UNITED STATES

Form 10-K

Annual Report Pursuant to SectionANNUAL REPORT PURSUANT TO SECTION 13 orOR 15(d) of

For the fiscal year ended June 3, 20001, 2002

SpeedFam-IPEC, Inc.

Registrant’s Telephone Number: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

    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]þ     No [   ]o

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

     State theThe aggregate market value of the voting and non-voting stock held by non-affiliates of the registrant: $408,323,953registrant was approximately $56 million based on the closing price of $2.85 per share of common stock as reported on the Nasdaq Stock Market on July 31, 2002. For purposes of this determination, shares of common stock held by each officer and director and by each person who owns 5% or more of the outstanding common stock have been excluded in that such persons may be deemed to be affiliates of the registrant. This determination of affiliate status is not necessarily a conclusive determination for other purposes. The number of outstanding shares of the registrant’s common stock as of the close of business on July 31, 2000.2002 was 31,058,793.

      Indicate the number of shares outstanding of each of the issuer’s classes of common stock: 29,895,142 as of July 31, 2000.

Documents incorporated by reference:

      Part III, Proxy Statement relating to the 2000 Annual Meeting of Shareholders (except for the report of the compensation committee of the board of directors and the performance graph).

TABLE OF CONTENTS

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Item 1.     Business

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

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

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

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

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

     The Company was incorporated in Illinois in 1959 as SpeedLap Corporation. Effective April 6, 1999, Integrated Process Equipment Corp. (IPEC), a supplier of chemical mechanical planarization (or CMP)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. The

     On August 30, 2000, the Company operates through three wholly owned subsidiaries, SpeedFam-IPECand Obara Corporation in the U.S. (SpeedFam-IPEC U.S.), and SpeedFam-IPEC Limited (SpeedFam-IPEC U.K.) and SpeedFam-IPEC GmbH (SpeedFam-IPEC Germany) in Europe. The Company also owns 50% of(Obara) restructured SpeedFam-IPEC Co., Ltd. (together with its subsidiaries and joint ventures, the Far East Joint Venture).

      The, effectively dissolving their joint venture. Prior to the dissolution, the Company designs, develops, manufactures, markets and supports CMP systems usedObara each owned a 50% interest in the fabricationFar East Joint Venture. Under the terms of semiconductor devicesthe Master Reorganization Agreement with Obara, ownership of the CMP sales and also manufactures other high-throughput precision surface processing systems. The Company’s flat surface processing systems are usedservice operations of the Far East Joint Venture was transferred to the Company allowing the Company to have direct control over CMP operations in general industrial applications markets. TheAsia. Obara continues the non-CMP activities of the former Far East Joint Venture, which include the manufacture of silicon wafer polishing products. Under the terms of a distributor agreement signed on August 31, 2000, the Company also marketscontinues to act as a direct distributor in the United States and distributesEurope for the wafer polishing liquids (slurries), parts and consumables used in its customers’ manufacturing processes.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.

      Effective December 1, 1999, Additional information about the Company changed its fiscal year from the twelve-month period ended May 31 to a 52 or 53 week period endingis available on the Saturday nearest May 31. Accordingly, the 2000 fiscal year ended on June 3 and contained 53 weeks, whereas the previous two fiscal years ended on May 31 and contained 52 weeks. All references to years relate to fiscal years unless otherwise noted.Company’s website atwww.sfamipec.com.

Joint VenturesRecent Events

     Since 1971,On August 11, 2002, the Company has ownedentered into an Agreement and Plan of Reorganization with Novellus Systems, Inc. (Novellus), a 50% interestDelaware corporation and the leader in thin film deposition technology for the Far East Joint Venture. The remaining 50%semiconductor industry. Novellus will acquire all outstanding shares of SpeedFam-IPEC in a stock-for-stock

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Industry Background

     The semiconductor industry has experienced significant growth overthroughout the past decade1990s due to increased demand for personal computerselectronic products, increased semiconductor content in electronics products, and the internet;preparation for the year 2000 systems conversion. The popularity of personal computers; the expansion of the telecommunications industry (especially wireless communications); and the emergence of new applications such aswithin consumer electronics products;continue to drive the demand for faster, smaller and the increased semiconductor content in electronics systems. Significant performance advantages and lower prices forcheaper integrated circuits have contributed to the growth and expansion of the semiconductor industry over time.circuit devices.

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

     Semiconductor manufacturers continually strive to produce faster, more complex devices at a lower cost. Historically, this has been accomplished by producing devices on larger wafers, utilizing smaller design feature sizes and more layers of interconnect material. During the downturn, device manufacturers have aggressively been evaluating next-generation production equipment that will prepare them for a fast ramp when the industry rebounds. Prior to the current industry downturn, most semiconductor equipment sales were for systems capable of producing devices on 200-millimeter wafers with device feature sizes down to 0.18-micron. Semiconductor manufacturers are currently designing devices with feature sizes of 0.13-micron and below, utilizing copper interconnect and oxide insulation. These devices may be manufactured on either 200- or 300-millimeter wafers. Analysts anticipate that 300-millimeter wafers with device feature sizes of 0.13-micron and below will reach significant commercial production when the industry rebounds. Similarly, Dataquest projects that new fabrication facilities coming on line will use primarily 300-millimeter equipment and that this market is cyclicalexpected to dominate the new equipment purchases by nature, however, characterized2004. In addition, Dataquest anticipates that the use of copper will continue to grow faster relative to other metal interconnect materials, and that silicon dioxide will continue to command a significant share of the dielectric — or insulator — market.

Company Solution

We recently developed two CMP systems — marketed under the Momentum trademark — that are specifically designed to process 200- and 300-millimeter wafers with device feature sizes of 0.13-micron and below. We believe Momentum^TM is on course to meet the coming demand for next-generation equipment and offers a number of advantages over competitive products for all CMP applications — and particularly for advanced applications such as copper. Momentum differentiators include tight process control parameters enabled by short-term periodsour unique through-the-pad slurry distribution, broadband endpoint detection and our patented Hexazone^TM carrier. We believe that the Momentum technology is differentiated from our competition as it has been specifically designed to meet the stringent processing requirements for the 0.13-micron node. Additionally, it is already meeting and exceeding certain processing requirements at the 0.10-micron processing node. In contrast, many of either under or over supplythe competitive systems available on the market today were designed for both memoryprocess requirements at the 0.25 and logic devices. When demand decreases, semiconductor manufacturers typically slow their purchasing of capital equipment; conversely, when demand increases, so does capital0.18-micron processing nodes. While these systems may be adapted for

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

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

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

     We are generally able to produce and ship our tools within 90 to 120 days of receipt of a new trend, driven by the increasingly rapid pace with which the sizewritten order from a customer. Customers are generally obligated to pay up to 90% of the circuitry onpurchase price of a tool within 30 days of shipment. The balance of the chippurchase price 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, anddue upon final acceptance of 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.tool.

Products

     The Company offersWe offer the broadest range of CMP systems currently available to the semiconductor industry. The Company’s product lines include both orbital and rotational technology.

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

     Orbital CMP Systems.The Company’sOur proprietary orbital CMP systems incorporate ana unique advanced polishing technique developed in conjunction with a major semiconductor manufacturer. Planarization in these systems is achieved by the downward pressure from and rotational motion of the upper wafer carrier against the orbital motion of the lower polishing platen, which has a polishing pad attached to its surface. The use of our patented orbital polishing technology in conjunction with other enhancements offered on the Company’sour orbital platforms provides customers with improved polish flexibility in a smaller footprint tool. Moreover, the Company’sour orbital systems incorporate an innovative polish 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.

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

	•	a tunable/ adaptive carrier technology and edge control (APT™), design;
	•	a stable, highly flexible new polishing technique, (Next™),which combines an advanced hard platen with orbital motion; and a newly designed cleaner. The system also integrates Intelligent In-line Inspection technology (I3TM) with
	•	closed-loop control metrology for maximum effective throughput and reduced cost of ownership. The system and processes for the MomentumTM product are scalable to 300mm.ownership

Rotational CMP Systems.

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

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

	•	The Avanti®Our 472TM CMP system, introduced in 1994, is a fully automated, single wafersingle-wafer planarization system for polishing oxide or metal layers on silicon wafers from four to eight incheswhich are either 150-millimeter or 200-millimeter in diameter. In addition to the planarization

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	of oxide layers, the system planarizes layers of metal interconnects, including tungsten, aluminum and copper.
	•	The Company’sOur AurigaTM system is a five head, two polishingfive-head, two-polishing table CMP systemtool capable of processing 50-6050 – 60 wafers per hour. The Auriga,TM system, which began shipping commercially in November 1996, is used primarily for oxide and metal (tungsten) applications. The system incorporates full cassette-to-cassette automation. Robotics remove the wafers from the cassetteAuriga product line is used for processing 150-millimeter 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. The wafers are then rinsed and placed into the output buffer tray, scrubbed on both sides with a wet polyvinyl alcohol brush and placed wet into the output cassettes. The system is self-enclosed, and has its own air filtration and air flow management system. The AurigaTM offers compatibility with all commonly used slurry chemistries.200-millimeter wafers.
	•	In 1998, the Companywe introduced the Auriga-CTM, which integrates cleaning and drying technology into the Company’sone CMP system, thereby providing a complete dry-in/dry-out system. The design of the Auriga-CTM is based upon the replacement of the automation module on the AurigaTM with a new automation module, which incorporates the cleaning technology.

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•	The Auriga VisionTM, introduced in 2000, is the latest tool derived from the industry proven AurigaTM platform. Announced in July  2000, the Auriga VisionTMplatform and provides complete dry-in/dry-out CMP processing in a high throughput tool. With anThis systems integrates five OlympianTM carriers with advanced carrier design, in-table end-point system, HF capable dual-station cleaner andcleaning capability, computer integrated manufacturing automation this low cost of ownership tool is suited for fabs producing devices in the most cost-competitive markets. The Auriga VisionTM is targeted at the 0.18 and 0.13 micron technology nodes for memory manufacturers.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 suppliesWe supply chemical mechanical polishing,planarization, double-sided lapping and edge polishing systems to the semiconductor substrates or silicon wafer market.

     The Company’sOur 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. The double-sidedDouble-sided polishers for silicon wafer polishing are also available.

     The CompanyWe also utilizes a line whereby asell chemical mechanical polishing process removesplanarization equipment to semiconductor wafer manufacturers that remove the shallow damage layer remaining from previous process steps to attain the specified flatness and surface finish.

The edge polishing technology was developed and introduced for the purpose of making the wafer’s edge easier to clean, thereby increasing semiconductor device manufacturing yields. We market and distribute edge-polishing systems manufactured by Obara Corporation in Japan, our former Far East Joint Venture partner.

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

Customers

     The Company sells itsWe sell our products to leading manufacturers of semiconductor devices, thin film memory disks, semiconductorsilicon wafers and various general industrial applications. During the last three years, the majority of the Company’sour total revenue has been derived from the sale of CMP products and services. In

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      Sales to two customers in 2000 accounted for 11.1% and 11.8% of the Company’s total revenue.respectively. In 1999,2002, sales to two customers accounted for 10.5%14% and 11.4%11% of the Company’sour total revenue. In 2001, sales to three customers accounted for 15%, 11% and 10% of our total revenue and in 19982000, sales to one customertwo customers accounted for 19.4%12% and 11% of the Company’sour total revenue. No other customer accounted for 10% or more of the Company’sour total revenue during these periods. The Company’sOur ten largest customers accounted for 64.9%56%, 60.8%60% and 53.4%65% of the Company’sour total revenue in 2000, 19992002, 2001 and 1998,2000, respectively.

Sales and Marketing

     The Company marketsWe market and sells itssell our products in North America through a combination of direct sales personnel and distributors. The Company sellsworldwide directly to all the industries it serveswe serve due to the highly technical nature of our products. We use distributors in Europe and in addition usesChina for our CMP product lines and a network of 10 regional distributors for itsour general industrial product lines. In its European operations, the Company uses direct sales personnel and a small number of distributors. For CMP products, the Company uses a distributor who sells in Germany, France, the Netherlands, Belgium, Italy, Scandinavia, Spain and Switzerland. After the merger, SpeedFam-IPEC’s relationship with a distributor in Japan was discontinued because the Company markets and sells its products in the Far East through the sales and marketing arm of the Far East Joint Venture. Most of the equipment sold to the thin film memory disk media and silicon wafer markets is manufactured by the Far East Joint Venture.

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

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

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

     Our sales offices are in Chandler, Arizona; Austin, Texas; Portland, Oregon; Des Plaines, Illinois; the United Kingdom; Germany; Taiwan; Seoul, Korea; India; Singapore; Hong Kong;Malaysia and Shanghai, China. To enhance its sales capabilities, the Company maintains process development and demonstration laboratories throughout the U.S. and Europe. Sales and marketing activities in the Far East are conducted primarily by the Far East Joint Venture. The Company also has direct sales personnel in the SpeedFam-IPEC U.K. and SpeedFam-IPEC Germany offices.Japan.

     The Company’sOur marketing strategy includes involvementcollaboration with International SEMATECH, Inc., a consortium of major semiconductor manufacturers, andas well as a similar Japan-based consortium; partnership in the Damascus Alliance–a collaborative group of semiconductor equipment suppliers attendance at Semicon, Diskcon, IMTSdedicated to accelerating chipmakers’ transition to copper/ low k dielectric; participation in Semicon; and other trade shows worldwideworldwide; and participationinvolvement in a wide range of technical conferences, which include the presentationincluding presentations of technical papers written by customers, university scientists and the Company’s ownour senior technologists. The Company believesWe believe these initiatives serve to promote acceptance of the Company’sour products and process technologies in the semiconductor, thin film memory disksilicon wafer and other industries.

Service and Support

     The Company believes that providingWe believe a highly responsive servicesupport infrastructure with standard and customized support programs is an essential factor in providing customers a total solution to its customers. In order to provide customers with experienced service and support personnel,competitive operational advantage in the Company hasmarketplace. We have structured itsour 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.industries staffed with experienced service and support personnel. Elements of the Company’sour service and support program include system installation and process certification, process support, machine repair, providingmaintaining spare parts inventories, internal training programs, external customer training, a monthly customer newsletter, multimedia documentation and formationcoordination of customer user groups. For large users of the Company’s systems, the Company often creates a customized service arrangement designed to meet the specific requirements of the customer.

     The CompanyWe generally providesprovide a one-year warranty on all equipment it sellswe sell and in certain instances the Company has providedprovide a warranty period in excess of one year. FieldAn extensive network of field and technical service personnel in place throughout the United States, Europe, and Asia provide

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Backlog

     Backlog of orders for capital equipment, parts consumables and slurriesconsumables was approximately $93.1$22.4 million on July 31, 2000,2002, compared to $45.4approximately $40.0 million on July 31, 1999. The Company’s backlog does not include orders for capital equipment or other products manufactured by the Far East Joint Venture and distributed by the Company in the U.S. and Europe for which the Company receives commissions.2001. The time between the placing of orders and shipment of parts, consumables and slurries is significantly less than for capital equipment and as a result, the Company’sour backlog consists mostly of orders for capital equipment. The Company includesWe include in itsour backlog only those customer orders for which it haswe have accepted signed purchase orders with assigned delivery dates within 12 months. Orders generally carry a stipulation that customers may incur a penalty in the event of cancellation. However, there can beis no assurance that orderscustomers will not be canceled by customerscancel orders or that the Companywe 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’sour 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,we operate, is characterized by rapid technological development and product innovation. The Company’sOur research and

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

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

     During 2000, the Company2001, we developed its advanced CMP system, which combines SpeedFam-IPEC’s industry-proven rotationalMomentum300, a 300-millimeter tool that delivers 0.13-micron and orbital technologies. The Momentum^TM product was developed to addressbelow process metrics for copper/ low k, direct STI, tungsten and oxide. Our pressure-controlled Hexazone™ multi-channel carrier is the industry’s growing needmost advanced polish carrier for an advanced leveloptimized removal rate and total wafer metrics control. The system provides ease of process capability, continued geometry shrinks downtransfer from 200-millimeter to 0.13 micron300-millimeter wafer processing.

     During 2002, we developed additional features and CMP challengesprocess capabilities for applications such as copperboth Momentum and STI in advanced semiconductor device manufacturing. Momentum^TM is a highly flexible system, which can be configuredMomentum300, and enhanced the cost of ownership and productivity benefits of the systems. We made overall improvements to provide world-class process results for oxide, tungsten, copperour cost of ownership through decreased slurry usage, longer pad life, higher throughput and STI.enhanced reliability. In addition, the Company developed the Auriga Vision^TMwe continued to enhance our total wafer metric control capabilities.

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Manufacturing

     The CompanyWe generally assembles itsassemble our equipment and systems from components and fabricated parts manufactured and supplied by third parties, including stainless steel plates, gears, frames and weldments, power supplies, process controllers, robots and polishing heads. Certain of the items manufactured by others are made to the Company’sour specifications. However, for Momentum and Momentum300 products, we have substantially implemented an outsourced production model, in which a limited number of key vendors are supplying a limited number of modules designed to our specifications that we assemble into our products. All final assembly and system tests are performed within the Company’sour 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’sour products sold to manufacturers of general industrial components are manufactured in itsour Illinois facility. MostSubstantially all of the equipmentour products sold to the thin film memory disk media and silicon wafer markets ismarket are manufactured by the Far East Joint Venture. The Company’sObara. Our CMP system development and manufacturing operations are located at the Company’sour 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.Arizona.

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.

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

     Competition in the general industrial products market is fragmented with no one competitor currently holding a dominant position. The Company faces significant competitive pressure in the sale of slurries, particularly with regardregards 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, 2000,2002, the Company had approximately 1,020476 full time employees located in the U.S., Europe and Europe.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

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Intellectual Property

     The Company currently holds 127190 United States patents and 113148 foreign patents in Japan and several Asian and European countries. As of July 31, 2000,2002, the Company has 14396 United States patent applications pending and 226238 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 AvantGaard 676, 776, 876Momentum and Momentum^TMMomentum300 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

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Item 2.     Properties.Properties

     The Company’s operations are conducted primarily in threetwo buildings in Chandler, Arizona and one building in Des Plaines, Illinois. Two of theThe Chandler buildings, arewhich were previously owned by the Company, andwere sold in June 2002, as part of a sale-leaseback transaction. These two buildings consist of approximately 245,000250,000 square feet. The other building is leasedfeet and is approximately 26,000 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,As part of the Company’s cost reduction measures, the Chandler, Arizona operations were consolidated into the Research and Development Center during 2002. The Company completedplans to leave the expansion of its CMPformer administration and manufacturing facility which nearly doubled the overallvacant until additional manufacturing space.space is needed. The Des Plaines, Illinois building, which houses the Industrial Applications Group, is owned by the Company and consists of approximately 42,00040,000 square feet. It houses the Industrial Applications Group.

      The Company also leases 22,000 square feet in Portland, Oregon, which is used for research and development and also houses the northwest field service operation. The central region field service operation is housed in a 20,000 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.centers, including facilities in Germany, Japan, Taiwan, Korea, Singapore and Malaysia.

     The Company is currently seeking sub-lessees for or has subleased certain of the properties previously occupied by the former IPEC operations, which have been relocated to the facilities in Chandler, Arizona. This includes a 150,000 square foot facility in Phoenix, Arizona, which was the primary manufacturing, research and administration facility for the IPEC operations.

The Company owns approximately 30 acres of vacant landis also seeking sub-lessees for a 39,000 square foot facility in Chandler, Arizona close towhich was formerly used as a training facility. The training operations were consolidated into the current facilities, which is being held for future expansion needs.main operating facility during the most recent industry downturn.

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

Item 3.     Legal Proceedings.Proceedings

     The Company is not presently involvedsubject to various legal proceedings and claims, either asserted or unasserted, that arise in anythe ordinary course of business. Management believes that these matters will be resolved without a material legal proceedings.effect on the Company’s financial position or results of operations.

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

     NoneNo matters were submitted to a vote of securities holders during the three months ended June 1, 2002.

PART II

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

Market for Common Stock

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

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Holders of Record

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

Dividends

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

9Sale of Unregistered Securities

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

Item 6.     Selected Financial Data.Data

SELECTED CONSOLIDATED FINANCIAL DATA

      The consolidated statements of operations data for the years ended June 3, 2000 and May 31, 1999 and 1998 and the consolidated balance sheet data as of June 3, 2000 and May 31, 1999 are derived from the Company’s consolidated financial statements and notes thereto which have been audited by KPMG LLP, independent public accountants and are included elsewhere herein. The consolidated statements of operations data for the years ended May 31, 1997 and 1996 and the consolidated balance sheet data as of May 31, 1998, 1997 and 1996 are derived from the Company’s consolidated financial statements but are not included herein.     The selected consolidated financial data presented below is not necessarily indicative of results of future operations and should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and with the Company’s consolidated financial statements, appearing elsewhere herein.

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(1)	Fiscal year 2002 reflects the adoption of the Financial Accounting Standards Board’s Statement of Financial Accounting Standards (SFAS) No. 142, “Goodwill and Other Intangible Assets”, which resulted in a non-cash charge of $2.6 million related to the cumulative effect of the accounting change as of June 3, 2001. Refer to Note 5 of the Consolidated Financial Statements. Fiscal year 2001 reflects the adoption of SAB 101, which resulted in a non-cash charge of $36.5 million related to the cumulative effect of the accounting change as of June 4, 2000. Refer to Note 5 of the Consolidated Financial Statements.
(2)	Includes $0.1 million, $(3.8) million, $0.1 million $2.8 million, $5.5 million, and $4.8$2.8 million for the 20002001 through 19961998 fiscal years, respectively, attributable to the Company’s share of net earnings (loss) from the Far East Joint Venture, accounted for on the equity method. See the consolidated financial statements of the Far East Joint Venture included elsewhere herein. The remainder represents the Company’s share of net earnings from the Fujimi Joint Venture.

      Set forth below is certain selected financial information with respect to the Far East Joint Venture, which has been derived from consolidated financial statements, which have been audited by KPMG LLP. Such information should be read in conjunction with the consolidated financial statements and notes thereto of the Far East Joint Venture (SpeedFam-IPEC Co., Ltd.) appearing elsewhere herein.

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

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

Overview

      Effective April 6, 1999, Integrated Process Equipment Corp. (IPEC) merged into a wholly owned subsidiary of SpeedFam International, Inc. Following the merger, SpeedFam International, Inc. changed its name to     SpeedFam-IPEC, Inc. The merger was accounted for as a pooling of interests. Accordingly, the financial statements of the separate entities were combined and the discussion herein reflects such combination.

      The Company(the Company) designs, develops, manufactures markets and supportsmarkets chemical mechanical planarization (or CMP)(CMP) systems usedfor use in the fabrication of semiconductor deviceschips. The Company also supplies parts and provides ongoing support for these systems.

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

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

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

     In addition to CMP systems, the Company markets high-throughput precision surface processing systems. The Company’s flat surface processing systems areequipment for the wafer market, and consumables used in thesurface processing. The Company also manufactures and markets polishing systems for general industrial components market. In addition, the Company markets and distributes parts, consumables and slurries.applications.

     The Company’s total revenue consists of net sales of the products described above and service revenues, as well as commissions from affiliates (Commissions) which consist primarily of 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 agentagent. Related costs to import this equipment are recorded as cost of goods sold. The Company’s CMP segment has provided the substantial majority of our revenues during the last several years. In fiscal years 2002, 2001 and receives Commissions thereon. Such amount reflects2000, the difference between the imported equipment’s cost to the CompanyCMP Group accounted for 75%, 81% and sales price to the customer.84% of revenues, respectively.

     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), and (3) manufacturers of general industrial components (Industrial Applications Group or IAG). 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 2000, 1999 and 1998, sales to semiconductor device manufacturers were 84.0%, 74.2% and 74.8% of total revenue, respectively.

      In 2000, 1999 and 1998, 69.6%, 37.4% and 34.3%, respectively, of the Company’s total revenue was attributable to sales outside of the United States. In particular, in 2000, 26.6% of the Company’s total revenue was attributable to sales made to European markets and 42.1% was attributable to sales to markets in the Far East. In 1999, 12.4% of the Company’s total revenue was attributable to sales made to European markets and 22.9% was attributable to sales to markets in the Far East.

      Since 1971, the Company has owned a 50% interest in the Far East Joint Venture. The remaining 50% is owned by Obara Corporation, a publicly traded Japanese company that supplies products to the automotive industry. The Far East Joint Venture designs and manufactures most of the equipment sold by the Company to the thin film memory disk media and silicon wafer markets in the U.S. and Europe. It also distributes such products in the Far East and provides sales and service channels in the Far East for products manufactured by the Company, including distribution of the Company’s CMP systems to manufacturers of semiconductor devices. The Company’s equity interest in the Far East Joint Venture is accounted for using the equity method. As a result, the Company’s share of the net earnings (loss) of the Far East Joint Venture appear in the “Equity in net earnings (loss) of affiliates” caption on the Company’s consolidated statements of operations. The Far East Joint Venture has paid dividends in the past, but is expected to reinvest substantially all earnings back into the business. The Company’s share of the net earnings (loss) of the Far East Joint Venture has not in the past resulted and is not expected in the future to result in a material effect on the cash flows of the Company. As of June 3, 2000, the Company’s equity interest in the Far East Joint Venture was $19.8 million, representing 4.6% of the Company’s total assets and 8.4% of stockholders’ equity.

      On June 27, 2000, the Company announced an agreement with Obara Corporation to transfer 100% of the CMP sales and service operations in the Far East region to SpeedFam-IPEC. Per the agreement, Obara Corporation will assume the business operations for non-CMP activities. In conjunction with this agreement, the Company is evaluating its impact on SpeedFam-IPEC’s domestic non-CMP operations. Based upon this ongoing review, as well as the terms of the agreement reached with Obara Corporation, the Company believes it will incur a one-time non-cash charge to operations in the range of $10 million to $20 million in the first half of 2001. The Company believes there will be no material cash outlays in conjunction with finalizing this

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      Pursuant to a joint venture agreement dated September 7, 1984, the Company and Fujimi Incorporated formed Fujimi Corporation (the Fujimi Joint Venture), an Illinois corporation. Fujimi Incorporated and the Company each owned 50% of the Fujimi Joint Venture’s common stock. Fujimi Incorporated, a publicly traded company in Japan, is a manufacturer of slurry, abrasives and compounds in Japan. The initial term of the joint venture agreement was for a period of five years. The agreement was in effect until it was terminated in the second quarter of 2000, at which time the Company sold its 50% interest in the joint venture to Fujimi Incorporated. Proceeds from the sale were $10.0 million and the Company recorded a gain on the sale of $6.1 million.

      The Company generally enters into foreign exchange contracts to hedge certain firm commitments denominated in foreign currencies, principally in Japanese yen. The terms of the contracts are rarely more than one year. Currency exchange rate variations have had an immaterial effect on the Company’s results of operations for the periods presented. The results of operations of the Company’s subsidiaries and its equity in the net earnings (loss) of the Far East Joint Venture are translated for financial statement purposes based upon average exchange rates during the period covered. As a result, fluctuations in exchange rates may have an adverse effect on the Company’s results of operations.

      Effective December 1, 1999, the Company changed its fiscal year from the twelve-month period ended May 31 to aconsists of 52 or 53 week periodweeks ending on the Saturday nearest May 31. Accordingly, the 2002 fiscal year ended on June 1, 2002, the 2001 fiscal year ended on June 2, 2001 and the 2000 fiscal year ended on June 3, and contained 53 weeks, whereas the previous two fiscal years ended on May 31 and contained 52 weeks.2000. All references to quarters and years relate to fiscal quarters and fiscal years unless otherwise noted.

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

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

Recent Events

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

Results of Operations

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

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20002002 Compared with 19992001

     Net Sales.Net sales for 20002002 were $274.0$119.2 million, up 26.6%down 55% from net sales of $216.4$267.1 million in 1999.2001. Sales of CMP systems totaled $230.2$88.8 million, or 84.0%75% of net sales, up 43.3%down 59% from the $160.6$217.4 million, or 81% of CMP systemnet sales in 1999.2001. Sales of CMP systems increased significantlydecreased in 2000 as a reflection2002 due to the slowing of strongworldwide demand for semiconductor manufacturing equipment which was caused by an increasinga rapid decline in demand fromfor semiconductor device manufacturers. Sales volume was higherdevices. Inventory buildups in 2000telecommunication 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 1999 because the semiconductorpostponement of equipment delivery and

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     Sales of thin film memory and silicon wafer products in 2000 accounted for $29.22002 decreased to $16.2 million, or 10.6%13% of net sales, as compared to $42.4$29.1 million, or 19.6%11% of net sales, in 1999.2001. 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 has created a larger market for used equipment making it even more difficult to sell new equipment. While2002, the Company continues to actively pursue consumable sales, the Company does not foresee a return of high volume equipment sales to this market. The silicon wafer market also experienced continued softness in demand due to the ongoing manufacturing over-capacity caused by various factors, including available capacity and increased production efficiencies due to the fact that more chips couldcan be produced on a given wafer per machine.wafer. This over-capacity situation has created a larger market for used equipment, resulting in even greater difficulty in the sale of new equipment. While the Company continues to actively pursue sales of consumable products, the Company does not foresee a return of high volume equipment sales to this market.

     Sales of products for general industrial applications increaseddecreased to $14.7$14.2 million, or 5.4%12% of net sales, in 20002002 compared with $13.3$20.6 million, or 6.2%8% of net sales in 19992001 due to increased shipments in European markets.the general economic slowdown.

     Included inGross Margin.Gross margin for 2002 was ($9.7) million, or (8)% of net sales, are commissions from affiliates which increased to $2.9 million in 2000, compared to $2.238.5 million, or 14% of net sales, in 1999 due to an increase2001. Because the length and severity of the industry downturn has been longer than originally anticipated, the Company believes that purchases in the Company’s distribution innext upturn will be primarily for the U.S.Momentum products. As a result, the Company recorded a one-time charge of $37.6 million to cost of goods sold during 2002 for the write-down of inventory and Europerecognition of products manufactured by the Far East Joint Venture.

      In December 1999, the Staff of the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin (SAB) No. 101, “Revenue Recognition in Financial Statements”. SAB 101 provides guidance on the recognition, presentation and disclosure of revenue in financial statements of all publicly held companies. The semiconductor capital equipment industry association and a number of association members have met with the Staff of the SECliabilities related to discuss and evaluate the applicability of SAB 101 and various practical implementation considerations. On June 26, 2000, the Staff of the SEC issued Staff Accounting Bulletin No. 101B (SAB 101B), which permitted the delay inoutstanding purchase commitments for the Company’s implementation date of SAB 101 until the fourth quarter of 2001. Accordingly, any shipments previously reported as revenue, including revenue reported during the first nine months of 2001, which do not meet SAB 101’s guidance will be recorded as revenue in future periods. Changes in our revenue recognition policy resulting from the interpretation of SAB 101 and SAB 101B would not involve the restatement of prior financial statements, but would, to the extent applicable, be reported as a change in accounting principle in the fourth quarter of 2001.

      Management believes that SAB 101 and SAB 101B, to the extent that they impact the Company, will not affect the underlying strength or weakness of the business operations as measured by the dollar value of the Company’s product shipments and cash flows.

Gross Margin.In 2000,legacy tools. Excluding this write-down, gross margin was $89.5$27.9 million, or 32.7%23% of total revenue, comparednet sales for 2002. During 2001, the Company recorded a one-time charge of $31.7 million to $21.4cost of goods sold related to the industry downturn and $3.4 million related to the exit from the manufacturing of wafer and disk polishing equipment. Excluding these charges, gross margin was $73.6 million or 9.9%28% of totalnet sales for 2001. The Company’s gross margins are below historical levels due primarily to decreased production volume resulting in lower overhead absorption on a reduced revenue 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 tobase. During the prior year period, as well as increased production efficiencies as a merged Company. In addition, during 1999industry downturn, the Company wrote down inventoryexpects this trend of reduced gross margins to continue. The Company’s gross margin has fluctuated significantly in the amountpast and will continue to fluctuate based on several factors, including the severity and duration of $13.6 million in connectionthe current industry downturn, product mix, overhead absorption levels, and costs associated with the merged Company’sintroduction of 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.products.

     Research, Development and Engineering.In 2000,2002, research, development and engineering expense decreased to $53.7$44.7 million, or 19.6%38% of total revenue,net sales, compared to $61.8$64.0 million, or 28.6%24% of total revenue,net sales, in 1999.2001. Research, development and engineering expenses in 2002 included $7.3 million in one-time charges related to the asset impairment of certain legacy tools located in our labs, which will no longer be used for ongoing research and development programs, as well as capitalized costs associated with certain patents that were written off. During 2001, research, development and engineering expenses included an asset impairment charge of $2.4 million for equipment that was designed by the Far East Joint Venture and an asset impairment charge of $3.6 million related to certain tools no longer used in our labs as a result of the industry slowdown. Excluding these charges, research, development and engineering expenses in 2002 decreased by $20.7 million, or 36%, from 2001 as a result of certain cost cutting measures which were implemented by the Company in response to the industry wide downturn. The decreaseCompany expects to continue investing substantial resources 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.

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programs.

     Selling, General and Administrative.In 2000,2002, selling, general and administrative expense decreased to $28.1 million, or 24% of net sales, compared to $52.4 million, or 19.1%20% of total revenue from $68.2 million, or 31.5% of total revenue,net sales, in 1999. The decrease in selling, general and administrative expense, both in dollars and2001 as a percentageresult of total revenue, resulted primarily from management’s effortscertain cost cutting measures that were implemented by the Company in response to control expenses which includes eliminating functional duplications throughout the merged Company.industry wide downturn. These cost cutting measures were partially offset by increased legal fees incurred related to the settlement of

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

Merger, Integration and Restructuring.InDuring 2001 and continuing in 2002, there was a significant decrease in the fourth quarterworldwide demand for semiconductor capital equipment, which has resulted in inventory buildups in telecommunications products, slower than expected personal computer sales and overall slower global economic growth. This has caused many semiconductor manufacturers to reevaluate their capital spending plans. Several of 1999,the Company’s customers have rescheduled deliveries or canceled existing orders and the Company has experienced a substantial decline in new orders. As a result, the Company implemented additional cost cutting measures in 2002 including the downsizing and consolidation of operations in the Phoenix, AZ, Portland, OR and Austin, TX areas and recorded lease termination costs of $1.1 million and asset impairments of $1.9 million for a total of $3.0 million related to these actions.

     During the year ended June 2, 2001, the Company recorded restructuring charges of $8.6 million. Approximately $3.5 million of restructuring charges related to the following merger, integrationindustry downturn and $5.1 million related to the restructuring costs totaling $53.9 million: $6.9associated with the Company’s exit from the manufacturing of silicon wafer and thin film memory disk polishing equipment. In 2001, slowing worldwide demand for semiconductors resulted in a rapid decline in demand for manufacturing equipment. In response, the Company took actions to substantially reduce overall operating expenses. Cost-cutting measures included an 18-percent reduction in workforce, a 10-percent salary cutback for executives, the deferment of management raises until business conditions improve and a decrease in overall discretionary spending. As a result, the Company recorded approximately $3.5 million direct merger costs; $16.9 millionin restructuring and other special charges related to 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$1.7 million; severance costs of $1.0 million for 247 employees, primarily manufacturing technicians, engineers and $1.8field service representatives; and $0.8 million related toof 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%charges. By the end 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 2000,2001, the Company completed the majority of its restructuring activities in accordance with its previously established plans. In regards to the $5.1 million of restructuring charges, $2.7 million related to fixed asset impairments, $1.2 million related to severance costs for three employees including a former executive of the Far East Joint Venture; and announced plans. Through June 3,$1.2 million related to other restructuring charges associated with the Company’s plan to exit the manufacturing of wafer and disk polishing products.

     During 2000, the Company incurredcompleted the majority of its merger, integration and restructuring activities in accordance with its previous plans established in 1999 at the time of the merger between SpeedFam International, Inc. and Integrated Process Equipment Corporation (IPEC). Through June 1, 2002, the Company recorded $27.0 million in asset write-downsimpairment charges and paid and charged to the liability $17.7$22.3 million. The remaining restructuring accrual for lease termination severance and other expenses associated with the merger was approximately $9.2$4.6 million as of June 3, 2000,1, 2002, which the Company believes is adequate to cover the remaining liabilities. Cash expenditures related to the merger, integration and restructuring charges are expected to be $2.0 million for 2001 and paid from cash generated from operations. During 2000,outlays, primarily lease terminationstermination 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 in May 1999, given the then-current real estate market conditions, that it would take approximately 9-12 months tonot offset by sublease the facility.income. Sublease activity began in May 2000 (as reflected in the remaining accrual) and is projected to be carried outcontinue through the Company’s lease term. The Company’s management has been

Other Expense, net.Other expense, net increased to ($6.6) million in 2002 from ($0.8) million in 2001. Interest expense totaled $7.8 million in both 2002 and is currently in the process of securing additional subleases or other negotiated agreements for the Phoenix, Arizona manufacturing and administrative facility.

      During 2000 and going forward, lease termination payments associated with its Phoenix, Arizona facility not recovered through sublease activity have been and are projected to be2001, offset by savings associated with consolidationinterest income of the merged Company’s facilities$1.1 million in 2002 and administrative functions.$4.7 million in 2001. The decrease in interest income resulted from lower average balances in cash, cash equivalents and short-term investments as well as a reduction in interest rates that occurred during 2002 yielding lower interest income when compared to 2001. In addition, a $1.8 million gain on sale of land was recorded in 2001.

     Other Income (Expense).Other income (expense) increased to $5.6 millionGain (Loss) on Disposal of Investment in 2000 from $4.3 million in 1999. This increase from prior year resulted from a $6.1 million gain recorded in the second quarter of 2000 on the sale of the Company’s 50% interest in its joint venture, Fujimi Corporation. Affiliate.In the first quarter of 1999,2001, the Company recorded a gain arising from$10.8 million loss on disposal of investment in an affiliate in connection with the collectiondissolution of insurance proceedsthe Far East Joint Venture that occurred on August 30, 2000.

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

     Provision for Income Taxes.At the end of 1999, as well as at the end of 2000,2002 and 2001, the Company established a valuation allowance for deferred tax assets generated by its operating losses and is in a net operating loss carryforward position. As a result, the effective tax rate for 20002002, exclusive of the net tax benefit discussed below, and 2001 was zero. Income

     The Company recorded a net tax benefit of approximately $2.5 million in 2002 primarily for a refund of taxes previously paid related to the “Job Creation and Worker Assistance Act of 2002” (The Act) passed by Congress in March 2002. The Act temporarily extended the general net operating loss carryback period to five years. This income tax benefit was $3.9recorded in the fourth quarter, the period in which the Act was passed, and will not impact future periods.

2001 Compared with 2000

Net Sales.Net sales for 2001 were $267.1 million, for 1999. The effective tax benefit rate for 1999 was approximately 2.7%. In 1999,down 3% from net sales of $274.0 million in 2000. Sales of CMP systems totaled $217.4 million, or 81% of net sales, down 6% from $230.2 million, or 84% of net sales in 2000. Had the expected tax benefit computed by applying the statutory rateCompany not changed its revenue recognition policy to conform to the current year loss was offsetrequirements of SAB 101, net sales for 2001 would have been $252.6 million, down 8% from net sales of $274.0 million in 2000. Sales of CMP systems decreased in 2001 due to the slowing of worldwide demand for semiconductor manufacturing equipment caused by a $51.5rapid decline in demand for semiconductor devices. Inventory buildups in telecommunication products, slower than expected personal computer sales and slower global economic growth have caused semiconductor companies to reevaluate their capital spending plans. A number of the Company’s customers revised the timing of their capital spending and rescheduled delivery or canceled existing orders, resulting in the postponement of equipment delivery and a decline in new orders and net sales. Net sales for 2001 as stated above reflect the Company’s adoption of SAB 101.

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

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

Gross Margin.Excluding special charges of $31.7 million (primarily inventory writedowns) recorded in response to the industry slowdown and $3.4 million related to the exit from the manufacturing of wafer and disk polishing equipment, gross margin for 2001 was $73.6 million, or 28% of net sales, compared to $89.5 million, or 33% of net sales, for 2000. The deferred tax valuation allowance fully offsetsdecrease in gross margin was primarily due to decreased production volume resulting in lower overhead absorption on a reduced revenue base. During the industry downturn, the Company expects this trend of reduced gross margins to continue. Gross margins for 2001 reflect the Company’s adoption of SAB 101, discussed above. Excluding the effect of SAB 101, gross margin for the year ended June 2, 2001 was 27% of net deferred tax assets at June 3, 2000sales.

Research, Development and May 31, 1999.Engineering.In 2001, research, development and engineering expense increased to $64.0 million, or 24% of net sales, compared to $53.7 million, or 20% of net sales, in 2000. The increase was primarily due to asset impairment charges during 2001 of approximately $6.0 million related to capital equipment that is no longer used in ongoing research and development programs. The asset impairment charges included $2.4 million of equipment that was designed by the Far East Joint Venture. In

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

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

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

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

Equity in Net Earnings (Loss) of Affiliates.Equity in net earnings of affiliates was $0.1 million in 2001 compared to equity in net loss of $3.3 million in 2000. During 2001, the Company and Obara restructured the Far East Joint Venture effectively dissolving the joint venture; therefore, equity in earnings of affiliates was only recorded for the first quarter of 2001. Included in equity in net loss of affiliates was $3.3 million infor 2000 compared to equity in net earnings of $0.9 million in 1999. This decline compared toare charges recorded by the prior year was due to significantly decreased sales revenue of theformer 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 chargescosts 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.

1999 Compared with 1998

     Net Sales.Net sales for 1999 were $216.4 million, down 42.2% from net sales of $374.3 million in 1998. Sales of CMP systems totaled $160.6 million, or 74.2% of net sales, down 42.6% from the $280.1 million of CMP system sales in 1998. Sales of CMP systems declined significantly in 1999 from the prior year due to a worldwide slowdown in overall demand for semiconductor manufacturing equipment, including CMP systems, which was caused by an over-capacity situation in the semiconductor device market worldwide. In addition, the Company saw erosion in its market share of new sales due to increased competition in the sales of CMP systems to semiconductor manufacturers.

      Sales of thin film memory and silicon wafer products in 1999 accounted for $42.4 million, or 19.6% of net sales, as compared to $80.2 million, or 21.4% of net sales in 1998. During 1999, thin film memory disk manufacturers continued to experience manufacturing over-capacity which in turn reduced capital spending. This industry continued to feel “price per unit” pressures which in turn forced a reduction in capital spending for equipment the Company supplies from its U.S. operations. The decline in sales was also due to continued slowdown in the silicon wafer market. This slowness was due to the ongoing manufacturing over-capacity caused by various factors including the Asian economic conditions and increased production efficiencies due to the fact that more chips could be produced on a given wafer per machine. Sales in the industrial applications market were $13.3 million, or 6.2% of net sales in 1999, compared to the $14.0 million, or 3.8% of net sales in 1998.

      Included in net sales are commissions from affiliates which decreased to $2.2 million in the year ended May 31, 1999, compared to $9.0 million in the year ended May 31, 1998. The decrease in 1999, as compared to 1998, was due to the continued slowdown in the thin film memory disk market, and silicon wafer markets.

Gross Margin.In 1999, gross margin was $21.4 million, or 9.9% of total revenue, compared to $142.9 million, or 38.2% of total revenue, in 1998. Gross margin, both in dollars and as a percentage of total revenue, was down year over year, primarily due to higher material costs for some of the Company’s mainline tools, higher overhead costs due to excess production capacity spread over a smaller revenue base, lower commission revenue, pricing pressure in all markets and shifts in the product mix. In addition, in the fourth quarter of 1999, the Company recorded approximately $13.6 million in integration inventory charges associated with the new Company’s strategic plan to discontinue certain product lines and accordingly increased its reserves for excess inventory and obsolescence. In 1999, the Company faced significantly increased competition in the sale of its products to 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 to record an increase in its allowance for excess and obsolescence to inventory to coincide with the increased weakness in order activity and demand for the Company’s products in the fourth quarter of 1999.

Research, Development and Engineering.In 1999, research, development and engineering expense increased as a percent of total revenue to $61.8 million, or 28.6%, compared to $67.2 million, or 18.0% of total revenue, in 1998. During 1999, the Company delivered numerous enhancements to the Auriga-C^TM system and 776 orbital system. In addition, in 1999, the Company continued to focus on enhanced performance for

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Selling, General and Administrative.In 1999, selling, general and administrative expense decreased to $68.2 million from $72.9 million in 1998. In 1999, selling, general and administrative expense increased as a percent of total revenue to 31.5% from 19.4% in 1998. Selling, general and administrative expense, in dollars, declined in 1999 from 1998 due to management’s efforts to control expenses to align them with lower revenue expectations, including decreased travel, an across-the-board reduction in all management salaries, a freeze on new hires, and reductions in the Company’s global workforce. Selling, general and administrative expense in 1999 as a percentage of total revenue increased substantially from prior year primarily due to reduced revenues in 1999.

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. Through May 31, 1999, the Company incurred $26.8 million in asset write-downs and paid and charged to the liability $4.1 million. The remaining restructuring accrual for lease termination, severance and other expenses associated with the merger was approximately $23.0 million as of May 31, 1999 which the Company believed was adequate to cover the remaining liabilities. 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.

Other Income (Expense).Other income (expense) increased to $4.3 million in 1999 from $3.5 million in 1998. This increase was due primarily to a gain arising from the collection of insurance proceeds for a CMP tool, which was destroyed in transit. Other income also increased in 1999 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.

Provision for Income Taxes.IncomeAt the end of 2001 and 2000, the Company established a valuation allowance for deferred tax benefit was $3.9 million for 1999 compared to an income tax expense of $29.6 millionassets generated by its operating losses and is in 1998. Thea net operating loss carryforward position. As a result, the effective tax expense (benefit) ratesrate for 19992001 and 1998 were approximately (2.7)% and 466%, respectively. Tax expense in 1998 resulted primarily from a $25.9 million net charge, which increased the Company’s deferred tax valuation allowance. In 1999, the tax benefit created by the current year loss2000 was offset by a $51.5 million increase to the Company’s deferred tax valuation allowance. This increase in the deferred tax valuation allowance fully offset the Company’s net deferred tax assets.zero.

Equity in Net Earnings of Affiliates.For 1999, equity in net earnings of affiliates decreased to $0.9 million compared to $4.4 million in 1998. Equity in the net earnings of affiliates was down from the prior year primarily due to significantly decreased sales revenue of the Far East Joint Venture. Investments by manufacturers of both silicon wafer and thin film memory disks were reduced significantly in 1999 compared to 1998. This reduced manufacturing volume also resulting in lower sales of consumable goods.17

Liquidity and Capital Resources

     As of June 3, 2000,1, 2002, the Company had $100.3$33.4 million in cash, cash equivalents and short-term investments compared to $147.0$60.8 million at May 31, 1999.June 2, 2001. The Company used $45.2$25.4 million of cash in operating activities during 20002002 compared to $51.6$30.0 million in 1999.2001. During 2000,2002, $4.0 million of cash primarily decreased due to a $52.7 million increase in accounts receivable as a result of the revenue growth during 2000. Changes in otherwas used for working capital accounts provided cash of $7.0 million in 2000. In 2000, therequirements. The net loss was $14.2of $94.1 million adjusted forincluded non-cash items totaling $64.4 million: fixed asset impairments and the non-cash portion of $17.4restructuring charges of $48.1 million; contribution of stock to employee benefit plan of $0.2 million; cumulative effect of change in accounting principle of $2.6 million forand depreciation and amortization expense and $3.3 million in equity in the net loss of the Far East Joint Venture which were offset by a $6.1 million gain on the sale of Fujimi Corporation and other items.

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$13.5 million.

     Net cash provided by investing activities totaled $18.4$10.0 million in 20002002 compared with $41.5$4.3 million in 1999.2001. The Company incurred capital expenditures of $15.1$3.2 million and $31.4$15.3 million in 20002002 and 1999,2001, respectively. The majority of the cash was used to fund building improvements software and laboratory equipment purchases in 2000.2002. During 1999, the majority of cash expenditures were used to fund the construction of a 109,000 square foot Technology Center next to the corporate headquarters in Chandler, Arizona with the remaining expenditures relating to purchase of equipment and software. During the second quarter of 2000, the Company sold its 50% interest in its joint venture, Fujimi Corporation, to its 50% partner, Fujimi Incorporated which generated proceeds of $10.0 million. In addition, cash of $2.3 million was provided from the licensing of certain technologies and transferring associated assets. During 2000, cash was also used to purchase short-term investments of $64.3 million offset by2002, proceeds of maturing investments totaling $85.8totaled $13.5 million, and in 2001 proceeds from maturing investments, net of investment purchases, totaled $15.3 million. Asset sales also generated proceeds of $8.1 million in 2001.

     Financing activities provided $2.3$1.3 million and $1.6$1.7 million during 20002002 and 1999,2001, respectively. The sale of stock to employees and the exercise of stock options generated proceeds of $3.4$1.4 million during each year.and 3.4 million in 2002 and 2001, respectively. Principal payments on capital lease obligations amounted to $1.2$0.1 million in 20002002 compared to $1.1$1.6 million in 1999.2001. Total long-term debt decreased to $116.2was $115.0 million at June 3, 20001, 2002 compared to $117.4$115.1 million at the end of the prior year.

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

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

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

     Due to the continuation and severity of the industry-wide downturn, the Company implemented additional cost-cutting measures during 2002, which included further decreases in discretionary spending and reductions in worldwide headcount. Despite the expected continuation of the industry-wide downturn and uncertainty associated with the introduction of new products, and taking into account the Company’s actions to restructure and downsize the Company, management believes that the Company’s current cash and investment balances along with net cash generated through operations and the proceeds of the sale-leaseback of its corporate headquarters and research and development facilities will be sufficient to meet the Company’s anticipated cash needs for working capital and capital expenditures at least through May 31, 1999. Total long-term2003. However, due to significant uncertainties related to the duration and severity of the semiconductor industry downturn and overall economic conditions, the Company may require additional sources of funds in order to strengthen

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

Related Party Transactions

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

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

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

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

Changes in Accounting Principles

     In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101 (SAB 101), “Revenue Recognition in Financial Statements,” addressing the timing of revenue recognition for sales of products that involve contractual customer acceptance provisions and installation if these events occur following shipment of the product and transfer of title. The Company adopted SAB 101 in the third quarter of 2001, retroactive to the beginning of 2001. As a result of the adoption of SAB 101, the Company changed its revenue recognition policy and recorded the cumulative effect of the change in accounting principle of ($36.5) million, or ($1.22) per share, as of the beginning of 2001 as a percentagecharge in the first quarter of stockholder’s equity increased2001. The previously reported results for the first quarter of 2001 prior to 49.0%the adoption of SAB 101 were restated to reflect the new revenue recognition method.

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

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     In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 142, “Goodwill and Other Intangible Assets.” Under SFAS No. 142, goodwill and intangible assets with indefinite useful lives are no longer amortized but are reviewed at least annually for impairment at the reporting unit level. The impairment test under SFAS No. 142 is based on a two-step process involving; 1) comparing the estimated fair value of the related reporting unit to its net book value, and 2) comparing the estimated implied fair value of goodwill to its carrying value. The Company elected early adoption of SFAS No. 142 in the first quarter of 2002. Based on the implementation of the non-amortization, impairment-only accounting approach, it was determined that an impairment charge of $2.6 million representing the carrying value of goodwill as of June 3, 2000 from 47.6%2001 should be recorded. Accordingly, the Company recorded the cumulative effect of the change in accounting principle of ($2.6) million, or ($0.08) per share, as of May 31, 1999.the beginning of 2002 (June 3, 2001) as a charge in the first quarter of 2002. Net loss for 2001 would have been ($133.5) million or ($4.46) per share if the accounting change related to goodwill required by SFAS No. 142 had been applied to 2001. Net loss for 2000 would have been ($13.2) million or ($0.45) per share if the accounting change related to goodwill required by SFAS No. 142 had been applied to 2000.

Critical Accounting Policies and Accounting Estimates

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

     Revenue Recognition

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

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

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

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

     Inventory and Purchase Order Commitments

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

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

     Allowance for Doubtful Accounts

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

     Valuation Allowance on Deferred Tax Assets

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

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     Product Warranty Costs

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

     Impairment of Long-lived and Intangible Assets

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

Contractual Obligations and Commercial Commitments

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

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

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

Impact of Recently Issued Accounting Standards

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

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

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

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

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

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

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     On June 27, 2000,Forward-looking statements involve risks, uncertainties and other factors which may cause actual results, performance or achievements of the Company announcedto be materially different from those expressed or implied by such forward-looking statements. Factors that it reached an agreement with its partner in the Far East Joint Venture, Obara Corporation, that will transfer full ownership of CMP sales and service operations in that region to the Company. Per the agreement, Obara Will assume the business operations for non-CMP activities. In conjunction with this agreement, the Company is evaluating its impact on its domestic non-CMP operations. Based upon this ongoing review, as well as the terms of the agreement reached with Obara Corporation, the Company believes it will incur a special, non-cash charge to operations in the range of $10.0 million to $20.0 million in the first six months of 2001. The Company believes there will be no material cash outlays in conjunction with finalizing this transaction

      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”, establishes accounting and reporting standards for derivative financial instruments and hedging activities. These statements require that the Company recognize all derivatives as either assets or liabilities on the balance sheet and measure those instruments at fair value. Derivatives that are not hedges must be adjusted to fair value through income. If the derivative is a hedge, depending on the nature of the hedge, changes in the fair value of derivatives will either be offset against changes in the fair value of the hedged assets, liabilities, or firm commitments through earnings or recognized in other comprehensive income until the hedged item is recognized in earnings. The ineffective portion of a derivative’s change in fair value will be immediately recognized in earnings. The Company will adopt SFAS No. 133 and No. 138 in the first quarter of 2002, and does not expect the adoption to have a material effect on its financial condition or results of operations.

      In December 1999, the Staff of the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin (SAB) No. 101, “Revenue Recognition in Financial Statements”. SAB 101 provides guidance on the recognition, presentation and disclosure of revenue in financial statements of all publicly held companies. The semiconductor capital equipment industry association and a number of association members have met with the Staff of the SEC to discuss and evaluate the applicability of SAB 101 and various practical implementation considerations. On June 26, 2000, the Staff of the SEC issued Staff Accounting Bulletin No. 101B (SAB 101B), which permitted the delay incould affect the Company’s implementation date of SAB 101 until the fourth quarter of 2001. Accordingly, any shipments previously reported as revenue, including revenue reported during the first nine months of 2001, which do not meet SAB 101’s guidance will be recorded as revenue in future periods. Changes in our revenue recognition policy resulting from the interpretation of SAB 101results and SAB 101B would not involve the restatement of prior financial statements, but would,cause them to the extent applicable, be reported as a change in accounting principle in the fourth quarter of 2001.

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      Management believes that SAB 101 and SAB 101B, to the extent that they impact the Company, will not affect the underlying strength or weakness of the business operations as measured by the dollar value of the Company’s product shipments and cash flows.

Year 2000

      In calendar year 1999, the Company completed all of its Year 2000 review and conversion projects to address all necessary changes, testing and implementation issues. This project encompassed three major areas of review; internal systems (hardware and software), supplier compliance and Company products. To date, the Company has not experienced any interruption to its business activities or incurred any impairment to its financial condition or results of operations as a result of entering calendar year 2000. The Company will continue to monitor its own internal systems and products to determine the impact, if any, of problems associated with the Year 2000.

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 couldmaterially differ materially from those projectedcontained in the forward-looking statements because of a number of factors, risks and uncertainties, includinginclude those listed below under the risk factors described in this discussion and elsewhere in this report. Such forward-lookingheading “Certain Factors Affecting SpeedFam-IPEC’s Business.” 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 and 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, the ability of the Company to complete the 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 isspeak only as of the filing date with the Securitiesstatement was made. The Company does not undertake and Exchange Commission and future events or circumstances could differ significantly from thespecifically declines any obligation to update any forward-looking statements included herein.statements:

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RISKCERTAIN FACTORS AFFECTING SPEEDFAM-IPEC’S BUSINESS

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

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

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

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

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

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

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

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

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

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

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

The Company facesrollout of Momentum and Momentum300 may be slowed due to:

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

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

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

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

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

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

The downturn in the semiconductor industry has led and may continue to lead to decreased revenues.During 2001 and 2002, slowing worldwide demand for semiconductors resulted in significant inventory buildups for semiconductor companies and a rapid decline in demand for semiconductor manufacturing equipment. Presently, we have little visibility regarding how long the semiconductor industry downturn will last or how severe the downturn will be. During fiscal 2002, we experienced cancellations and suspensions of orders for our products and a significant decrease in orders. Although we experienced a significant increase in bookings during the fourth quarter, we are uncertain as to the timing of a significant and sustainable industry recovery. If the downturn continues or worsens, we may experience additional cancellations and/or suspensions of orders for our products and a continuing slowdown in orders.

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

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

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

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

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

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

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

	•	Some competitors may have greater financial resources and are in better financial condition than the Company. They also mayus.
	•	Some competitors have more extensive engineering, manufacturing, marketing and customer service and support capabilities.
	•	Some competitors may supply a broader range of semiconductor capital equipment, than the Company. As a result, theseenabling them to serve more or all of their customers’ needs. This could limit sales for us and strengthen existing relationships that competitors may have better relationships with semiconductor manufacturers, including our current and potential customers of the Company.customers.
	•	The Company expectsSome competitors may be able to better adapt to changing market conditions and customer demand.
	•	Competitors are expected to continue to improve their existing technology and introduce new products. This could cause a decline in the Company’s salesThese products may be better than ours, cheaper than ours or lead to intensified price-based competition.more efficient than ours.
	•	Other capital equipment manufacturers not currently involved in the development of CMP systems may enter the market or develop technology that reduces the need for the Company’sour 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 lower prices and reduced margins for the Company’s products, thereby materiallyour products. If we experience continued reductions in our revenue for any reason, our margins will continue to be reduced, which would adversely affecting the Company’s business, financial condition andaffect our results of operations. There can be no assuranceWe cannot assure you that the Companywe will be able to compete successfully in the future.

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

	•	anticipation of market trends;
	•	product selectionselection;
	•	timely and efficient completion of product design and developmentdevelopment;
	•	timely and efficient implementation of manufacturing and assembly processesprocesses;
	•	adjustment of production and pricing to meet customer demand;
	•	product performance in the fieldfield; and
	•	effective sales and marketingmarketing.