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

Washington, D.C. 20549

Form 10-Q

(Mark One)

Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended March 2, 2002 Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended December 1, 2001

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

For the transition period from ____________ to ____________

Commission File Number 0-26784

SpeedFam-IPEC, Inc. (Exact name of registrant as specified in its charter)

(Exact name of registrant as specified in its charter)


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




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

Illinois		36-2421613
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)
305 North 54th Street, Chandler, Arizona (Address of principal executive offices)		85226 (Zip Code)

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

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

Yes [X].gif No [ ].gif

~~Indicate~~The ~~the~~Registrant ~~number~~had of30,602,532 shares ~~outstanding~~ of ~~each~~its ofcommon ~~the~~stock, ~~issuer’s~~no ~~classes of~~par ~~common stock~~value, outstanding as of ~~the latest practicable date (December~~March 31, ~~2001)~~2002.

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

TABLE OF CONTENTS

PART I FINANCIAL INFORMATION
	Condensed Consolidated Balance Sheets
		Condensed Consolidated Balance Sheets
Part I – Financial Information
	Condensed Consolidated Statements of Operations	~~Condensed Consolidated Statements of Operations~~
	Condensed Consolidated Statements of Cash Flows	~~Condensed Consolidated Statements of Cash Flows~~
	Notes to Condensed Consolidated Financial Statements	~~Notes to Condensed Consolidated Financial Statements~~
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Management’s Discussion and Analysis of Financial Condition and Results of Operations
	ITEM 3. Quantitative and Qualitative Disclosures About Market Risk.
PART II — OTHER INFORMATION
SIGNATURES
	Item 1. Legal Proceedings
	Item 6. Exhibits and Reports on Form 8-K
Signature
EXHIBIT INDEX
Exhibit 10.1
EX-3.1
EX-3.2

SpeedFam-IPEC, Inc. Index

Index


			Page

Part I Financial Information




	Item 1. Financial Statements




		Condensed Consolidated Balance Sheets March 2, 2002 and June 2, 2001		3




		Condensed Consolidated Statements of Operations Third Quarter Ended and Three Quarters Ended March 2, 2002 and March 3, 2001		4




		Condensed Consolidated Statements of Cash Flows Three Quarters Ended March 2, 2002 and March 3, 2001		5




		Notes to Condensed Consolidated Financial Statements		6




	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			13




	Item 3. Quantitative and Qualitative Disclosures about Market Risk			25




Part II Other Information				25




	Item 1. Legal Proceedings			25




	Item 6. Exhibits and Reports on Form 8-K			26




Signatures				27




Exhibit index				28

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

Part I1 –— Financial Information

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

					December 1,			June 2,
					March 2,			June 2,
					2001			2001
					2002			2001
					(Unaudited)			(Audited)
				Assets
Current assets:
	Cash and cash equivalents				$	3736,~~180~~164		$	47,344
	Short-term investments					~~1,900~~—			13,495
	Trade accounts receivable, net					3020,~~837~~959			60,619
	Inventories					4639,~~226~~622			83,857
	Shipped systems pending acceptance					76,~~909~~668			13,953
	Prepaid expenses and other current assets					32,~~438~~511			4,549
		Total current assets				~~127~~105,~~490~~924			223,817
Property, plant and equipment, net						6260,~~328~~773			75,241
Other assets						1415,~~413~~627			15,827
		Total assets			$	~~204~~182,~~231~~324		$	314,885
			Liabilities and Stockholders’ Equity
Current liabilities:
	Current portion of long-term debt				$	~~127~~87		$	229
	Accounts payable					1210,~~797~~067			23,314
	Deferred systems revenue					2618,~~571~~061			46,281
	Accrued liabilities					1716,~~178~~150			18,675
		Total current liabilities				5644,~~673~~365			88,499
Long-term liabilities:
	Long-term debt					115,~~072~~043			115,124
	Other liabilities					4,~~549~~789			5,321
		Total long-term liabilities				119,~~621~~832			120,445
Stockholders’ equity:
	Common stock, no par value, 60,000 shares authorized, 30,318 and 30,116 shares issued and outstanding at December 1, 2001 and June 2, 2001, respectively					1			1
	Common stock, no par value, 60,000 shares authorized, 30,602 and 30,116 shares issued and outstanding at March 2, 2002 and June 2, 2001, respectively					1			1
	Additional paid-in capital					~~434~~435,~~831~~406			434,090
	Retained earnings (deficit)					(407,639	)		(328,977	)
	Retained deficit					(418,072	)		(328,977	)
	Accumulated comprehensive income					~~744~~792			827
		Total stockholders’ equity				2718,~~937~~127			105,941
			~~Total liabilities and stockholders’ equity~~	Total liabilities and stockholders’ equity	$	~~204~~182,~~231~~324		$	314,885

See Accompanying Notes to Condensed Consolidated Financial Statements.

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

					Second Quarter Ended						Two Quarters Ended
					December 1,			December 2,			December 1,			December 2,
					2001			2000			2001			2000
Net sales					$	25,827		$	83,911		$	66,909		$	156,930
Cost of sales						57,910			56,776			89,605			113,861
				Gross margin		(32,083	)		27,135			(22,696	)		43,069
Operating expenses:
				Research, development and engineering		17,851			14,412			30,239			30,969
				Selling, general and administrative		7,283			15,016			15,403			31,469
				Litigation settlement costs		—			—			1,800			—
				Restructuring charges		3,000			—			3,000			5,123
				Total operating expenses		28,134			29,428			50,442			67,561
Operating loss						(60,217	)		(2,293	)		(73,138	)		(24,492	)
				Other expense, net		(1,460	)		(88	)		(2,962	)		(209	)
				Loss on disposal of investment in affiliate		—			—			—			(10,763	)
				Equity in net earnings of affiliates		—			—			—			110
Loss before income taxes and cumulative effect of accounting changes						(61,677	)		(2,381	)		(76,100	)		(35,354	)
				Income taxes		—			—			—			—
Loss before cumulative effect of accounting changes						(61,677	)		(2,381	)		(76,100	)		(35,354	)
Cumulative effect of accounting changes						—			—			(2,582	)		(36,542	)
Net loss					$	(61,677	)	$	(2,381	)	$	(78,682	)	$	(71,896	)
Net loss per common share:
	Basic and diluted:
				Before cumulative effect of accounting changes	$	(2.03	)	$	(0.08	)	$	(2.51	)	$	(1.18	)
				From cumulative effect of accounting changes		—			—			(0.09	)		(1.22	)
				Net loss	$	(2.03	)	$	(0.08	)	$	(2.60	)	$	(2.40	)
Weighted average number of shares:
			Basic and diluted			30,318			29,912			30,318			29,865
Amounts as if the fiscal 2002 accounting change to goodwill was applied retroactively:
Net loss					$	(61,677	)	$	(2,145	)	$	(78,682	)	$	(71,439	)
Net loss per share:
		Basic and diluted			$	(2.03	)	$	(0.07	)	$	(2.60	)	$	(2.39	)

See Accompanying Notes to Condensed Consolidated Financial Statements.

SpeedFam-IPEC, Inc. Condensed Consolidated Statements of ~~Cash Flows~~Operations ~~Two~~Third Quarter Ended and Three Quarters Ended ~~December~~March 12, ~~2001~~2002 and ~~December~~March 23, ~~2000~~2001 (in thousands, except per share data)

					Two Quarters Ended
						Third Quarter Ended							Three Quarters Ended
					December 1, 2001				December 2, 2000
						March 2,				March 3,			March 2,			March 3,
Cash flows from operating activities
						2002				2001			2002			2001
	Net loss				$	(78,682	)		$	(71,896	)
Net sales						$	25,119			$	58,818		$	92,028		$	215,748
	Adjustments to reconcile net loss to net cash provided by (used in) in operating activities:
Cost of sales							18,799				74,107			108,404			187,968
		Equity in net earnings of affiliates				—				(110	)
				Gross margin			6,320				(15,289	)		(16,376	)		27,780
		Depreciation and amortization				8,074				8,831
Operating expenses:
		Non-cash portion of restructuring and other charges				48,295				19,360
				Research, development and engineering			7,398				18,474			37,637			49,443
		Cumulative effect of changes in accounting principles				2,582				36,542
				Selling, general and administrative			7,170				12,636			22,573			44,105
		Changes in assets and liabilities:
				Litigation settlement costs			—				—			1,800			—
			Decrease in trade accounts receivable			29,615				40,331
				Restructuring charges			—				3,460			3,000			8,583
			Increase in inventories, excluding restructuring charges			(1,855	)			(37,571	)
				Total operating expenses			14,568				34,570			65,010			102,131
			Decrease in shipped systems pending acceptance			6,044				1,144
Operating loss							(8,248	)			(49,859	)		(81,386	)		(74,351	)
			(Increase) decrease in other current assets			1,103				(3,416	)
			Other expense, net				(2,186	)			(1,070	)		(5,148	)		(1,279	)
			Increase (decrease) in accounts payable			(10,485	)			6,149
				Loss on disposal of investment in affiliate			—				—			—			(10,653	)
			Increase (decrease) in deferred systems revenue			(19,926	)			673
Loss before income taxes and cumulative effect of accounting changes							(10,434	)			(50,929	)		(86,534	)		(86,283	)
			Increase in accrued liabilities			(4,554	)			5,905
				Income taxes			—				—			—			—
	Net cash provided by (used in) in operating activities					(19,789	)			5,942
Loss before cumulative effect of accounting changes							(10,434	)			(50,929	)		(86,534	)		(86,283	)
Cash flows from investing activities
Cumulative effect of accounting changes							—				—			(2,582	)		(36,542	)
	Purchases of short-term investments					—				(15,700	)
Net loss						$	(10,434	)		$	(50,929	)	$	(89,116	)	$	(122,825	)
	Matured short-term investments					11,596				15,012
Net loss per common share:
	Capital expenditures					(1,877	)			(9,555	)
	Basic and diluted:
	Other investing activities					(645	)			(949	)
			Before cumulative effect of accounting changes			$	(0.34	)		$	(1.70	)	$	(2.85	)	$	(2.89	)
	Net cash provided by (used in) investing activities					9,074				(11,192	)
				From cumulative effect of accounting changes			—				—			(0.09	)		(1.22	)
Cash flows from financing activities
				Net loss		$	(0.34	)		$	(1.70	)	$	(2.94	)	$	(4.11	)
	Proceeds from exercise of stock options and employee stock purchases					544				2,703
Weighted average number of shares -
	Principal payments on long-term debt					(20	)			(1,356	)
Basic and diluted							30,474				29,996			30,338			29,909
	Net cash provided by financing activities					524				1,347
Amounts as if the fiscal 2002 accounting change to goodwill was applied retroactively:
	Effects of foreign currency rate changes on cash					27				(271	)
Net loss						$	(10,434	)		$	(50,693	)	$	(89,116	)	$	(122,132	)
	Net decrease in cash and cash equivalents					(10,164	)			(4,174	)
Net loss per share:
	Cash and cash equivalents at beginning of year					47,344				72,060
		Basic and diluted				$	(0.34	)		$	(1.69	)	$	(2.94	)	$	(4.08	)
	Cash and cash equivalents at end of quarter				$	37,180			$	67,886

See Accompanying Notes to Condensed Consolidated Financial Statements.

SpeedFam-IPEC, Inc.
Condensed Consolidated Statements of Cash Flows
Three Quarters Ended March 2, 2002 and March 3, 2001
(in thousands)


				Three Quarters Ended

				March 2,			March 3,
				2002			2001

Cash flows from operating activities




Net loss				$	(89,116	)	$	(122,825	)




	Adjustments to reconcile net loss to net cash used in operating activities:




		Depreciation and amortization			11,172			12,910




		Non-cash portion of restructuring and other charges			48,295			58,026




		Cumulative effect of changes in accounting principles			2,582			36,542




		Changes in assets and liabilities:




			Decrease in trade accounts receivable		39,326			52,163




			(Increase) decrease in inventories, excluding restructuring charges		2,710			(41,050	)




			(Increase) decrease in shipped systems pending acceptance		7,286			(1,396	)




			(Increase) decrease in other current assets		2,254			(498	)




			Decrease in accounts payable		(13,183	)		(12,593	)




			Increase (decrease) in deferred systems revenue		(28,220	)		958




			Increase (decrease) in accrued liabilities		(5,158	)		6,810

	Net cash used in operating activities				(22,052	)		(10,953	)

Cash flows from investing activities




Purchases of short-term investments					—			(19,797	)




	Matured short-term investments				13,495			31,212




	Capital expenditures				(2,635	)		(13,419	)




	Other investing activities				(809	)		(2,366	)

	Net cash provided by (used in) investing activities				10,051			(4,370	)

Cash flows from financing activities




Proceeds from exercise of stock options and employee stock purchases					1,119			3,581




	Principal payments on long-term debt				(38	)		(1,581	)

	Net cash provided by financing activities				1,081			2,000

	Effects of foreign currency rate changes on cash				(260	)		(428	)

	Net decrease in cash and cash equivalents				(11,180	)		(13,751	)




	Cash and cash equivalents at beginning of year				47,344			72,060

	Cash and cash equivalents at end of quarter			$	36,164		$	58,309

See Accompanying Notes to Condensed Consolidated Financial Statements.

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

(1) BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements of SpeedFam-IPEC, Inc. (The Company) have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required for comprehensive financial statements. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires the Company’s management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements as well as the reported amounts of revenues and expenses during the reporting period. In the opinion of management, all adjustments (consisting of normal recurring items) considered necessary for a fair presentation have been included. Actual results may differ from these estimates. Operating results for the quarter or ~~two~~three quarters ended ~~December~~March 12, ~~2001~~2002 are not necessarily indicative of the results that may be expected for the year ending June 1, 2002. For further information, refer to the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended June 2, 2001.

The Company’s fiscal year consists of 52 or 53 weeks ending on the Saturday nearest May 31. Accordingly, the 2002 fiscal year ends on June 1, 2002 and ~~contains 52 weeks whereas~~ the 2001 fiscal year ended on June 2, 2001 ~~and also contained 52 weeks~~. All references to quarters and years relate to fiscal quarters and fiscal years unless otherwise noted.

Certain prior period amounts have been reclassified to conform to the current year presentation.

Since 1971, the Company had owned a 50% interest in SpeedFam-IPEC Co., Ltd. (together with its subsidiaries and joint ventures, also known as the Far East Joint Venture) which was accounted for using the equity method of accounting. The remaining 50% was owned by Obara Corporation, a publicly traded Japanese company that supplies products to the automotive industry. On August 30, 2000, the Far East Joint Venture between the Company and Obara Corporation was officially dissolved. Under the terms of the Master Reorganization Agreement, ownership of the chemical mechanical planarization (CMP) operations of the Far East Joint Venture was transferred to the Company. The CMP operations, as of the date of dissolution, have been consolidated in the accompanying unaudited condensed consolidated financial statements.

(2) INVENTORIES

The components of inventory are as follows:

	December 1,		June 2,
	March 2,		June 2,
	2001		2001
	2002		2001
Raw materials	$	1814,~~973~~647	$	49,081
Work-in-process		1713,~~415~~870		19,422
Finished goods		911,~~838~~105		15,354
	$	4639,~~226~~622	$	83,857

(3) ACCRUED LIABILITIES

Accrued liabilities are as follows:

	December 1,		June 2,
	March 2,		June 2,
	2001		2001
	2002		2001
Accrued warranty and installation costs	$	31,~~223~~386	$	6,156
Accrued payroll and benefits		23,~~172~~671		3,361
Accrued merger, integration, and restructuring costs		3,908		1,719
Accrued restructuring and one-time charges		1,436		1,719
Other accrued liabilities		79,~~875~~657		7,439
	$	1716,~~178~~150	$	18,675

(4) COMPREHENSIVE LOSS

The comprehensive loss is as follows:

		Second Quarter Ended						Two Quarters Ended
		Third Quarter Ended						Three Quarters Ended
		December 1,			December 2,			December 1,			December 2,
		March 2,			March 3,			March 2,			March 3,
		2001			2000			2001			2000
		2002			2001			2002			2001
Net loss		$	(6110,~~677~~434	)	$	(250,~~381~~929	)	$	(7889,~~682~~116	)	$	(71122,~~896~~825	)
Other comprehensive income (loss):
	Unrealized gain (loss) on securities		(111	)		93164			(2324	)		~~313~~477
	Foreign currency translation adjustment		~~(171~~49	)		(~~675~~729	)		(6011	)		(~~413~~1,142	)
Comprehensive loss		$	(6110,~~859~~386	)	$	(251,~~963~~494	)	$	(7889,~~765~~151	)	$	(71123,~~996~~490	)

Accumulated other comprehensive income (loss) is as follows:

										Accumulated Other
											Accumulated
		Foreign Currency				Unrealized Gain				Comprehensive Income
			Foreign				Unrealized				Other
		Translation				(Loss) on Securities				(Loss)
			Currency				Gain (Loss)				Comprehensive
Balance at June 2, 2001		$	803			$	24			$	827
			Translation				on Securities				Income (Loss)
	Two quarter change		(60	)			(23	)			(83	)
Balance at June 2, 2001			$	803			$	24			$	827
Balance at December 1, 2001		$	743			$	1			$	744
	Three quarter change			(11	)			(24	)			(35	)
Balance at June 3, 2000		$	1,239			$	(487	)		$	752
Balance at March 2, 2002			$	792			$	—			$	792
	Two quarter change		(413	)			313				(100	)
Balance at June 3, 2000			$	1,239			$	(487	)		$	752
Balance at December 2, 2000		$	826			$	(174	)		$	652
	Three quarter change			(1,142	)			477				(665	)
Balance at March 3, 2001			$	97			$	(10	)		$	87

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

During ~~2001~~the ~~there~~third ~~was~~quarter aof ~~significant~~2001, ~~decrease~~slowing ~~in the~~ worldwide demand for ~~semiconductor~~semiconductors ~~capital~~resulted ~~equipment.~~in ~~This~~a rapid decline ~~has continued~~ in ~~2002~~demand ~~and~~for ~~has~~manufacturing ~~resulted~~equipment. inInventory ~~inventory~~ buildups in ~~telecommunications~~telecommunication products, slower than expected personal computer sales and ~~overall~~ slower global economic growth~~, causing~~ ~~many~~ caused semiconductor ~~manufacturers~~companies to reevaluate their capital spending plans. ~~Several~~A number of the Company’s customers ~~have~~revised ~~rescheduled deliveries or canceled existing orders and~~ the ~~Company~~timing ~~has~~of ~~experienced~~their acapital ~~substantial~~spending ~~decline~~and inrescheduled ~~new~~or ~~orders.~~canceled ~~Because~~existing ~~the~~orders, ~~duration~~resulting ~~of this downturn~~ in ~~demand~~the ispostponement ~~longer than~~or ~~originally~~cancellation ~~anticipated,~~of ~~the~~equipment ~~Company~~delivery ~~believes~~and ~~that~~a ~~purchases~~decline in ~~the~~new ~~next upturn will be primarily for the Company’s Momentum™ products~~orders. As a result of , the ~~extended~~Company ~~downturn,~~was ~~the Company~~forced ~~recorded~~to ~~significant~~record inventory write-downs ~~for obsolete inventory~~ and ~~inventory~~take inswift ~~excess~~actions to ofsubstantially ~~forecasted~~reduce ~~requirements~~overall ~~during~~operating ~~the second quarter ended December 1, 2001~~expenses. ~~In addition, the Company implemented additional cost~~ Cost-cutting measures ~~during the~~ ~~quarter~~included ~~including~~an ~~the~~18-percent ~~downsizing~~reduction ~~and consolidation of operations~~ in ~~the Phoenix~~workforce, ~~AZ,~~a ~~Portland,~~10-percent ORsalary ~~and~~cutback ~~Austin~~for executives, ~~TX areas. During~~ the ~~second~~deferment ~~quarter ended December 1, 2001, the Company recorded charges~~ of ~~$48.1 million~~management ~~which~~raises ~~included~~until ~~inventory~~business ~~write-downs of $36.3~~conditions ~~million;~~improve ~~asset impairments of $8.5 million; lease termination costs of $1.1 million; $1.3 million in non-cancelable purchase commitments;~~ and $0.9 million of other charges. The Company anticipates cash outlays of approximately $1.3 million over the next two quarters related to non-cancelable purchase commitments and approximately $1.1 million over the next three and a ~~half~~decrease ~~years related~~in tooverall ~~non-cancelable~~discretionary ~~leases~~spending.

During the third quarter ended March 3, 2001, the Company recorded approximately $39.1 million in restructuring and other special charges which included inventory write-downs of $31.3 million; asset impairments of $4.3 million; lease termination costs of $1.7 million; severance costs of $1.0 million for 247 employees, primarily manufacturing technicians, engineers and field service representatives; and $0.8 million of other charges.

These costs were classified in the statement of operations for the third quarter ended March 3, 2001 in cost of sales and operating expenses. The following table summarizes the classification of the restructuring and other charges:


Cost of sales	$	31,707




Research and development costs		3,623




Selling, general and administrative costs		296




Restructuring charges		3,460

	$	39,086

This decline in demand for semiconductors has continued in 2002 and several of the Company’s customers have rescheduled deliveries or canceled existing orders and the Company has experienced a substantial decline in new orders. Because the duration of this downturn in demand has been longer than originally anticipated, the Company believes that purchases in the next upturn will be primarily for the Company’s Momentum^TM products. As a result of the extended downturn, the Company recorded significant inventory write-downs for obsolete inventory and inventory in excess of forecasted requirements during the second quarter ended December 1, 2001. In addition, the Company implemented additional cost cutting measures during the second quarter including the downsizing and consolidation of operations in the Phoenix, AZ, Portland, OR and Austin, TX areas. During the

second quarter ended December 1, 2001, the Company recorded charges of $48.1 million which included inventory write-downs of $36.3 million; asset impairments of $8.5 million; lease termination costs of $1.1 million; $1.3 million in non-cancelable purchase commitments; and $0.9 million of other charges. In the third quarter the Company spent $0.9 million for non-cancelable purchase commitments and anticipates spending the remaining $0.4 million in the next quarter. Additional cash outlays for non-cancelable leases were $0.2 million in the third quarter and the Company anticipates spending the remaining $0.9 million over the next three and a half years.

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


Cost of sales	$	37,602




Research and development costs		7,338




Selling, general and administrative costs		159




Restructuring charges		3,000

	$	48,099

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

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

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

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

(7) BUSINESS SEGMENT INFORMATION

The Company classifies its products into three core business segments: (i) the CMP Group, which is comprised of the Company’s development and production of chemical mechanical planarization systems; (ii) the Surface Technology Group (STG), which is comprised of the distribution of high-throughput precision surface processing equipment used in ~~thin~~the ~~film memory disk media and~~ silicon wafer market; and (iii) the Industrial Applications Group (IAG), which is comprised of the development and production of high-throughput precision surface processing equipment used in general industrial applications. Information concerning the Company’s business segments during the ~~second~~third quarter and ~~two~~three quarters ended ~~December~~ March 12, ~~2001~~2002 and ~~December~~ March 23, ~~2000~~2001 is as follows (in thousands):

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

		Second Quarter Ended						Two Quarters Ended
		Third Quarter Ended						Three Quarters Ended
		December 1,			December 2,			December 1,			December 2,
		March 2,			March 3,			March 2,			March 3,
		2001			2000			2001			2000
		2002			2001			2002			2001
Loss on disposal of investment in affiliate			—			—			—			(10,763	)
Net sales:
Equity in net earnings of affiliate			—			—			—			110
	CMP Group	$	18,230		$	47,710		$	68,650		$	183,535
Loss before cumulative effect of accounting changes		$	(61,677	)	$	(2,381	)	$	(76,100	)	$	(35,354	)
	Surface Technology Group		4,065			5,178			13,444			17,916
	Industrial Applications Group		2,824			5,930			9,934			14,297
Total net sales to unaffiliated customers			25,119			58,818			92,028			215,748
Segment operating profit (loss):
	CMP Group		(5,136	)		(46,605	)		(67,814	)		(53,484	)
	Surface Technology Group		(364	)		(493	)		(944	)		(3,196	)
	Industrial Applications Group		(6	)		916			833			2,429
Total segment operating profit (loss)			(5,506	)		(46,182	)		(67,925	)		(54,251	)
General corporate expense, net			(3,131	)		(3,891	)		(13,734	)		(19,660	)
Interest expense, net			(1,797	)		(856	)		(4,875	)		(1,719	)
Loss on disposal of investment in affiliate			—			—			—			(10,653	)
Loss before cumulative effect of accounting changes		$	(10,434	)	$	(50,929	)	$	(86,534	)	$	(86,283	)

(8) CHANGES IN ACCOUNTING PRINCIPLES

In July 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 142, “Goodwill and Other Intangible Assets”. SFAS No. 142 supercedes prior guidance and requires that goodwill no longer be amortized to earnings, but instead be annually reviewed for impairment. In addition, goodwill should be tested for impairment upon adoption. The Company early adopted SFAS No. 142 in the first quarter of 2002 ~~and~~ and recorded a cumulative effect of change in accounting principle for the write-off of goodwill of ($2.6) million, or ($0.09) per share, as of the beginning of 2002 (June 3, 2001). The impact of adoption was to reduce the loss before cumulative effect of accounting change for the ~~second~~third quarter of 2002 by $0.2 million or $0.01 per share and for the first ~~two~~three quarters of ~~2002~~ 2002 by $0.57 million or $0.02 per share. The circumstances leading to the ~~impairment~~ impairment of goodwill primarily relate to current operating losses, the absence of positive cash flows and uncertainties resulting from the duration and severity of the industry downturn. The fair value of the reporting units, ~~which~~ which correspond to the Company’s business segments, were estimated using ~~quoted~~ quoted market prices. Net loss for the ~~second~~third quarter of 2001 would have been ($250.17) million or ($01.0769) per share and the net loss for the first ~~two~~ three quarters of 2001 would have been ($71122.41) million or ($24.3908) per share, if the ~~accounting~~ accounting change related to goodwill required by SFAS No. 142 had been applied to those periods.

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

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

~~Statement of Financial Accounting Standards (SFAS) No. 133, “Accounting~~10 ~~for Derivative Instruments and Hedging Activities” and No. 138, “Accounting for~~ ~~Certain Derivative Instruments and Certain Hedging Activities”,~~

~~established~~deferred ~~accounting~~until ~~and~~customer ~~reporting~~acceptance, ~~standards~~at which time the revenue is recognized. The related tocosts ~~derivative~~for ~~financial~~systems for which this approach is used are recorded as ~~instruments~~shipped systems pending acceptance until customer acceptance, at which time cost of goods sold is recorded; and ~~hedging~~2) ~~activities.~~for ~~These~~CMP ~~statements~~system ~~require~~sales to existing customers that have previously purchased the ~~Company~~same system with the same ~~recognize~~customer-specified ~~all~~acceptance ~~derivatives~~provisions, ~~including~~revenue ~~foreign~~is ~~currency~~recognized ~~exchange~~under ~~contracts~~a multiple-element arrangement. Accordingly, ~~as either~~upon ~~assets~~shipment, orthe ~~liabilities~~contractual amount onpayable by the ~~balance~~customer ~~sheet~~is recorded as revenue and ~~measure~~title ~~those~~is ~~instruments~~transferred. atThe ~~fair~~remainder ~~value.~~is ~~Changes~~recorded inas ~~the~~deferred ~~fair~~revenue ~~value~~and ofrecognized ~~derivatives~~as ~~that~~revenue doupon customer ~~not~~acceptance. ~~qualify~~Revenue related to non-CMP systems and spare parts for all ~~hedge~~segments ~~treatment,~~continues asto ~~well~~be asrecognized ~~the~~upon ~~ineffective~~transfer ~~portion~~ of ~~any hedges~~title, ~~must~~which beis generally upon shipment. Revenue related to service contracts is recognized ~~currently~~ratably inover the ~~operations~~duration of the contracts. ~~The~~In ~~Company~~all ~~adopted~~cases, ~~SFAS~~revenue ~~133~~is ~~and~~only ~~SFAS~~recognized ~~138~~when aspersuasive evidence of ~~June 3~~an arrangement exists, ~~2001~~delivery has occurred or services have been rendered, the seller’s price is fixed or determinable and collectibility is reasonably assured. The cumulative effect of the ~~transition~~change ~~adjustment~~in accounting ~~was~~principle ~~not~~discussed ~~material~~above toincludes system revenue, cost of sales and certain expenses that will be recognized when the conditions for revenue ~~financial~~recognition ~~statements~~have been met.

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

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

(9) COMMITMENTS AND CONTINGENCIES

MEMC Electronics Materials Litigation

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

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

Raytheon Aircraft Company Litigation

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

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

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

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

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

Overview

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

~~The~~Semiconductor ~~Company~~chips ~~sells~~are ~~its~~built ~~products~~on ~~and~~a ~~services~~base toof ~~three~~silicon, ~~market~~called ~~segments:~~a ~~(1)~~wafer, and ~~semiconductor~~include ~~device~~multiple ~~manufacturers~~layers ~~(CMP~~of ~~Group)~~wiring, ~~(2) thin~~which ~~film~~connect ~~memory~~a ~~disk~~variety ~~media~~of circuit components, such as transistors and ~~silicon~~other ~~wafer~~structures. ~~manufacturers~~The ~~(Surface~~construction ~~Technology~~of semiconductor ~~Group~~chips oris ~~STG~~accomplished ~~Group),~~through ~~and~~the deposition onto a wafer of ~~(3) manufacturers~~layers of ~~general~~metal ~~industrial~~for ~~components~~wire ~~(Industrial~~connections ~~Applications Group~~and orsilicon ~~IAG~~dioxide ~~Group)~~for insulation. Copper ~~Over~~is ~~the~~fast ~~last~~becoming ~~three~~the ~~years,~~metal aof ~~substantial~~choice ~~majority~~among ofchip ~~the Company’s~~manufacturers ~~total~~due ~~revenue~~to ~~has~~its superior ~~been~~conductivity ~~derived~~capability. ~~from~~Insulators, ~~the~~or ~~sales~~dielectrics, of ~~products~~which ~~and~~silicon ~~services~~dioxide byis the ~~CMP~~conventional ~~Group~~material, are used to prevent interference between closely spaced metal interconnects.

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

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

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

The Company’s total revenue consists of net sales of the products described above and service revenues, as well as revenue derived from the distribution by the Company in the U.S. and Europe of products manufactured by the former SpeedFam-IPEC, Co., Ltd. (the Far East Joint Venture). The Company distributes such products throughout the U.S. and Europe acting as sales agent, under a five-year agreement. 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 2001, 2000 and 1999, the CMP Group accounted for 82%, 84% and 74% of revenues, respectively.

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

~~During~~On ~~2001~~August 30, ~~there~~2000, ~~was~~the aCompany ~~significant~~and ~~decrease~~Obara inCorporation ~~the~~(Obara) ~~worldwide demand for~~effectively ~~semiconductor~~dissolved ~~capital~~the ~~equipment.~~Far ~~This~~East ~~decline~~Joint ~~has~~Venture. ~~continued~~Under inthe ~~2002~~terms ~~and~~of ~~has~~the Master ~~resulted~~Reorganization inAgreement ~~inventory~~with ~~buildups in telecommunications products~~Obara, ~~slower~~ownership ~~than expected~~of ~~personal~~the ~~computer~~CMP sales and ~~overall~~service operations ~~slower~~of ~~global~~the ~~economic~~Far ~~growth, causing~~East ~~many~~Joint ~~semiconductor~~Venture ~~manufacturers~~was transferred to ~~reevaluate~~the ~~their~~Company ~~capital spending~~and ~~plans.~~specific ~~Several~~personnel ofinvolved ~~the~~in ~~Company’s~~CMP ~~customers~~efforts ~~have~~became ~~rescheduled~~employees ~~deliveries~~of orthe Company. ~~canceled~~Obara ~~existing~~continues ~~orders and~~ the ~~Company~~non-CMP ~~has~~activities ~~experienced~~of athe ~~substantial~~former ~~decline in~~Far ~~new~~East ~~orders.~~Joint ~~Because~~Venture, which include the ~~duration~~manufacturing of ~~this~~silicon ~~downturn~~wafer inand ~~demand~~thin isfilm ~~longer~~memory ~~than~~disk ~~originally~~polishing ~~anticipated,~~products. ~~the~~The Company ~~believes~~will ~~that~~not ~~purchases~~compete inwith the ~~next~~non-CMP ~~upturn~~business and Obara will benot ~~primarily~~compete ~~for~~with the ~~Company’s~~CMP ~~Momentum™~~business ~~products.~~for ~~As a~~an ~~result~~initial period of ~~the~~five years. ~~extended~~The ~~downturn, the~~ Company has ~~recorded~~indemnified ~~significant~~Obara ~~inventory~~for ~~write-downs~~any ~~for~~claims ~~obsolete~~relating to the CMP ~~inventory~~business and ~~inventory~~Obara inhas ~~excess~~indemnified ofthe ~~forecasted~~Company ~~requirements,~~for ~~charges~~any ~~related~~claims relating to ~~asset~~the non-CMP ~~impairments,~~business. ~~charges~~Under ~~related~~the toterms of a distributor agreement signed on August 31, 2000, the ~~downsizing~~Company ~~and~~continues ~~consolidation~~to ofact ~~operations~~as ~~and~~a ~~severance~~direct ~~costs~~distributor in the United ~~connection~~States ~~with~~and ~~across-~~Europe for the~~-board~~ ~~headcount~~wafer ~~reductions.~~and ~~Furthermore,~~disk ~~the~~polishing products manufactured by ~~Company~~Obara, ~~implemented~~under ~~measures~~a tofive-year ~~reduce~~agreement, ~~discretionary~~and ~~spending~~is prohibited from manufacturing these products.

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

In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101 (SAB 101), “Revenue Recognition in Financial Statements,” addressing the timing of revenue recognition for sales of products that involve contractual customer acceptance provisions and installation if these events occur following shipment of the product and transfer of title. The Company adopted SAB 101 in the third quarter of 2001, retroactive to the beginning of 2001. As a result of the adoption of SAB 101, the Company changed its revenue recognition policy and recorded the cumulative effect of the change in accounting principle of ($36.5) million, or ($1.22) per share, as of the beginning of 2001 as a charge in the first quarter of 2001. The previously reported results for the first quarter of 2001 prior to the adoption of SAB 101 were restated to reflect the new revenue recognition method. The impact of this restatement on the second quarter of 2001 was to decrease the loss before cumulative effect of accounting changes by $1.2 million, or $0.04 per share, and for the first two quarters of 2001 the impact was to increase the loss before cumulative effect of accounting changes by $2.6 million or $0.09 per share.

Prior to the implementation of SAB 101, the Company recognized revenue from the sale of its products generally upon shipment. Effective June 4, 2000, the Company changed its method of recognizing revenue for sales of CMP systems to one in which revenue may be deferred in whole or in part based on customer acceptance and other factors (see “Notes to Condensed Consolidated Financial Statements” for a description of the Company’s revenue recognition policy). Due to the cyclical nature of the semiconductor capital equipment industry, and the Company’s dependence on a relatively small number of large sales, the change in the Company’s revenue recognition practices could have a material affect on recorded revenue in any particular reporting period.

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

Results of Operations

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

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

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

Net sales of the Surface Technology Group (STG) in the second quarter of 2002 accounted for $4.4 million, or 17% of net sales, compared to $7.2 million, or 9% of net sales, in the second quarter of 2001. Net sales in the first two quarters of 2002 accounted for $9.4 million, or 14% of net sales, compared to $12.7 million, or 8% of net sales, in the first two quarters of 2001. During 2002, thin film memory disk manufacturers continued to experience manufacturing over-capacity, which in turn reduced capital spending. In addition, this over-capacity situation has created a larger market for used equipment making it even more difficult to sell new equipment. While the Company continues to actively pursue sales of consumable products, the Company does not foresee a return of high volume equipment sales to this market. The silicon wafer market has also experienced continued softness in demand due to ongoing manufacturing over-capacity caused by various factors including available capacity and increased production efficiencies due to the fact that more chips can be produced on a given wafer.

~~Net~~During ~~sales~~2001 ofthere ~~the~~was ~~Industrial~~a ~~Applications~~significant ~~Group~~decrease ~~(IAG)~~ in the ~~second~~worldwide ~~quarter~~demand for ofsemiconductor capital equipment. This decline has continued in 2002 ~~totaled~~and ~~$3.6 million~~has resulted in inventory buildups in telecommunications products, orslower ~~14%~~than expected ofpersonal ~~net~~computer sales and overall slower global economic growth, causing ~~compared~~many semiconductor manufacturers to ~~$4.5 million~~reevaluate ortheir capital spending 5%plans. Several of ~~net~~the ~~sales,~~Company’s incustomers have rescheduled deliveries or canceled existing orders and the ~~second~~Company ~~quarter~~has ofexperienced ~~2001~~a substantial decline in new orders. ~~Net~~Because ~~sales~~the duration of this downturn in demand has been longer than originally anticipated, the ~~first~~Company ~~two~~believes that purchases in the next ~~quarters~~upturn ofwill ~~2002~~be ~~totaled~~primarily $7for the Company’s Momentum™ products.~~1 million~~ As a result, the orCompany ~~11%~~has ofrecorded ~~net~~significant ~~sales~~inventory write-downs related to its older generation products, ~~compared~~charges related to ~~$8.4~~asset impairments, charges related to ~~million~~the ordownsizing 5%and consolidation of ~~net~~operations ~~sales,~~and severance costs in connection with across-the-board ~~first~~headcount ~~two~~reductions. ~~quarters~~Furthermore, ofthe Company ~~2001~~implemented measures to reduce discretionary spending.

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

~~Research,~~In ~~Development~~December ~~and~~1999, ~~Engineering.~~the InSecurities ~~the~~and ~~second~~Exchange ~~quarter~~Commission ofissued ~~2002,~~Staff ~~research,~~Accounting ~~development~~Bulletin ~~and~~No. 101 ~~engineering~~(SAB ~~expenses~~101), ~~increased~~“Revenue toRecognition ~~$17.9 million,~~in orFinancial ~~69%~~Statements,” ofaddressing ~~net~~the ~~sales,~~timing ~~compared~~of torevenue ~~$14.4 million,~~recognition orfor ~~17%~~sales of ~~net~~products that ~~sales,~~involve incontractual ~~the~~customer ~~second quarter~~acceptance ofprovisions ~~2001.~~and Ininstallation ~~the~~if these ~~first~~events ~~two~~occur ~~quarters~~following shipment of ~~2002,~~the ~~research,~~product ~~development~~ and ~~engineering~~ ~~expenses~~transfer ~~were~~of ~~$30~~title.~~2 million,~~ The orCompany ~~45%~~adopted ofSAB ~~net~~101 ~~sales,~~in ~~compared~~the tothird ~~$30.9 million,~~quarter ~~or 20%~~ of ~~net sales~~2001, inretroactive to the beginning ~~first two quarters~~ of 2001. ~~Research, development~~As ~~and~~a ~~engineering~~result ~~expense~~of in the ~~second~~adoption ~~quarter~~ of ~~2002~~SAB ~~included~~101, ~~$7.4~~the Company changed ~~million~~its inrevenue ~~one-time~~recognition ~~charges~~policy ~~related~~and torecorded the ~~asset~~cumulative ~~impairment~~effect of ~~certain~~the ~~legacy~~change ~~tools located~~ in ~~our~~accounting ~~labs~~principle ~~which~~of ~~will~~($36.5) nomillion, ~~longer~~or be($1.22) ~~used~~per ~~for~~share, ~~ongoing~~as ~~research~~of ~~and~~the ~~development~~beginning ~~programs,~~of as2001 ~~well~~ as ~~capitalized~~a ~~costs~~charge ~~associated~~in ~~with certain patents. During~~ the first quarter of 2001,. ~~research,~~The ~~development and~~previously ~~engineering~~reported ~~expenses~~results ~~included~~for anthe ~~asset~~first ~~impairment~~quarter ~~charge~~ of ~~$2.4 million~~2001 ~~for equipment~~prior ~~that~~to ~~was designed by~~ the ~~Far~~adoption ~~East~~of ~~Joint~~SAB ~~Venture.~~101 were ~~The~~restated ~~Company expects~~ to ~~continue~~reflect ~~investing~~the ~~substantial~~new ~~resources~~revenue inrecognition ~~research, development and engineering programs~~method.

~~Selling,~~Prior ~~General~~to ~~and Administrative. In~~ the ~~second~~implementation ~~quarter~~ of ~~2002~~SAB 101, ~~selling,~~ ~~general~~the ~~and~~Company ~~administrative~~recognized ~~expenses~~revenue from ~~decreased~~the tosale ~~$7.3 million, or 28%~~ of ~~net~~its ~~sales,~~products ~~compared~~generally toupon ~~$15~~shipment.~~0 million,~~ orEffective ~~18% of net sales~~June 4, ~~in the second~~2000, ~~quarter of 2001. In~~ the ~~first~~Company ~~two~~changed ~~quarters~~its method of ~~2002,~~recognizing ~~selling,~~revenue ~~general~~for ~~and administrative~~sales ~~expenses~~of ~~decreased~~CMP systems to ~~$15.4 million,~~one orin ~~23%~~which ofrevenue ~~net~~may ~~sales, compared~~be todeferred ~~$31.5 million,~~in whole or ~~20% of net sales,~~ in ~~the~~part ~~first~~based ~~two~~on ~~quarters of~~customer ~~2001.~~acceptance ~~During~~and ~~the~~other ~~first~~factors ~~two~~(see ~~quarters~~“Notes ofto ~~2002,~~Condensed ~~selling,~~Consolidated ~~general and~~Financial ~~administrative~~Statements” ~~expense~~for ~~decreased~~a bydescription ~~$16.1 million~~of orthe ~~51%,~~Company’s ~~from~~revenue ~~the~~recognition ~~first two~~policy). ~~quarters~~Due ofto ~~2001,~~the ascyclical anature ~~result~~ of ~~certain~~the ~~cost~~semiconductor ~~cutting~~capital ~~measures~~equipment ~~which~~industry, ~~were~~and ~~implemented by~~ the Company’s independence ~~response~~on toa ~~the~~relatively ~~industry~~small ~~wide~~number ~~downturn.~~of ~~These~~large sales, the ~~cost~~change ~~cutting~~in ~~measures~~the ~~were~~Company’s ~~partially~~revenue ~~offset~~recognition bypractices ~~increased~~could ~~legal~~have ~~fees~~a ~~incurred~~material ~~related~~affect toon ~~the~~recorded ~~settlement~~revenue ofin ~~two~~any ~~outstanding~~particular ~~litigation~~reporting ~~cases~~period. In ~~addition,~~periods of ~~during~~declining ~~2001~~business, ~~significant~~such ~~marketing~~as ~~and~~the ~~promotional~~current ~~costs~~environment, ~~were~~revenues ~~incurred~~would inexceed ~~connection~~shipments, ~~with~~and ~~product~~in ~~launch~~periods ~~activities related to the introduction~~ of ~~the Company’s~~increasing ~~new products~~revenues, ~~the~~shipments ~~Momentum™~~would ~~and the Auriga Vision™~~exceed revenues.

~~Litigation~~In ~~settlement~~June ~~costs.~~2001, Onthe ~~October~~Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) 5No. 142, ~~2001~~“Goodwill and Other Intangible Assets.” Under SFAS 142, goodwill and intangible assets with indefinite useful lives are no longer amortized but are reviewed at least annually for impairment at the ~~Company~~reporting ~~settled~~unit level. The impairment test under SFAS 142 is based on a two-step process involving; 1) comparing the estimated fair value of the related reporting unit to its net book value, and 2) comparing the estimated ~~outstanding~~implied ~~litigation~~fair ~~with~~value ~~MEMC~~of goodwill to its carrying value. InThe ~~connection~~Company ~~with~~elected early ~~this~~adoption ~~settlement~~of SFAS 142 in the first quarter of 2002. Based on the ~~Company~~implementation ~~agreed~~of tothe ~~pay~~non-amortization, ~~MEMC~~impairment-only accounting approach, it was determined that an impairment charge of $12.86 million representing the carrying value of goodwill as of June 3, ~~which~~2001 ~~was~~should ~~expensed~~be recorded. Accordingly, the Company recorded the cumulative effect of the change in accounting principle of ($2.6) million, or ($0.09) per share, as of the ~~second~~beginning of 2002 (June 3, 2001) as a charge in the first quarter of 2002. Net loss for the third quarter of 2001 would have been ($50.7) million or ($1.69) per share and for the first three quarters of 2001 the net loss would have been ($122.1) million or ($4.08) per share, if the accounting change related to goodwill required by SFAS No. 142 had been applied to those periods.

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

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

~~Other~~The ~~Expense,~~following ~~net.~~table ~~Other~~sets ~~expense,~~forth ~~net~~certain ~~increased~~consolidated tostatements ~~$1.4 million during the second quarter~~ of ~~2002 from $0.1 million during the same period a year ago.~~operations ~~Other~~data ~~expense, net~~ for the ~~first~~periods ~~two~~indicated quarters of 2002 increased to $3.0 million compared to $0.2 million for the same period a year ago. This increase primarily resulted from lower average balances in cash, cash equivalents and short-term investments as ~~well as~~ a ~~reduction~~percentage inof ~~interest~~total ~~rates~~net ~~yielding lower~~sales: ~~interest income to offset interest expense on the Company’s long-term debt.~~

Provision for Income Taxes. At the end of the second quarter of 2002 and 2001, the Company established a valuation allowance for deferred tax assets generated by its operating losses and is in a net operating loss carry-forward position. As a result, the effective tax rate for the second quarter of 2002 and 2001 was zero. While the Company will reassess its tax situation each quarter, the Company expects that its effective tax rate will approximate zero throughout 2002.


		Third Quarter Ended						Three Quarters Ended

		March 2,			March 3,			March 2,			March 3,
		2002			2001			2002			2001

Net sales			100.0	%		100.0	%		100.0	%		100.0	%




Cost of sales			74.8			126.0			117.8			87.1

	Gross margin		25.2			(26.0	)		(17.8	)		12.9




Research, development and engineering			29.5			31.4			40.9			23.0




Selling, general and administrative			28.5			21.5			24.5			20.4




Litigation settlement costs			—			—			1.9			—




Restructuring charges			—			5.9			3.3			4.0

Operating loss			(32.8	)		(84.8	)		(88.4	)		(34.5	)




Other expense, net			(8.7	)		(1.8	)		(5.6	)		(0.6	)




Loss on sale of joint venture interest			—			—			—			(4.9	)

Loss before cumulative effect of accounting change			(41.5	)		(86.6	)		(94.0	)		(40.0	)




Cumulative effect of accounting change			—			—			(2.8	)		(16.9	)

Net loss			(41.5	)%		(86.6	)%		(96.8	)%		(56.9	)%

~~Loss~~Net onSales. ~~Disposal~~Net sales for the third quarter of ~~Investment~~2002 inwere ~~Affiliate~~$25.1 million, down ~~and~~57% ~~Equity~~from net sales of $58.8 million in the third quarter of 2001. Net sales ~~Earnings~~of CMP products for the third quarter of 2002 totaled $18.2 million, or ~~Affiliates~~73% of net sales, compared to $47.7 million, Ator 81% of net sales, in the ~~end~~third quarter of 2001. Net sales for the first ~~quarter~~three quarters of ~~2001~~2002 were $92.0 million, down 57% from net sales of $215.7 million for the ~~Company~~first ~~reported~~three aquarters of 2001. Net sales of CMP products for the first three quarters of 2002 totaled $1068.87 million, ~~loss~~or on75% ~~disposal~~of net sales, compared to $183.5 million, or 85% of ~~investment~~net sales, in ~~affiliate~~the infirst ~~connection~~three ~~with~~quarters of 2001. Sales of CMP systems products decreased in 2002 due to the ~~dissolution~~slowing of ~~the~~worldwide ~~Far~~demand ~~East~~for ~~Joint~~semiconductor manufacturing ~~Venture~~equipment caused by a rapid decline in demand for semiconductor devices. ~~The~~Inventory ~~30-year-old~~buildups ~~Far~~in ~~East~~telecommunication ~~Joint~~products, slower than expected ~~Venture~~personal ~~between~~computer sales and slower global economic growth have caused semiconductor companies to reevaluate their capital spending plans. A number of the Company’s ~~and~~customers ~~Obara~~revised ~~Corporation~~the ~~was~~timing ~~officially~~of ~~dissolved~~their oncapital spending and ~~August 30~~rescheduled deliveries of or canceled existing orders, ~~2000~~resulting in the postponement of equipment deliveries and a decline in new orders and net sales.

~~For~~Net sales of the ~~first~~Surface ~~two~~Technology ~~quarters~~Group (STG) in the third quarter of 2002 ~~2001~~accounted for $4.1 million, ~~equity~~or in16% of net ~~earnings~~sales, compared to $5.2 million, or 9% of ~~affiliates~~net sales, in the third quarter of 2001. Net sales of STG products in ~~was~~the first three quarters of 2002 accounted for $013.14 million, or 15% of net sales, compared to $17.9 million, or 8% of net sales, in the first three quarters of 2001. During 2002, the silicon wafer market has experienced continued softness in demand due to ongoing manufacturing over-capacity caused by various factors including available capacity and increased production efficiencies due to the fact that more chips can be produced on a given wafer.

~~Liquidity~~ Net sales of the Industrial Applications Group (IAG) in the third quarter of 2002 totaled $2.8 million, or 11% of net sales, compared to $5.9 million or 10% of net sales, in the third quarter of 2001. Net sales of IAG products in the first three quarters of 2002 totaled $9.9 million, or 11% of net sales, compared to $14.3 million or 7% of net sales, in the first three quarters of 2001. The decrease in net sales for both the third quarter and ~~Capital~~first ~~Resources~~three quarters of 2002 is a result of the general economic slowdown.

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

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

Financing activities provided cash of $0.5 million during the first two quarters of 2002 compared with approximately $1.3 million during the same period of 2001. The sale of stock to employees and the exercise of stock options generated proceeds of $0.5 million during the first two quarters of 2002.

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

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

~~and~~ Gross ~~investment~~Margin. ~~balances~~In ~~along~~the ~~with~~third ~~net~~quarter ~~cash~~of ~~generated~~2002, ~~through~~gross ~~operations~~margin ~~will~~was $6.3 million, beor ~~sufficient~~25% of net sales, compared to ~~meet~~($15.3) ~~the~~million, ~~Company’s~~or ~~anticipated~~(26%) ~~cash~~of ~~needs~~net ~~for~~sales, ~~working~~in ~~capital~~the ~~and~~third ~~capital~~quarter ~~expenditures~~of ~~for~~2001. atIn ~~least~~ the ~~remainder~~first ofthree ~~fiscal~~quarters of 2002, gross margin was ($16.4) ~~However~~million, ~~due~~ toor ~~significant~~(18%) ~~uncertainties~~of ~~related~~net sales, compared to $27.8 million, or 13% of net sales, in the ~~duration~~first ~~and~~three ~~severity~~quarters of 2001. Because the length and severity ~~semiconductor~~of the industry downturn ~~and~~is ~~overall~~longer ~~economic~~that ~~conditions~~originally anticipated, the Company is ~~currently~~believes ~~evaluating~~that ~~additional~~purchases ~~sources~~in ofthe ~~funds~~next ~~and~~upturn ~~reduction~~will inbe ~~expenses~~primarily infor the ~~order~~Momentum™ products. toAs ~~strengthen~~a ~~its~~result, ~~working~~the ~~capital~~Company ~~position.~~recorded ~~The~~a ~~Company~~one-time ischarge ~~also~~of ~~reviewing~~$37.6 million ~~various~~to ~~ways~~cost of ~~improving~~goods ~~its~~sold ~~balance~~during ~~sheet.~~the ~~Based~~second onquarter ~~discussions~~of ~~with~~2002 ~~various~~for the write-down of ~~lenders,~~inventory and recognition of liabilities related to outstanding purchase commitments for the Company’s ~~believes~~legacy ~~that~~tools. ~~the~~Excluding ~~sources~~this ofwrite-down, ~~funds~~gross margin ~~available~~was ~~include~~$21.2 million, ~~but~~or 23% of net sales for the first three quarters of ~~are~~2002. ~~not~~During ~~limited~~the tofirst three quarters of fiscal 2001, the Company recorded a one-time ~~line~~charge of ~~credit~~$31.7 million ~~facility~~to ~~and~~cost ~~term~~of ~~debt.~~goods Ifsold related to the ~~Company~~industry ~~were~~downturn, and $3.4 million related to ~~raise~~the ~~additional~~exit ~~funds~~from the manufacturing of wafer and disk polishing equipment. Excluding these charges, gross margin was $62.9 million or ~~restructure~~29% ~~its~~of ~~balance~~net ~~sheet~~sales ~~through~~in the ~~issuance~~ first three quarters of ~~equity~~fiscal 2001. The Company’s ~~shareholders~~gross ~~would~~margins beare ~~diluted.~~below Inhistorical ~~addition,~~levels ~~these~~due primarily to decreased ~~equity~~production ~~securities~~volume ~~may~~resulting ~~have~~in ~~rights,~~lower ~~preferences~~overhead orabsorption ~~privileges~~on ~~senior~~a toreduced revenue base. During the industry downturn, the Company expects this trend of reduced gross margins to continue. The Company’s ~~common~~gross ~~stock~~margin has fluctuated significantly in the past and will continue to fluctuate based on several factors including the severity and duration of the current industry downturn, revenue recognition under SAB 101, product mix, overhead absorption levels, and costs associated with the introduction of new products.

~~Subsequent~~Research, Development and Engineering. In the third quarter of 2002, research, development and engineering expenses decreased to $7.4 million, or 30% of net sales, compared to $18.5 million, or 31% of net sales, in the ~~end~~third quarter of 2001. In the ~~December~~first three quarters of 2002, research, development and engineering expenses were $37.6 2million, or 41% of net sales, compared to $49.4 million, or 23% of net sales, in the first three quarters of 2001. Research, development and engineering expenses in the second quarter, of 2002 included $7.3 million in one-time charges related to the ~~Company~~asset ~~entered~~impairment of ~~into~~certain alegacy ~~sale/leaseback~~tools ~~transaction~~located in our labs which will no longer be used for ongoing research and development programs, as well as capitalized costs associated with ~~respect~~certain topatents. ~~its~~During ~~corporate~~the ~~headquarters~~first quarter of 2001, research, development and engineering expenses included an asset impairment charge of $2.4 million for equipment that was designed by the Far East Joint Venture. IfDuring the ~~transaction~~third ~~closes~~quarter of 2001, itresearch ~~would~~development ~~yield~~and ~~approximately~~engineering expenses included an asset impairment charge of $313.56 million inrelated ~~net~~to the asset ~~proceeds~~impairment toof certain tools used in our labs as a result of the ~~Company~~industry slowdown. Excluding charges, research, development and engineering expenses in the ~~Company~~first ~~would~~three ~~enter~~quarters ~~into~~of afiscal 152002 decreased by $13.1 ~~year~~million ~~lease~~or ~~with~~30%, ~~monthly~~from ~~payments~~the offirst ~~approximately~~three ~~$383~~quarters of 2001,~~000.~~ ~~The~~as ~~transaction~~a isresult ~~subject~~of certain cost cutting measures which were implemented by the Company in response to the industry wide ~~customary~~downturn. ~~closing~~The ~~conditions~~Company ~~(including~~expects ~~due~~to ~~diligence)~~continue investing substantial resources in research, development and engineering programs.

~~Impact~~ Selling, General and Administrative. In the third quarter of ~~Recently~~2002, selling, ~~Issued~~general ~~Accounting~~and ~~Standards~~administrative expenses decreased to $7.2 million, or 29% of net sales, compared to $12.6 million, or 22% of net sales, in the third quarter of 2001. In the first three quarters of 2002, selling, general and administrative expenses decreased to $22.6 million, or 25% of net sales, compared to $44.1 million, or 20% of net sales, in the first three quarters of 2001. During the first three quarters of 2002, selling, general and administrative expenses decreased by $21.5 million or 49%, from the first three quarters of 2001, as a result of certain cost cutting measures which were implemented by the Company in response to the industry wide downturn. These cost cutting measures were partially offset by increased legal fees incurred related to the settlement of two outstanding litigation cases. In addition, during 2001, significant marketing and promotional costs were incurred in connection with product launch activities related to the introduction of the Company’s new products, the Momentum™ and the Auriga Vision™.

InLitigation ~~October~~settlement ~~2001,~~costs. ~~the~~On ~~Financial Accounting Standards Board issued Statement of Financial Accounting Standard (SFAS)~~October ~~No. 144~~5, ~~“Accounting for the Impairment or Disposal of Long-Lived Assets”. SFAS 144~~2001, ~~which replaces SFAS 121 “Accounting for~~ the ~~Impairment~~Company ofsettled ~~Long-Lived Assets and for Long-Lived Assets~~its tooutstanding Belitigation ~~Disposed~~with ~~Of,”~~MEMC. ~~requires~~In ~~long-lived~~connection ~~assets~~with tothis besettlement ~~measured at~~ the ~~lower of~~ ~~carrying~~Company ~~amount~~agreed ~~or fair value less the cost~~ to ~~sell.~~pay ~~SFAS~~MEMC ~~144 also broadens disposal transactions reporting related to discontinued operations~~$1. ~~SFAS 144 is effective for financial statements issued for fiscal years beginning after December~~8 15million, ~~2001.~~which ~~The~~was ~~Company~~expensed ~~has~~in ~~not yet determined~~ the ~~effects SFAS 144 will~~first ~~have~~quarter ~~on its financial position, results~~ of ~~operations or cash flows but does not anticipate that the impact will be significant~~2002.

~~CAUTIONARY~~ Restructuring ~~STATEMENT~~Charges. ~~REGARDING~~During ~~FORWARD-LOOKING~~2001 ~~STATEMENTS~~there was a significant decrease in the worldwide demand for semiconductor capital equipment. This decline has continued in 2002 and has resulted in inventory buildups in telecommunications products, slower than expected personal computer sales and overall slower global economic growth, causing many semiconductor manufacturers to reevaluate their capital spending plans. Several of the Company’s customers have rescheduled deliveries or canceled existing orders and the Company has experienced a substantial decline in new orders. Because the duration of this downturn in demand is longer than originally

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

CERTAIN FACTORS AFFECTING SPEEDFAM-IPEC’S BUSINESS

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

~~We are using substantial cash reserves to fund operations during the industry downturn~~anticipated, ~~and there can be no assurance we will be able to achieve positive cash flow in~~ the ~~foreseeable~~Company ~~future.~~recorded Asa ofrestructuring ~~December 1,~~charge ~~2001, we had $39.1 million~~ in ~~cash, cash equivalents and short-term investments, compared to $60.8 million at June 2, 2001. During~~ the ~~first~~second ~~two quarters~~ quarter of 2002, ~~we used $19.8 million in operating activities compared to generating cash from operations~~ of $53.90 million ~~during~~for the ~~same~~downsizing ~~period of the prior year. We are currently exploring options to restructure our balance sheet~~ and ~~generate positive~~consolidation ~~cash~~of ~~flow,~~operations ~~including a reduction~~ in ~~operating expenses and a~~ ~~sale-leaseback~~the ~~transaction~~Phoenix, ~~involving~~AZ, ~~our Chandler facility. However~~Portland, weOR ~~have experienced a significant decrease in revenues~~ and ~~orders.~~Austin, WeTX ~~can provide no assurances that we will achieve a positive cash flow position in the future~~areas.

~~Our~~During ~~current~~the ~~capital~~third ~~structure~~quarter ~~includes~~of a2001, ~~substantial~~the ~~amount~~Company recorded $3.5 million of ~~subordinated~~restructuring ~~debt~~and ~~that~~other ~~may~~special ~~contribute~~charges toas ~~the~~a ~~erosion~~result of ~~the~~cost ~~equity~~cutting ~~value of our~~actions ~~outstanding~~implemented ~~common~~by ~~stock.~~the WeCompany ~~currently have $115 million~~ in ~~subordinated~~response ~~debt that is senior~~ to ~~our~~the ~~common~~industry ~~stock~~wide downturn. ~~Interest~~Included in ~~payments~~these oncharges ~~this~~was ~~debt amount to approximately~~ $1.7 million ~~per~~of ~~year.~~lease Wetermination ~~are evaluating various ways to restructure our balance sheet~~costs, ~~which~~$1.0 million ~~could include restructuring the debt,~~of ~~issuing~~severance ~~additional common stock~~costs, orand ~~other alternatives~~$0.8 million Weof ~~can~~other ~~provide no assurances that we will be able to accomplish a restructuring or that any restructuring will benefit shareholders~~charges.

~~Our~~During ~~current~~the ~~business~~first ~~model~~quarter isof ~~predicated~~2001, onthe ~~closing~~Company ~~and~~recorded ~~fulfilling~~charges ~~the~~of $5.1 ~~successful~~million ~~launch~~that ~~and~~primarily ~~market~~related ~~acceptance~~to ofrestructuring ~~our~~associated ~~Momentum™~~with ~~and~~the ~~Momentum300™~~Company’s ~~products.~~plan ~~Our failure~~ to ~~win~~exit ~~qualification~~from ~~contests~~the ~~and~~manufacturing ~~obtain~~of ~~volume~~silicon ~~orders for~~wafer ~~our 300 millimeter~~ and~~/or~~ ~~copper-based~~thin ~~wafers~~film ~~would~~memory ~~materially adversely~~disk ~~affect~~polishing ~~our~~equipment, ~~revenues~~as ~~and~~required ~~operations.~~by Athe ~~significant~~distribution ~~portion~~agreement ofwith ~~our projected~~Obara. ~~revenue~~Approximately ~~depends on sales of our Momentum™ product~~$2.7 million ~~Although~~related ~~initial customer reaction~~ to ~~Momentum™~~the ~~has~~impairment ~~been~~of ~~positive,~~fixed ~~this~~assets ~~response may not translate into sales~~ of ~~Momentum™ on~~ the exited ~~scale~~operations; or$1.2 million inrelated ~~the~~to ~~time~~severance ~~frame~~costs wefor ~~anticipate.~~three ~~For~~employees ~~instance,~~including ~~market~~a ~~conditions~~former inexecutive of the ~~semiconductor~~Far ~~industry~~East ~~have~~Joint ~~caused~~Venture; and ~~may~~$1.2 million ~~continue~~related to ~~cause~~other ~~potential~~restructuring ~~purchasers~~charges ofassociated ~~Momentum™~~with tothe ~~delay~~Company’s ~~investment~~exit ~~in new~~from ~~equipment, which could reduce demand for Momentum™. If we are unable to close anticipated orders or fulfill orders for~~ the ~~Momentum™~~manufacturing ~~product,~~of ~~our~~wafer ~~revenues, cash flow~~ and ~~profitability~~disk ~~will~~polishing ~~be adversely affected~~products.

InOther ~~particular~~Expense, wenet. ~~must~~Other ~~succeed~~expense, innet ~~selling~~increased ~~CMP~~to ~~equipment~~$2.2 million ~~for~~during the ~~300~~third ~~millimeter and/or~~quarter ~~copper-based~~of ~~wafers~~2002 infrom ~~order~~$1.1 million toduring ~~increase~~the ~~our~~same ~~revenue~~period ~~and~~a ~~maintain~~year ~~market share~~ago. Other Ifexpense, wenet ~~fail~~for tothe ~~win~~first ~~qualification~~three ~~contests~~quarters ~~for~~of ~~300~~2002 ~~millimeter~~increased ~~and/or~~to $5.1 ~~copper-based~~million ~~wafers,~~compared weto ~~may~~$1.3 million ~~experience~~for ~~difficulty~~the ~~achieving~~same ~~volume~~period ~~sales~~a ofyear ~~the next-generation~~ago. ~~equipment~~This toincrease primarily ~~semiconductor~~resulted ~~manufacturers,~~from ~~which~~lower ~~could~~average ~~result~~balances in ~~declining~~ ~~revenues. In addition~~cash, ~~rollout~~cash ofequivalents ~~Momentum~~and short-term ~~300™~~investments ~~may~~as bewell ~~slowed~~as ~~due to~~a ~~manufacturing~~reduction ~~problems,~~in ~~unforeseen~~interest ~~technical~~rates ~~problems~~yielding ~~with the Momentum~~lower ~~300™~~interest ~~product~~income ~~itself~~to oroffset ~~changes~~interest inexpense on the ~~CMP~~Company’s ~~marketplace~~long-term ~~that differ from our expectations~~debt.

~~Our~~Provision ~~dependence~~for onIncome ~~selling~~Taxes. aAt ~~small~~the ~~number~~end of ~~high-priced~~the ~~machines~~third toquarter ~~a small number~~ of ~~major~~2002 ~~customers may lead to reduced revenues~~ and ~~profits should~~ ~~our~~2001, ~~customers~~the ~~delay~~Company orestablished ~~cancel~~a ~~delivery~~valuation ~~orders.~~allowance Wefor ~~derive~~deferred atax ~~significant portion~~assets ofgenerated ~~our~~by ~~revenue~~its ~~from~~operating ~~the~~losses ~~sale~~and ofis in a ~~relatively~~net ~~small~~operating ~~number~~loss ~~of high~~carry-~~priced CMP~~forward ~~systems to a select group of CMP customers~~position. ~~The~~As ~~loss of~~ a ~~significant customer or a substantial reduction in orders by any significant customer~~result, ~~including reductions~~the ~~due~~effective totax ~~customer~~rate ~~departures~~for ~~from recent buying patterns, market, economic or competitive conditions in~~ the ~~semiconductor~~third ~~industry,~~quarter ~~would~~of ~~damage our~~2002 ~~business~~ and 2001 ~~results~~was ~~of operations~~zero.

~~Orders~~In inMarch, ~~backlog~~2002 ~~may~~Congress ~~not~~passed ~~result~~the in“Job ~~future~~Creation ~~revenue~~and ifWorker ~~customers~~Assistance ~~cancel or~~Act ~~reschedule~~of ~~orders.~~2002” We(The ~~include~~Act) inwhich ~~backlog~~temporarily ~~only~~extended ~~those~~the ~~customer~~general ~~orders~~net ~~for~~operating ~~which~~loss wecarryback ~~have~~period ~~accepted~~to ~~purchase~~five ~~orders~~years. ~~Expected~~As ~~revenue~~a ~~may~~result, bethe ~~lower~~Company ifexpects ~~customers~~to record a ~~cancel~~net ortax ~~reschedule~~benefit ~~orders,~~of ~~which~~approximately ~~they~~$2 million ~~can~~for ~~generally~~a dorefund ~~without~~of ~~penalty.~~taxes ~~For~~previously ~~instance,~~paid. ~~during~~This net income tax benefit will be recorded in the ~~first~~fourth ~~two~~quarter, ~~quarters~~the period ofin ~~2002~~which the Act was passed, weand ~~adjusted~~will ~~approximately~~not ~~$17 million~~impact ~~out~~future ofperiods. ~~our~~While the ~~backlog~~Company ~~for~~will ~~orders~~reassess ~~that~~its ~~were~~tax ~~canceled~~situation oreach ~~had~~quarter, ~~shipment~~the ~~dates~~Company expects that ~~were~~its ~~not~~effective ~~scheduled~~tax ~~within~~rate, ~~the~~exclusive ~~next~~of ~~twelve~~this ~~months~~net tax benefit, will approximate zero throughout 2002.

~~The~~Loss ~~downturn~~on inDisposal ~~the~~of ~~semiconductor~~Investment ~~industry~~in ~~has led and may continue to lead to decreased revenue~~Affiliates. ~~During~~At ~~2001~~the ~~and~~end of the first quarter ~~two quarters~~ of ~~2002~~2001, ~~slowing~~ ~~worldwide~~the ~~demand~~Company ~~for~~reported ~~semiconductors resulted in significant inventory buildups for semiconductor companies and~~ a ~~rapid decline in demand for semiconductor manufacturing equipment~~$10.7 million ~~Presently,~~loss weon ~~have~~disposal ~~little visibility~~of ~~regarding~~investment ~~how~~in ~~long~~affiliate ~~the~~in ~~semiconductor~~connection ~~industry~~with ~~downturn will last or how severe~~ the ~~downturn~~dissolution ~~will~~of ~~be. During~~ the ~~first~~Far ~~two quarters of 2002, we experienced~~East ~~certain~~Joint ~~cancellations~~Venture. ~~and~~The ~~pushouts~~30-year-old ofFar ~~orders~~East ~~for~~Joint ~~our~~Venture ~~products.~~between If the ~~downturn continues~~Company ~~or worsens, we may experience greater levels of cancellations~~ and~~/or~~ ~~pushouts~~Obara ofCorporation ~~orders~~was ~~for~~officially ~~our~~dissolved ~~products~~on inAugust 30, ~~the future~~2000.

Liquidity and Capital Resources

As of March 2, 2002, the Company had $36.2 million in cash, cash equivalents and short-term investments, compared to $60.8 million at June 2, 2001. During the first three quarters of 2002, the Company used $22.1 million of cash in operating activities compared to $11.0 million used in operating activities during the same period in 2001. The net loss of $89.1 million included non-cash items totaling $62.0 million: the cumulative effect of change in accounting principle of $2.6 million, depreciation and amortization expense of $11.1 million, 401(k) stock match of $0.2 million and one-time charges of $48.1 million. Partially offsetting this decrease in cash was the reduction in working capital in the first three quarters of 2002 which provided cash of $5.0 million.

Net cash provided by investing activities totaled $10.1 million during the first three quarters of 2002 compared with net cash used of $4.4 million during the same period in 2001. Cash was provided from the maturity of short-term investments of $13.5 million and offset by capital expenditures and other investing activities of $3.4 million during the first three quarters of 2002.

Financing activities provided cash of $1.1 million during the first three quarters of 2002 compared with approximately $2.0 million during the same period of 2001. The sale of stock to employees and the exercise of stock options generated proceeds of $1.1 million during the first three quarters of 2002.

~~Our~~The ~~quarterly~~Company ~~results~~has ofincurred ~~operations~~operating ~~could~~losses ~~fluctuate~~of ~~due~~$81.4 million toin ~~factors~~the ~~outside~~first ofthree ~~our~~quarters ~~control~~of 2002, ~~which~~and ~~may~~$74.4 million ~~cause~~in ~~fluctuations~~2001. ~~and~~The aCompany ~~corresponding~~has ~~decrease~~incurred toa ~~the~~decrease ~~price~~in ofits ~~our~~cash ~~common~~and ~~stock.~~investment ~~Our~~balances ~~quarterly~~of ~~operating~~$24.6 million ~~results~~in ~~may~~the ~~fluctuate~~first ~~for~~three ~~reasons~~quarters ~~that~~of ~~are not within our control, including:~~2002.

• Due to the continuation and severity of the industry-wide ~~demand~~downturn, ~~for~~the Company ~~capital~~has ~~equipment~~implemented additional cost-cutting measures during the first three quarters of 2002, which ~~depends~~include onfurther ~~economic~~decreases ~~conditions~~in discretionary spending and reductions in worldwide headcount. Despite the ~~semiconductor,~~expected ~~memory~~continuation ~~disk~~of the industry-wide downturn and ~~silicon~~uncertainty ~~wafer~~associated ~~markets;~~with •the ~~timing~~introduction of new products, ~~product~~and ~~introductions;~~taking •into ~~ability~~account the Company’s actions to ~~develop~~restructure and downsize ~~implement~~the ~~new~~Company, ~~technologies;~~management •believes ~~timing~~that the Company’s current cash and investment balances along with net cash generated through operations will be sufficient to meet the Company’s anticipated cash needs for working capital and capital expenditures for the foreseeable future. However, ~~cancellation~~due orto ~~delay~~significant uncertainties related to the duration and severity of ~~customer~~the ~~orders~~semiconductor industry downturn and overall economic conditions, ~~shipments~~the Company is currently evaluating additional sources of funds and ~~acceptance;~~reduction •in ~~unexpected~~expenses ~~costs~~in ~~associated~~order to strengthen its working capital position. Specifically, the Company is actively pursuing a sale/leaseback transaction of its Corporate headquarters in Chandler, Arizona. The Company is also reviewing various other ways of improving its balance sheet. Based on discussions with ~~sales~~various lenders, the Company believes that the sources of funds available include, but are not limited to, a line of credit facility, term debt, and ~~service~~the issuance of additional equity. If the ~~CMP~~Company ~~tools~~were ~~and~~to ~~processes;~~raise •additional ~~foreign~~funds, ~~currency~~or restructure ~~exchange~~its ~~rates;~~balance sheet through the issuance of equity, Company shareholders would be diluted and •the ~~announcements~~dilution ~~regarding~~could ~~restructuring~~be substantial. In addition, ~~technological~~these ~~innovations~~equity securities may have rights, ~~departures~~preferences ofor ~~key~~privileges senior ~~officers~~to the Company’s common stock. There can be no assurance that the Company will be able to complete a sale/leaseback or ~~employees~~other financing on terms acceptable to it, or at all. In such an event, and if the ~~introduction~~Company ofcontinues ~~new~~to suffer ~~products~~from negative cash flows, it could have insufficient liquidity to conduct its operations in the ordinary course of business.

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

• “Management’s ~~the~~Discussion ~~announcement~~and Analysis of ~~new~~Financial ~~customers~~Condition orand ~~the~~Results of ~~loss~~Operations” ofdiscusses ~~significant~~our ~~customers;~~consolidated •financial ~~changes~~statements which have been prepared in ~~earnings~~accordance ~~estimates~~with oraccounting ~~recommendations~~principles bygenerally ~~securities~~accepted ~~analysts,~~in orthe United ~~our~~States ~~failure~~of toAmerica. ~~achieve~~The ~~analysts’~~preparation ~~earnings~~of these financial statements requires us to make estimates; and •assumptions ~~general~~that ~~market~~affect ~~conditions~~the reported amount of assets and ~~other~~liabilities ~~factors~~at the date of the financial statements, ~~including~~the disclosure ~~factors~~of ~~unrelated~~contingent toassets ~~our~~and ~~operating~~liabilities ~~performance~~at orthe ~~that~~date of ~~our~~the ~~competitors~~financial statements, and the reported amounts of revenues and expenses during the reporting period.

InOn ~~addition~~an on-going basis, ~~the~~we ~~stock~~evaluate ~~prices~~our estimates and judgments, including those related to revenue recognition, impairment of ~~many~~long-lived ~~companies~~assets, valuation inallowances ~~the~~for ~~semiconductor~~inventory and accounts receivable, and warranty. We ~~industry~~base ~~have~~our ~~experienced~~estimates ~~wide~~and ~~fluctuations~~judgments ~~that~~on ~~have~~historical ~~often~~experience ~~been~~and ~~unrelated~~on tovarious other ~~the~~factors ~~operating~~that ~~performance~~are ofbelieved ~~those~~to ~~companies.~~be ~~These~~reasonable ~~factors~~under ~~and~~the ~~price~~circumstances. The result ~~fluctuations~~of ~~may~~these ~~materially~~estimates and ~~adversely~~judgements ~~affect~~form the ~~market~~basis ~~price~~for ofmaking ~~our~~judgments ~~common~~about the ~~stock.~~carrying ~~Investors~~value inof ~~our~~assets ~~common~~and ~~stock~~liabilities ~~should~~that beare ~~willing~~not toreadily ~~incur~~apparent ~~the~~from other ~~risk~~sources. ofActual results may differ from these estimates under different ~~such~~assumptions ~~price~~or ~~fluctuations~~conditions.

IfOn December 20, 2001, the ~~market~~Securities ~~price~~and ofExchange ~~our~~Commission ~~stock~~(“SEC”) requested isthat ~~adversely~~all ~~affected,~~registrants welist ~~may~~their ~~experience difficulty~~most “critical accounting policies” in ~~raising~~Management’s ~~capital~~Discussion and Analysis. InThe ~~addition,~~SEC weindicated ~~may~~that ~~become~~a “critical accounting policy” is one which is both important to the ~~object~~portrayal of the ~~securities~~Company’s ~~class~~financial ~~action~~condition ~~litigation.~~and Ifresults weand ~~are~~requires ~~sued~~management’s inmost difficult, subjective or complex judgments, often as a ~~securities~~result ~~class~~of ~~action~~the need to ~~lawsuit,~~make weestimates ~~may~~about ~~incur~~the ~~substantial~~effect ~~costs~~of ~~and~~matters ~~management’s~~that ~~attention~~are ~~and~~inherently uncertain. ~~resources~~Management ~~may~~believes bethe ~~diverted~~following critical accounting policies affect its more significant judgments and estimates in the preparation of its consolidated financial statements.

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

• Prior ~~Some~~to ~~competitors~~the ~~may~~implementation ~~have~~of ~~greater~~SAB ~~financial resources and be in better financial condition than us. They also may have more extensive engineering~~101, ~~manufacturing,~~we ~~marketing~~recognized ~~and~~revenue ~~customer~~from ~~service~~the sale ~~and support capabilities. • Some competitors may supply a broader range~~ of ~~semiconductor~~our ~~capital~~products ~~equipment~~generally ~~than~~upon ~~we may~~shipment. AsEffective ~~a result~~June 4, ~~these competitors may have better relationships with semiconductor manufacturers~~2000, ~~including~~we changed our ~~current~~method ~~and~~of ~~potential~~recognizing ~~customers.~~revenue •for Wesales ~~expect~~of ~~competitors~~CMP tosystems ~~continue~~ to ~~improve~~reflect the ~~their~~following ~~existing technology and introduce new products.~~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

•approach ~~Other~~is ~~capital~~used ~~equipment~~are ~~manufacturers~~recorded ~~not~~as ~~currently~~shipped ~~involved~~systems inpending ~~the~~acceptance ~~development~~until customer acceptance, at which time cost of ~~CMP~~goods ~~systems~~sold ~~may~~is ~~enter~~recorded. ~~the~~• ~~market~~For orCMP ~~develop~~system ~~technology~~sales ~~that~~to ~~reduces~~existing customers who have previously purchased the ~~need~~same ~~for~~system ~~our~~with ~~products.~~the •same ~~Once~~customer-specified aacceptance ~~semiconductor~~provisions, ~~manufacturer~~revenue ~~commits~~is torecognized ~~purchase~~under a ~~competitor’s~~multiple-element ~~equipment~~arrangement. Accordingly, upon shipment, the ~~manufacturer~~contractual ~~generally~~amount ~~relies~~payable onby ~~that~~the ~~equipment~~customer ~~for~~is anrecorded ~~entire~~as ~~production~~revenue ~~line~~and title is transferred. The remainder is recorded as deferred revenue and ~~continues~~recognized as revenue upon customer acceptance. Ordinarily, 80% to ~~purchase~~90% ~~that~~of ~~equipment~~the ~~exclusively~~system ~~for~~sales price is payable by the customer upon shipment, while 10% to 20% (a “holdback”) is due upon acceptance. As a result, customer acceptance may also have an ~~extended~~impact ~~period~~on the timing of ~~time~~cash receipts associated with deferred revenue.

~~Increased~~Revenue ~~competitive~~related ~~pressure~~to ~~could~~non-CMP ~~lead~~systems toand ~~lost~~spare ~~revenue~~parts ~~from~~for ~~sales~~all ~~for~~segments ~~our~~continue ~~products~~to be recognized upon transfer of title, which ~~may~~is ~~damage~~generally ~~our~~upon shipment. ~~business~~Revenue related to service contracts is recognized ratably over the duration of the contracts. ~~There~~In ~~can~~all becases, norevenue ~~assurance~~is ~~that~~only werecognized when ~~will~~persuasive beevidence ~~able~~of toan ~~compete~~arrangement ~~successfully~~exists, indelivery has occurred or services have been rendered, the ~~future~~seller’s price is fixed or determinable and collectibility is reasonably assured. Normally, we do not incur returns of CMP or non-CMP systems.

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

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 ~~develop~~be recoverable. ~~products~~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 ~~time~~measuring towhether ~~meet~~the ~~changing~~asset ~~technologies~~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 ~~lead~~be modified if adverse changes were to ~~reduced~~occur ~~revenue~~in ~~and~~the ~~market~~future ~~share~~resulting in an inability to recover the carrying value of these assets. ~~Semiconductor~~We ~~manufacturing~~have recently experienced ~~equipment~~impairments ~~and~~to ~~processes~~long-lived ~~are~~assets ~~subject~~due to ~~rapid~~the ~~technological~~unexpected ~~changes~~duration of the semiconductor industry downturn and its impact on our forecasted product ~~obsolescence~~demand. ~~The~~Future ~~success~~adverse ofchanges ~~the~~could ~~Company~~be incaused ~~developing~~by, ~~introducing~~among ~~and~~other ~~selling~~factors, a ~~new~~continued ~~and~~downturn ~~enhanced~~in ~~systems~~the ~~depends~~semiconductor ~~upon~~industry, a ~~variety~~general economic slowdown, reduced demand of ~~factors~~our ~~including:~~products in the market place, poor operating results, inability to protect intellectual property, or changing technologies and product obsolescence.

• Inventory product selection; • timely and efficient completion of product design and development; • timely and efficient implementation of manufacturing and assembly processes; • product performance in the field; and • effective sales and marketing.Valuation

IfWe wevalue ~~are~~our ~~unable~~inventory toat ~~timely~~the ~~develop~~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 provision is primarily based on our estimated forecast of product demand and production requirements. However, our industry is characterized by customers in highly cyclical industries, rapid technological changes, frequent new ~~products~~product developments, and rapid product obsolescence. During 2001, there was a significant decrease in the worldwide demand for semiconductor capital equipment, and this decline has continued in 2002. As a result, we ~~will~~recorded ~~likely~~significant ~~experience~~inventory write-downs ~~reduced~~for ~~revenue~~obsolete inventory and ~~market~~inventory ~~share~~in excess of forecasted requirements during the second quarter ended December 1, 2001. As demonstrated in the past, demand for our products has fluctuated significantly, and may do so in the future, which could result in an increase in the cost of inventory purchases or an increase in the amount of excess inventory quantities on hand. This could result in an increase in the amount of excess and obsolete inventory quantities on hand.

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

• We ~~incur~~maintain ~~substantial~~allowances ~~costs~~for todoubtful ~~ensure~~accounts ~~the~~for ~~functionality~~estimated ~~and~~losses resulting ~~reliability~~from the inability of ~~products~~our ~~earlier~~customers into ~~their~~make ~~life~~required ~~cycle~~payments. ~~This~~These allowances ~~can~~are ~~reduce~~established ~~orders,~~based ~~increase~~upon ~~manufacturing~~historical ~~costs~~experience, ~~adversely~~credit ~~impact~~evaluations and ~~working~~specific ~~capital~~customer ~~and~~collection ~~increase~~issues ~~service~~we ~~and~~have ~~warranty expenses~~identified. •Since Weour ~~require~~accounts receivable ~~significant~~are ~~lead-times~~concentrated ~~between~~in ~~product~~a ~~introduction~~relatively ~~and~~few ~~commercial~~number ~~shipment.~~of Ascustomers, a significant ~~result,~~change wein ~~may~~the liquidity or financial position of any one of these customers could have toa ~~write~~material ~~off~~adverse ~~inventory~~impact ~~and~~on ~~other~~the ~~assets~~collectibility ~~related~~of toour accounts ~~products~~receivable and ~~could~~our ~~lose~~future ~~customers~~operating ~~and~~results. ~~revenue~~Collection of “holdbacks” is conditioned upon system acceptance. We have, on occasion, experienced longer than expected delays in receiving cash from certain customers until CMP system

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

Our business is highly cyclical and industry downturns are likely to damage our operating results. Our business depends substantially on the capital expenditures of semiconductor manufacturers and, to a lesser extent, thin film memory disk and silicon wafer manufacturers. These industries are highly cyclical. Semiconductor manufacturers continue to experience softening demand for their products, which has caused companies to delay or

~~cancel~~acceptance ~~the~~was ~~acquisition~~completed. ofIf ~~capital~~some ~~equipment~~of ~~and~~our ~~other~~customers ~~products~~refuse ~~used~~to inpay the ~~manufacturing~~ ~~process~~remaining “holdbacks”, ~~including~~ the ~~products~~deferred werevenue ~~offer.~~will ~~These~~not ~~industry downturns~~be ~~have~~recognized ~~in the past~~ and ~~are expected in the~~ future ~~to damage our~~operating ~~business~~results ~~and~~may ~~operating~~be ~~results~~adversely affected.

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

~~International~~We ~~sales~~generally warrant our systems for a period of up to 12 months from shipment for material and labor to repair and service the system. A provision for the estimated cost of warranty is recorded upon shipment for non-CMP systems and for CMP systems in which revenue is recorded as a multiple-element arrangement. A provision for the estimated costs of warranty is recorded upon acceptance for systems as to which revenue is recorded upon acceptance. On occasion, we have been required and may be required in the future to provide additional warranty coverage to ensure that the systems are ~~subject~~ultimately accepted. While our warranty costs have historically been within our expectations and provisions established, we cannot guarantee that we will continue to ~~risks~~experience the same warranty costs we have in the past. In addition, ~~including:~~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.

•Contractual ~~foreign~~Obligations ~~exchange issues; • political, economic~~ and ~~regulatory~~Commercial ~~environment of the countries where customers are located; • collection of accounts receivable; • inadequate intellectual property protection; and • intense price competition.~~Commitments

~~Failure~~The ofCompany ~~critical~~has ~~suppliers~~Convertible toSubordinated ~~deliver~~Notes ~~sufficient quantities~~ of ~~parts~~$115.0 million due in aSeptember ~~timely and cost-effective manner could negatively affect our business~~2004. WeThe ~~use numerous~~Company ~~suppliers~~also toleases ~~supply~~certain ~~parts,~~facilities ~~components~~ and ~~subassemblies~~equipment ~~for the~~under ~~manufacture~~capital leases and ~~support~~non-cancelable ofoperating ~~its products. In addition~~leases, ~~some~~which ~~key~~expire ~~parts~~at ~~may be~~various ~~obtained~~dates ~~only~~through ~~from a single supplier or a limited group of suppliers~~2011. IfOther wecash ~~do not~~obligations ~~receive~~consist ~~a sufficient quantity~~ of ~~parts in a timely and cost~~non-~~effective~~cancelable ~~manner~~commercial tocommitments ~~meet~~which ~~our production requirements,~~ the ~~results~~Company ofanticipates ~~our~~paying ~~operations~~through ~~may be~~March ~~damaged~~2003.

IfContractual wecash ~~are~~obligations ~~unable~~and tocommitments ~~protect~~relating ~~our~~to ~~intellectual property~~debt, ~~our business could~~lease ~~suffer.~~payments ~~Our~~and ~~intellectual~~commercial ~~property~~commitments ~~portfolio~~are isas ~~very important to our success. We may not be able to protect our technology because~~follows:

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


			Operating		Commercial
	Debt		Leases (1)		Commitments

	(in thousands)
Through March 2003	$	81	$	2,463	$	4,020




April 2003 to March 2006		115,065		2,798		—




April 2006 to March 2008		—		170		—




Thereafter		—		734		—

Total	$	115,146	$	6,165	$	4,020

~~Third~~(1) ~~parties~~Reported ~~may~~amounts ~~prevent~~for usoperating ~~from~~leases ~~selling~~have ~~products~~been ~~that~~reduced ~~allegedly~~for ~~infringe on~~income ~~those~~from ~~third~~subleases. ~~parties’~~Sublease ~~intellectual~~income ~~property~~is ~~rights.~~as Wefollows: ~~cannot~~$1,820 bethrough ~~certain~~March ~~that third~~2003, ~~parties~~$7,493 ~~will~~April ~~not~~2003 into ~~the~~March ~~future~~2006; ~~claim~~$5,100 ~~that~~April ~~our~~2006 ~~products~~to ~~infringe~~March ~~their intellectual~~2008; ~~property~~$10,677 ~~rights~~thereafter. ~~Third parties may:~~

•Impact ~~bring claims~~ of ~~patent,~~Recently ~~copyright~~Issued orAccounting trademark infringement; • obtain patents or other intellectual property rights that limit the Company’s ability to do business or require us to license or cross-license technology; and • bring costly, time consuming lawsuits.Standards

~~Third~~In ~~parties~~October ~~hold~~2001, ~~many~~the ~~patents~~Financial ~~relating~~Accounting toStandards ~~CMP~~Board ~~machines~~issued ~~and~~Statement of ~~processes~~Financial Accounting Standard (SFAS) No. 144, “Accounting for the Impairment ~~which~~or ~~expose~~Disposal usof toLong-Lived ~~the~~Assets”. ~~possibility~~SFAS ~~that~~144, wewhich ~~may~~replaces beSFAS ~~forced~~121, “Accounting tofor ~~cease~~the ~~production~~Impairment of Long-Lived Assets and for Long-Lived Assets ~~our~~to ~~products.~~Be InDisposed ~~the~~Of,” ~~event~~requires welong-lived ~~lose~~assets ~~any~~to ofbe ~~its~~measured ~~intellectual~~at ~~property~~the ~~rights~~lower orof ~~otherwise~~carrying ~~determine~~amount ~~that~~or wefair ~~need~~value toless ~~obtain~~the ~~licenses~~cost to ~~third~~sell. ~~party~~SFAS ~~intellectual~~144 also broadens ~~property,~~disposal ~~there~~transactions isreporting norelated ~~assurance~~to ~~that~~discontinued weoperations. ~~will~~SFAS be144 ~~able~~is effective tofor ~~obtain~~financial ~~such~~statements ~~licenses~~issued ~~on reasonable~~for ~~terms,~~fiscal ifyears atbeginning ~~all~~after December 15, 2001. IfThe weCompany ~~are~~has ~~unable~~not toyet ~~secure~~determined the ~~necessary~~effects ~~licenses,~~SFAS 144 will wehave ~~may~~on beits ~~forced~~financial toposition, ~~cease~~results atof ~~least~~operations aor ~~portion~~cash offlows ~~our~~but ~~operations~~does not anticipate that the impact will be significant.

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

~~Our~~This ~~future~~report ~~success~~contains ~~also~~forward-looking ~~depends~~statements onwithin ~~our~~the ~~ability~~meaning toof Section 27A ~~identify,~~of ~~hire,~~the ~~train~~ Securities Act of 1933 and ~~retain~~Section 21E ~~other~~of ~~highly~~the ~~qualified~~Securities Exchange ~~managerial~~Act ~~and~~of ~~technical~~1934. ~~personnel~~SpeedFam-IPEC claims the protection of the safe-harbor for forward-looking statements contained in those Sections. These ~~Competition~~forward-looking ~~for~~statements ~~such~~are ~~personnel~~often ischaracterized ~~intense~~by the terms “may,” “believes,” “projects,” “expects,” or “anticipates,” and do not reflect historical facts. IfSpecific weforward-looking statements contained in this report relate to, but are not ~~successful~~limited to: ; (i) continuing fluctuation in gross ~~identifying~~margins; (ii) continuing investment in research, ~~hiring~~development, ~~training~~and engineering programs; and ~~retaining~~(iii) management’s ~~such~~belief ~~personnel~~that current cash and investment balances along with cash generated through operations will be sufficient to meet the Company’s cash needs or that sources of additional financings may be available. Forward-looking statements involve risks, ituncertainties and other factors that may cause actual results, performance or achievements of SpeedFam-IPEC to be materially different from those expressed or implied by such forward-looking statements. Factors that could ~~damage~~affect ~~our~~SpeedFam-IPEC’s ~~business~~results and cause them to materially differ from those contained in the forward-looking statements include those listed below under the heading “Certain Factors Affecting SpeedFam-IPEC’s Business.” Forward-looking statements speak only as of the date the statement was made. SpeedFam-IPEC does not undertake and specifically declines any obligation to update any forward-looking statements.

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

WeOur ~~use~~business ~~financial~~is ~~instruments that potentially~~ subject us to ~~concentrations of~~numerous ~~credit~~risks, ~~risk.~~including Wethose ~~enter into foreign exchange contracts to hedge certain firm~~discussed ~~commitments~~below. ~~denominated~~If inany ~~foreign~~of ~~currencies,~~the ~~primarily~~events ~~Japanese~~described ~~yen. We also invest our cash~~ in ~~deposits~~these inrisks ~~banks~~occurs, ~~money~~our ~~market funds~~business, financial ~~government~~condition and ~~corporate~~ ~~debt~~results ~~securities.~~of ~~These~~operations ~~investments expose us to possible losses that~~ could ~~damage~~be ~~our~~seriously ~~business~~harmed.

We are using substantial cash reserves to fund operations during the industry downturn, and there can be no assurance we will be able to achieve positive cash flow in the foreseeable future. As of March 2, 2002, we had $36.2 million in cash, cash equivalents and short-term investments, compared to $60.8 million at June 2, 2001. During the first three quarters of 2002, we used $22.1 million in operating activities compared to $10.9 million during the same period of the prior year. We are currently exploring options to restructure our balance sheet and generate positive cash flow, including a reduction in operating expenses and a sale-leaseback transaction involving our headquarters in Chandler, Arizona. However, we have experienced a significant decrease in revenues and orders and we are unable to determine when 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 operations.

Our future operating performance must generate cash flows sufficient to meet our payment obligations on our debt. As of March 2, 2002, we had aggregate indebtedness in the principal amount of approximately $115 million. We incurred a $10.4 million net loss in the third quarter of fiscal 2002 and net losses of $134 million in fiscal 2001 and $14 million in fiscal 2000. We expect the losses will continue for the foreseeable future. Our ability to make scheduled debt payments will depend on our future operating performance and cash flow. Our operating performance and cash flow are subject, in part, to economic factors beyond our control, primarily the market for semiconductor capital equipment, which in turn depends in part on demand for semiconductor chips. If we cannot generate sufficient cash flow from operations to service our debt, we may need to further refinance our debt, dispose of assets, issue equity, or undertake other actions to obtain the necessary funds. We do not know whether we will be able to accomplish any of such transactions on a timely basis or on terms satisfactory to us, or at all.

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 March 2, 2002 our stockholders equity was $18.1 million and our stock price as quoted on Nasdaq was $3.02 per share. As of March 31, 2002 our stock price as quoted on Nasdaq was $4.28.

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. Although initial customer response to

Momentum^TM through evaluation testing has been positive, this response may not translate into sales of Momentum^TM 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^TM 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, .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. If we fail to win qualification contests for 300 millimeter, .13 micron and below processing, and copper applications, we may experience difficulty achieving volume sales of next-generation equipment to semiconductor manufacturers, which would adversely affect revenues and cash flows.

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

	•		manufacturing problems;

	•		unforeseen technical problems with the Momentum^TM or Momentum300^TM 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.

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 next-generation 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 the first three quarters of 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 the first three quarters of 2002, slowing worldwide demand for semiconductors resulted in significant inventory buildups for semiconductor companies and a rapid decline in demand for semiconductor manufacturing equipment. Presently, we have little visibility regarding how long the semiconductor industry downturn will last or how severe the downturn will be. During the first three quarters of 2002, we experienced cancellations and suspensions of orders for our products. If the downturn continues or worsens, we will continue to experience cancellations and/or suspensions of orders for our products.

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, memory disk 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;

	•		timing, cancellation or delay of customer orders, shipments and acceptance;

	•		unexpected costs associated with sales and service of the CMP tools and processes;

	•		foreign currency exchange rates.

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

	•		enhanced credit risk associated with our debt;

	•		the announcement of new customers or the loss of significant customers;

	•		delays in orders;

	•		announcements by our competitors;

	•		sales or purchases of Company securities by officers, directors and insiders;

	•		government regulation;

	•		changes in earnings estimates or recommendations by securities analysts, or our failure to achieve analysts’ earnings estimates;

	•		announcements regarding restructuring, technological innovations, departures of key officers, directors or employees, or the introduction of new products; and

	•		general market conditions and other factors, including factors unrelated to our operating performance or that of our competitors.

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

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

	•		Some competitors have greater financial resources and are in better financial condition than us.

	•		Some competitors have more extensive engineering, manufacturing, marketing and customer service and support capabilities.

	•		Some competitors may supply a broader range of semiconductor capital equipment, enabling them to serve more or all of their customers’ needs. This could limit sales for us and strengthen existing relationships that competitors have with semiconductor manufacturers, including our current and potential customers.

	•		Some competitors may be able to better adapt to changing market conditions and customer demand.

	•		Competitors are expected to continue to improve their existing technology and introduce new products. These products may be better than ours, cheaper than ours or more efficient than ours.

	•		Other capital equipment manufacturers not currently involved in the development of CMP systems may enter the market or develop technology that reduces the need for our products.

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

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

	•		anticipation of market trends;

	•		product selection;

	•		timely and efficient completion of product design and development;

	•		timely and efficient implementation of manufacturing and assembly processes;

	•		adjustment of production and pricing to meet customer demand;

	•		product performance in the field; and

	•		effective sales and marketing.

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

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

	•		We incur substantial costs to ensure the functionality and reliability of products early in their life cycle.

	•		Repeated defects or bugs can reduce orders, increase manufacturing costs, adversely impact working capital and increase service and warranty expenses.

	•		We require significant lead-times between product introduction and commercial shipment. As a result, we may have to write off inventory and other assets related to products and could lose customers and revenue.

There is no assurance that we will be successful in preventing product and process development problems that could potentially harm our results of operations.

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

	•		foreign exchange issues, including risks associated with our forward exchange contracts to buy and sell foreign currency;

	•		language and other cultural differences that may inhibit our sales and marketing efforts and create internal communication problems among our US and foreign counterparts;

	•		political, economic and regulatory environment of the countries where customers are located;

	•		tariffs, quotas, and other trade barriers or restrictions;

	•		collection of accounts receivable;

	•		inadequate intellectual property protection;

	•		potentially adverse tax consequences; and

	•		intense price competition.

International sales accounted for 62% of our total revenue for the first three quarters of 2002, 61% for 2001, and 70% for 2000. We expect that international sales will continue to account for a significant portion of total revenue in future periods. If international sales are adversely effected as a result of any of the foregoing risks or uncertainties, our cash flows and financial condition would be similarly effected.

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

	•		pending and new patent applications may not be approved in a timely manner or approved at all;

	•		third parties may try to challenge or invalidate existing patents and new patents;

	•		policing unauthorized use of intellectual property is difficult and expensive;

	•		the laws of some foreign countries do not protect intellectual property rights as much as U.S. laws;

	•		competitors may independently develop similar technology or design around our intellectual property;

	•		third parties may prevent us from selling products by alleging infringement, obtaining intellectual property rights that limit our ability to do business or require us to license technology; and

	•		we may not have adequate financial resources to address a dispute.

	•		The occurrence of any of the foregoing risks or uncertainties concerning our intellectual property could make us less competitive and adversely affect our revenues, cash flows and financial condition.

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

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

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

ITEM 3. Quantitative and Qualitative Disclosures About Market Risk.

For financial market risks related to changes in interest rates and foreign currency exchange rates, refer to Part II, Item 7A, Quantitative and Qualitative Disclosures About Market Risk, in the Company’s Annual Report on Form 10-K for the year ended June 2, 2001.

PART II — OTHER INFORMATION

Item 1. Legal Proceedings

~~MEMC~~For ~~Electronics~~a ~~Materials~~discussion ~~Litigation~~of recent legal proceedings, see Footnote 9 of the Notes to Condensed Consolidated Financial Statements.

~~On December 20, 1999, MEMC Electronics Materials, Inc. (“MEMC”) filed an~~25 ~~action against IPEC Precision, Inc. (“IPI”), Integrated Process Equipment Corp.~~ ~~(“IPEC”), predecessor in interest to SpeedFam-IPEC Corporation (“SFC”), and~~ SpeedFam-IPEC, Inc. (“SFI”) in the Circuit Court for St. Charles County, State of Missouri. An amended petition was filed on or about May 3, 2001. The amended petition alleges causes of action for breach of contract and quantum meruit/unjust enrichment arising out of a joint development agreement between MEMC and IPI. Plaintiff alleged that defendants failed to fulfill their obligations required by the parties’ joint development agreement and was seeking damages of approximately $7.4 million plus interest and attorneys’ fees.

A settlement was reached with MEMC on October 5, 2001. The settlement agreement calls for a payment of $1.8 million to MEMC. In addition, the parties executed mutual releases of all claims relating to the joint development program existing as of September 27, 2001. SFI, SFC, IPEC, and IPI also agreed to transfer to MEMC all of their ownership or other interests, shares, or equity in Plasmasil, L.L.C. Pursuant to the settlement, MEMC dismissed this litigation with prejudice.

Raytheon Aircraft Company Litigation

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

Item 46. ~~Submission~~Exhibits ofand ~~Matters~~Reports toon ~~a Vote of Security Holders~~Form 8-K

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

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


Exhibit		Description

3.1*		Articles of Incorporation of SpeedFam-IPEC, Inc.




3.2*		Bylaws of SpeedFam-IPEC, Inc.

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

Filed herewith

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

(b) Reports on Form 8-K

~~Item 6. Exhibits and Reports on Form 8-K.~~ None

~~(a) Exhibits.~~26

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

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

(b) Reports on Form 8-K.

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

SpeedFam-IPec, Inc.

Signature

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Date:	January 11, 2002	/s/ J. Michael Dodson By J. Michael Dodson Secretary and Chief Financial Officer (Principal Financial Officer)
	/s/ J. Michael Dodson
Date:	January 11, 2002	/s/ G. Michael Latta By G. Michael Latta Corporate Controller (Principal Accounting Officer)
Date: April 10, 2002	By J. Michael Dodson Secretary and Chief Financial Officer (Principal Financial Officer)
	/s/ G. Michael Latta
Date: April 10, 2002	By G. Michael Latta Corporate Controller (Principal Accounting Officer)

2427

EXHIBIT INDEX

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

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

Filed herewith

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