the Company and Fujimi Incorporated.                                                                                                                             
|        | *10.36 |             |  | Employment Agreement between the Registrant and
	Giovanni Nocerio.                                                                                                                                                   
|        | 10.37  |             |  | Employment Agreement between the Registrant and
	Peter J. Simone.                                                                                                                                                    
|        | 10.38  |             |  | 1995 Stock Plan as amended and restated as of
	July 27, 2001.                                                                                                                                                        
|        | *10.39 |             |  | 2001 Nonstatutory Stock Option Plan of
	SpeedFam-Ipec, Inc.                                                                                                                                                          
|        | *10.40 |             |  | Stand-Alone Option Agreement.                                                                                                                                                                                        
|        | 10.41  |             |  | Indemnification Agreement.                                                                                                                                                                                           
|        | 21.1   |             |  | Subsidiaries of the Registrant (incorporated by
	reference to Exhibit 21.1 to Registrants Registration
	Statement on Form S-1, File No. 33-95628).                                                                  
|        | 23.1   |             |  | Consent of KPMG LLP.                                                                                                                                                                                                 
|        | *24.1  |             |  | Power of Attorney.                                                                                                                                                                                                   
|        | *99    |             |  | Audit Committee of the Board of Directors
	Charter.                                                                                                                                                                 




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

59