~~United~~UNITED ~~States~~STATES ~~Securities~~SECURITIES ~~and~~AND ~~Exchange~~EXCHANGE ~~Commission~~COMMISSION ~~Washington, D.C. 20549~~

WASHINGTON, D.C. 20549

Form 10-Q

(Mark One)


(Mark One)









x		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934









		For the quarterly period ended August 31, 2002









o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

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 transition period from ____________ to ____________

Commission File Number 0-26784

~~SpeedFam~~SPEEDFAM-IPEC, ~~Inc~~INC. ~~(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)

(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)


Illinois		36-2421613

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









305 North 54th Street, Chandler, Arizona		85226

(Address of principal executive offices)		(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 ü No

~~The~~Indicate ~~Registrant~~the ~~had~~number ~~30,602,532~~of shares outstanding of ~~its~~each ~~common~~of ~~stock,~~the noissuer’s ~~par~~classes of ~~value~~common stock, ~~outstanding~~ as of ~~March~~the latest practicable date (September 3130, 2002).

Common Stock, no par value: 31,103,409 shares

TABLE OF CONTENTS

	Condensed Consolidated Balance Sheets
	PART I – FINANCIAL INFORMATION
Part I – Financial Information
		Condensed Consolidated Balance Sheets
	~~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
	Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
	ITEM 3. Quantitative and Qualitative Disclosures About Market Risk.
	ITEM 4. Controls and Procedures.
PART II — OTHER INFORMATION
	Item 1. Legal Proceedings
	Item 6. Exhibits and Reports on Form 8-K
Signature
EXHIBIT INDEX
EX-3.1
EX-99.1
EX-3.2

~~SpeedFam~~SPEEDFAM-IPEC, ~~Inc~~INC. ~~Index~~

			Page
Part I Financial Information
	Item 1. Financial Statements
		Condensed Consolidated Balance SheetsMarch 2, 2002 and June 2, 2001		3
		Condensed Consolidated Statements of OperationsThird Quarter Ended and Three Quarters Ended March 2, 2002 and March 3, 2001		4
		Condensed Consolidated Statements of Cash FlowsThree 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 Conditionand 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

INDEX


			Page

PART I	FINANCIAL INFORMATION




		Condensed Consolidated Balance Sheets August 31, 2002 and June 1, 2002	2




		Condensed Consolidated Statements of Operations First Quarter Ended August 31, 2002 and September 1, 2001	3




		Condensed Consolidated Statements of Cash Flows First Quarter Ended August 31, 2002 and September 1, 2001	4




		Notes to Condensed Consolidated Financial Statements	5




	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	10




	Item 3.	Quantitative and Qualitative Disclosures about Market Risk	23




PART II	OTHER INFORMATION		23




SIGNATURES			25




EXHIBIT INDEX

PART I – FINANCIAL INFORMATION

SPEEDFAM-IPEC, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)


					AUGUST 31,			JUNE 1,
					2002			2002

				ASSETS




Current assets:




	Cash and cash equivalents				$	60,391		$	33,358




	Trade accounts receivable, net					21,995			22,162




	Inventories					42,500			44,545




	Shipped systems pending acceptance					6,379			9,175




	Prepaid expenses and other current assets					3,000			3,896

		Total current assets				134,265			113,136




Property, plant and equipment, net						31,413			58,007




Other assets						5,883			5,684

		Total assets			$	171,561		$	176,827

			LIABILITIES AND STOCKHOLDERS’ EQUITY




Current liabilities:




	Current portion of long-term debt				$	48		$	65




	Accounts payable					13,513			11,061




	Deferred systems revenue					14,752			18,238




	Accrued liabilities					14,934			13,904

		Total current liabilities				43,247			43,268

Long-term liabilities:




	Long-term debt					115,057			115,054




	Other liabilities					4,711			4,620

		Total long-term liabilities				119,768			119,674

Stockholders’ equity:




	Common stock, no par value, 60,000 shares authorized, 31,099 and 30,672 shares issued and outstanding at August 31, 2002 and June 1, 2002, respectively					1			1




	Additional paid-in capital					436,897			435,663




	Retained deficit					(429,538	)		(423,049	)




	Accumulated comprehensive income					1,186			1,270

		Total stockholders’ equity				8,546			13,885

				Total liabilities and stockholders’ equity	$	171,561		$	176,827

See Accompanying Notes to Condensed Consolidated Financial Statements.

~~Part~~SPEEDFAM-IPEC, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FIRST QUARTER ENDED AUGUST 31, 2002 AND SEPTEMBER 1, —2001 (in ~~Financial~~thousands, except per share data) ~~Information~~

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


				First Quarter Ended

				August 31,			September 1,
				2002			2001

Net sales				$	33,789		$	41,082




Cost of sales					25,536			31,695

			Gross margin		8,253			9,387

Operating expenses:




		Research, development and engineering			7,781			12,388




		Selling, general and administrative			5,696			8,120




		Litigation settlement costs			—			1,800

		Total operating expenses			13,477			22,308

Operating loss					(5,224	)		(12,921	)




		Other expense, net			(1,266	)		(1,502	)

Loss before income taxes and cumulative effect of accounting change					(6,490	)		(14,423	)




		Income taxes			—			—

Loss before cumulative effect of accounting change					(6,490	)		(14,423	)




Cumulative effect of accounting change					—			(2,582	)

Net loss				$	(6,490	)	$	(17,005	)

Net loss per common share:




	Basic and diluted:




		Before cumulative effect of accounting change		$	(0.21	)	$	(0.48	)




		From cumulative effect of accounting change			—			(0.08	)

		Net loss		$	(0.21	)	$	(0.56	)

	Weighted average number of shares:




		Basic and diluted			30,871			30,223

					March 2,			June 2,
					2002			2001
					(Unaudited)			(Audited)
				Assets
Current assets:
	Cash and cash equivalents				$	36,164		$	47,344
	Short-term investments					—			13,495
	Trade accounts receivable, net					20,959			60,619
	Inventories					39,622			83,857
	Shipped systems pending acceptance					6,668			13,953
	Prepaid expenses and other current assets					2,511			4,549
		Total current assets				105,924			223,817
Property, plant and equipment, net						60,773			75,241
Other assets						15,627			15,827
		Total assets			$	182,324		$	314,885
			Liabilities and Stockholders’ Equity
Current liabilities:
	Current portion of long-term debt				$	87		$	229
	Accounts payable					10,067			23,314
	Deferred systems revenue					18,061			46,281
	Accrued liabilities					16,150			18,675
		Total current liabilities				44,365			88,499
Long-term liabilities:
	Long-term debt					115,043			115,124
	Other liabilities					4,789			5,321
		Total long-term liabilities				119,832			120,445
Stockholders’ equity:
	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					435,406			434,090
	Retained deficit					(418,072	)		(328,977	)
	Accumulated comprehensive income					792			827
		Total stockholders’ equity				18,127			105,941
				Total liabilities and stockholders’ equity	$	182,324		$	314,885

See Accompanying Notes to Condensed Consolidated Financial Statements.

~~SpeedFam~~SPEEDFAM-IPEC, ~~Inc~~INC. ~~Condensed~~CONDENSED ~~Consolidated~~CONSOLIDATED ~~Statements~~STATEMENTS ofOF ~~Operations~~CASH FLOWS ~~Third~~FIRST ~~Quarter~~QUARTER ~~Ended~~ENDED ~~and~~AUGUST ~~Three Quarters Ended March 2~~31, 2002 ~~and~~AND ~~March 3~~SEPTEMBER 1, 2001 (in thousands~~, except per share data~~)

						Third Quarter Ended							Three Quarters Ended
					First Quarter Ended
						March 2,				March 3,			March 2,			March 3,
					August 31,				September 1,
					2002	~~2002~~			2001	~~2001~~			~~2002~~			~~2001~~
Net sales						$	25,119			$	58,818		$	92,028		$	215,748
Cash flows from operating activities
Cost of sales							18,799				74,107			108,404			187,968
	Net loss				$	(6,490	)		$	(17,005	)
				Gross margin			6,320				(15,289	)		(16,376	)		27,780
	Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Operating expenses:
		Depreciation and amortization				2,561				4,557
				Research, development and engineering			7,398				18,474			37,637			49,443
		Loss on disposal of assets				85				—
				Selling, general and administrative			7,170				12,636			22,573			44,105
		Cumulative effect of change in accounting principle				—				2,582
				Litigation settlement costs			—				—			1,800			—
		Contribution of stock to employee benefit plan				160				—
				Restructuring charges			—				3,460			3,000			8,583
		Changes in assets and liabilities:
				Total operating expenses			14,568				34,570			65,010			102,131
			Decrease in trade accounts receivable			403				14,156
Operating loss							(8,248	)			(49,859	)		(81,386	)		(74,351	)
			(Increase) decrease in inventories			2,318				(5,806	)
			Other expense, net				(2,186	)			(1,070	)		(5,148	)		(1,279	)
			Decrease in shipped systems pending acceptance			2,796				5,218
				Loss on disposal of investment in affiliate			—				—			—			(10,653	)
			Decrease in other current assets			914				1,030
Loss before income taxes and cumulative effect of accounting changes							(10,434	)			(50,929	)		(86,534	)		(86,283	)
			Increase (decrease) in accounts payable			1,583				(5,275	)
				Income taxes			—				—			—			—
			Decrease in deferred systems revenue			(3,486	)			(11,838	)
Loss before cumulative effect of accounting changes							(10,434	)			(50,929	)		(86,534	)		(86,283	)
			Increase in accrued liabilities			1,088				2,856
Cumulative effect of accounting changes							—				—			(2,582	)		(36,542	)
	Net cash provided by (used in) operating activities					1,932				(9,525	)
Net loss						$	(10,434	)		$	(50,929	)	$	(89,116	)	$	(122,825	)
Cash flows from investing activities
Net loss per common share:
	Proceeds from sale of assets					25,000				—
	Basic and diluted:
	Maturities of short-term investments					—				7,115
			Before cumulative effect of accounting changes			$	(0.34	)		$	(1.70	)	$	(2.85	)	$	(2.89	)
	Capital expenditures					(570	)			(1,169	)
				From cumulative effect of accounting changes			—				—			(0.09	)		(1.22	)
	Other investing activities					(634	)			(548	)
				Net loss		$	(0.34	)		$	(1.70	)	$	(2.94	)	$	(4.11	)
	Net cash provided by investing activities					23,796				5,398
Weighted average number of shares -
Cash flows from financing activities
Basic and diluted							30,474				29,996			30,338			29,909
	Proceeds from exercise of stock options and employee stock purchases					1,074				544
Amounts as if the fiscal 2002 accounting change to goodwill was applied retroactively:
	Principal payments on long-term debt					(68	)			(19	)
Net loss						$	(10,434	)		$	(50,693	)	$	(89,116	)	$	(122,132	)
	Net cash provided by financing activities					1,006				525
Net loss per share:
	Effects of foreign currency rate changes on cash					299				71
		Basic and diluted				$	(0.34	)		$	(1.69	)	$	(2.94	)	$	(4.08	)
	Net increase (decrease) in cash and cash equivalents					27,033				(3,531	)
	Cash and cash equivalents at beginning of year					33,358				47,344
	Cash and cash equivalents at end of quarter				$	60,391			$	43,813

See Accompanying Notes to Condensed Consolidated Financial Statements.

~~SpeedFam~~SPEEDFAM-IPEC, ~~Inc~~INC. ~~Condensed~~NOTES ~~Consolidated~~TO ~~Statements~~CONDENSED ofCONSOLIDATED ~~Cash~~FINANCIAL ~~Flows~~STATEMENTS ~~Three~~(in ~~Quarters Ended March 2~~thousands, ~~2002~~except ~~and~~per ~~March 3,~~share ~~2001 (in thousands~~amounts)

				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 three quarters~~ ended ~~March 2,~~August 31, 2002 are not necessarily indicative of the results that may be expected for ~~the~~ the year ending ~~June~~May 131, ~~2002~~2003. For further information, refer to the ~~consolidated~~ consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended June 21, ~~2001~~2002.

The Company’s fiscal year consists of 52 or 53 weeks ending on the Saturday nearest May 31. Accordingly, the ~~2002~~2003 fiscal year ends on ~~June~~May 131, ~~2002~~2003 and contains 52 weeks whereas the ~~2001~~2002 fiscal year ended on June 21, ~~2001~~2002 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~~were:

	March 2,		June 2,
	August 31,		June 1,
	2002		~~2001~~2002
Raw materials	$	1421,~~647~~956	$	4919,~~081~~164
Work-in-process		1310,~~870~~522		1911,~~422~~490
Finished goods		1110,~~105~~022		1513,~~354~~891
	$	3942,~~622~~500	$	8344,~~857~~545

(3)

ACCRUED LIABILITIES

Accrued liabilities are as follows:

	March 2,		June 2,
	August 31,		June 1,
	2002		~~2001~~2002
Accrued warranty and installation costs	$	1,386	$	6,156
Accrued warranty	$	833	$	804
Accrued payroll and benefits		32,~~671~~736		32,~~361~~310
Accrued restructuring and one-time charges		1,436		1,719
Accrued merger, integration, and restructuring costs		1,156		1,288
Other accrued liabilities		910,~~657~~209		79,~~439~~502
	$	1614,~~150~~934	$	1813,~~675~~904

(4)

COMPREHENSIVE LOSS

The Company’s comprehensive loss iswas as follows:

		Third Quarter Ended						Three Quarters Ended
		First Quarter Ended
		March 2,			March 3,			March 2,			March 3,
		August 31,			September 1,
		2002			2001			~~2002~~			~~2001~~
Net loss		$	(106,~~434~~490	)	$	(5017,~~929~~005	)	$	~~(89,116~~	)	$	~~(122,825~~	)
Other comprehensive income (loss):
	Unrealized gain (loss) on securities		(1	)		164			(24	)		477
	Unrealized loss on securities		—			(12	)
	Foreign currency translation adjustment		49(84	)		~~(729~~112	)		~~(11~~	)		~~(1,142~~	)
Comprehensive loss		$	(106,~~386~~574	)	$	(5116,~~494~~905	)	$	~~(89,151~~	)	$	~~(123,490~~	)

Accumulated other comprehensive income (loss) was as follows:


								Accumulated
		Foreign			Unrealized			Other
		Currency			Gain (Loss)			Comprehensive
		Translation			on Securities			Income (Loss)

Balance at June 1, 2002		$	1,270		$	—		$	1,270




	One quarter change		(84	)		—			(84	)

Balance at August 31, 2002		$	1,186		$	—		$	1,186

Balance at June 2, 2001		$	803		$	24		$	827




	One quarter change		112			(12	)		100

Balance at September 1, 2001		$	915		$	12		$	927

(5)

BASIC EARNINGS (LOSS) PER COMMON SHARE

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

In calculating diluted net loss per common share, the dilutive effect of 28,895 and 591,772 common stock equivalent shares (determined under the treasury stock method) have been excluded for the first quarter ended August 31, 2002 and September 1, 2001, respectively, because their inclusion would have been anti-dilutive due to the net losses recorded for the periods.

(6)

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 the silicon wafer industry; 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 first quarter ended August 31, 2002 and September 1, 2001 is as follows (in thousands):


		First Quarter Ended

		August 31,			September 1,
		2002			2001

Net sales:




	CMP Group	$	28,103		$	32,619




	Surface Technology Group		3,442			5,015




	Industrial Applications Group		2,244			3,448

Total net sales to unaffiliated customers			33,789			41,082

Segment operating profit (loss):




	CMP Group		(2,683	)		(8,393	)




	Surface Technology Group		(328	)		100




	Industrial Applications Group		(154	)		599

Total segment operating loss			(3,165	)		(7,694	)




General corporate expense, net			(1,551	)		(5,227	)




Interest expense, net			(1,774	)		(1,502	)

Loss before income taxes and cumulative effect of accounting changes		$	(6,490	)	$	(14,423	)

(7)

CHANGES IN ACCOUNTING PRINCIPLES

~~Accumulated~~SFAS ~~other~~No. 142 ~~comprehensive~~in ~~income~~the first quarter of 2002 and recorded a cumulative effect of a change in accounting principle for the write-off of goodwill of (~~loss~~$2.6) is million, or ($0.08) per share, as ~~follows:~~of the beginning of 2002 (June 3, 2001). The circumstances leading to the impairment of goodwill primarily relate to operating losses, the absence of positive cash flows and uncertainties resulting from the duration and severity of the industry downturn. The fair value of the reporting units, which correspond to the Company’s business segments, were estimated using quoted market prices.

								Accumulated
		Foreign			Unrealized			Other
		Currency			Gain (Loss)			Comprehensive
		Translation			on Securities			Income (Loss)
Balance at June 2, 2001		$	803		$	24		$	827
	Three quarter change		(11	)		(24	)		(35	)
Balance at March 2, 2002		$	792		$	—		$	792
Balance at June 3, 2000		$	1,239		$	(487	)	$	752
	Three quarter change		(1,142	)		477			(665	)
Balance at March 3, 2001		$	97		$	(10	)	$	87

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

~~(5)~~ In ~~RESTRUCTURING~~October ~~AND~~2001, ~~OTHER~~the ~~CHARGES~~Financial ~~ASSOCIATED~~Accounting ~~WITH~~Standards ~~THE~~Board ~~INDUSTRY~~issued ~~DOWNTURN~~SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” SFAS No. 144, which replaces SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,” requires long-lived assets to be measured at the lower of carrying amount or fair value less the cost to sell. SFAS No. 144 also broadens disposal transactions reporting related to discontinued operations. SFAS No. 144 is effective for financial statements issued for fiscal years beginning after December 15, 2001. The Company has not yet determined the effects SFAS No. 144 will have on its financial position, results of operations or cash flows but does not anticipate that the impact will be significant.

~~During~~In April 2002, the ~~third~~Financial ~~quarter~~Accounting Standards Board issued SFAS No. 145, “Rescission of ~~2001~~FASB Statements No. 4, ~~slowing~~44, ~~worldwide~~and ~~demand~~64, ~~for~~Amendment of FASB ~~semiconductors~~Statement ~~resulted~~No. 13, inand aTechnical ~~rapid~~Corrections.” ~~decline~~SFAS inNo. 145 ~~demand~~rescinds ~~for~~SFAS ~~manufacturing equipment~~No. 4, “Reporting ~~Inventory~~Gains ~~buildups~~and inLosses ~~telecommunication~~from ~~products~~Extinguishment of Debt,” ~~slower~~and ~~than~~an amendment of ~~expected~~that ~~personal~~Statement, ~~computer~~SFAS ~~sales~~No. 64, ~~and~~“Extinguishments ~~slower~~of ~~global~~Debt ~~economic~~Made ~~growth~~to ~~caused~~Satisfy ~~semiconductor~~Sinking-Fund ~~companies~~Requirements”. toSFAS ~~reevaluate~~No. 145 ~~their~~also ~~capital~~rescinds ~~spending~~SFAS ~~plans~~No. 44, ~~A number~~“Accounting offor ~~the~~Intangible ~~Company’s~~Assets ~~customers~~of ~~revised~~Motor ~~the~~Carriers.” ~~timing~~SFAS ofNo. 145 ~~their~~amends ~~capital~~SFAS ~~spending and~~No. 13, ~~rescheduled~~“Accounting orfor ~~canceled~~Leases,” ~~existing~~to ~~orders,~~eliminate ~~resulting~~an ininconsistency between the ~~postponement or~~required ~~cancellation~~accounting offor ~~equipment~~sale-leaseback ~~delivery~~transactions and athe ~~decline~~required inaccounting ~~new~~for certain ~~orders.~~lease Asmodifications athat ~~result, the~~have ~~Company~~economic ~~was~~effects ~~forced~~that are similar to sale-leaseback ~~record~~transactions. ~~inventory~~SFAS ~~write-downs~~No. 145 ~~and~~also ~~take~~amends ~~swift~~other ~~actions~~existing toauthoritative ~~substantially~~pronouncements ~~reduce~~to ~~overall~~make ~~operating~~various ~~expenses.~~technical ~~Cost-cutting~~corrections, ~~measures~~clarify ~~included~~meanings, anor ~~18-percent~~describe ~~reduction~~their inapplicability ~~workforce,~~under achanged ~~10-percent~~conditions. ~~salary~~The ~~cutback for~~Company ~~executives~~adopted SFAS No. 145 on June 2, ~~the~~2002 ~~deferment~~and ofit ~~management~~did ~~raises~~not ~~until~~have ~~business~~a ~~conditions~~material impact on ~~improve~~the ~~and~~financial aposition ~~decrease~~or inresults ~~overall~~of ~~discretionary~~operations ~~spending~~of the Company.

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~~) ofSUBSEQUENT ~~other charges.~~ EVENTS

~~These~~On ~~costs~~August 11, ~~were~~2002, ~~classified~~the Company entered into an Agreement and Plan of Reorganization with Novellus Systems, Inc. (Novellus), a California corporation and a leader in thin film deposition technology for the ~~statement~~semiconductor industry. Novellus will acquire all outstanding shares of ~~operations~~SpeedFam-IPEC in a stock-for-stock merger transaction. If the ~~third quarter~~merger ~~ended~~is ~~March 3~~completed, ~~2001~~the inCompany would ~~cost~~become a wholly-owned subsidiary of ~~sales~~Novellus. ~~and~~Each ~~operating~~share ~~expenses~~of SpeedFam-IPEC common stock outstanding as of the closing date will be converted into 0.1818 shares of Novellus common stock on a fixed exchange ratio basis. The merger is ~~following~~intended ~~table~~to ~~summarizes~~qualify as a tax-free reorganization under IRS regulations. The transaction has been approved by the ~~classification~~board of ~~the~~directors ~~restructuring~~of both companies and is ~~other~~expected to formally close in the fourth calendar quarter of 2002. ~~charges:~~

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

(9)

RELATED PARTY TRANSACTIONS

~~This~~On ~~decline~~June 21, ~~in demand for semiconductors has continued in~~ 2002, ~~and several of~~ the Company’s ~~customers~~completed ~~have~~a ~~rescheduled~~sale-leaseback ~~deliveries~~transaction ~~or canceled~~of ~~existing~~its ~~orders~~corporate headquarters and ~~the~~research ~~Company~~and ~~has~~development ~~experienced~~facilities ~~a substantial decline~~ in ~~new~~Chandler, ~~orders~~Arizona. ~~Because~~The ~~the~~purchaser/lessor ~~duration~~is ofPhoenix ~~this~~Industrial ~~downturn~~Investment inPartners, ~~demand has been longer than~~L.P. ~~originally~~(the ~~anticipated~~“Buyer”), ~~the~~a ~~Company~~firm ~~believes~~controlled ~~that~~by ~~purchases~~Kenneth inLevy, ~~the next upturn will be primarily for the Company’s MomentumTM products. As~~ a ~~result~~director of the ~~extended~~ ~~downturn, the~~ Company. ~~recorded~~The ~~significant~~sales ~~inventory~~price ~~write-downs for~~was ~~obsolete inventory and inventory in excess of forecasted requirements during the second quarter ended December~~$25.0 ~~1, 2001~~million. ~~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~~

In connection with the sale of the buildings, the Company has simultaneously entered into a 15-year lease for the buildings. The lease, which has been accounted for as an operating lease, contains provisions for three, five-year extensions and requires minimum annual rental payments of $3.0 million. Annual operating expenses will

~~second~~increase ~~quarter~~by ~~ended~~approximately ~~December 1, 2001, the Company recorded charges of~~ $482.~~1 million which included inventory write-downs of $36.3~~4 million;, ~~asset impairments~~reflecting ~~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~~new ~~quarter the Company spent $0.9 million for~~rental ~~non-cancelable~~payments, ~~purchase~~offset ~~commitments~~by ~~and~~interest ~~anticipates~~income ~~spending~~on the ~~remaining~~net ~~$0.4 million~~proceeds ~~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~~reduced ~~remaining~~depreciation $0expense.~~9 million over the next three and a half years.~~

~~These~~As a ~~costs~~result ~~were~~of ~~classified~~the intransaction, the ~~statement~~Company received cash proceeds of $25.0 million. ~~operations~~The ~~for~~book ~~the~~value ~~second~~of buildings and improvements ~~quarter~~removed ~~ended~~from ~~December 1,~~the ~~2001~~balance sheet in ~~cost~~the offirst ~~sales~~quarter ~~and~~of ~~operating~~2003 ~~expenses.~~is ~~The~~$25.1 million. ~~following~~The ~~table~~loss ~~summarizes~~on the ~~classification~~sale of the ~~restructuring~~buildings ~~and~~was ~~other~~immaterial. ~~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 the 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 third quarter and three quarters ended March 2, 2002 and March 3, 2001 is as follows (in thousands):

		Third Quarter Ended						Three Quarters Ended
		March 2,			March 3,			March 2,			March 3,
		2002			2001			2002			2001
Net sales:
	CMP Group	$	18,230		$	47,710		$	68,650		$	183,535
	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 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 third quarter of 2002 by $0.2 million or $0.01 per share and for the first three quarters of 2002 by $0.7 million or $0.02 per share. The circumstances leading to the impairment of goodwill primarily relate to current operating losses, the absence of positive cash flows and uncertainties resulting from the duration and severity of the industry downturn. The fair value of the reporting units, which correspond to the Company’s business segments, were estimated using quoted market prices. Net loss for the third quarter of 2001 would have been ($50.7) million or ($1.69) per share and the net loss for the first three quarters of 2001 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.

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

Prior to the implementation of SAB 101, the Company recognized revenue from the sales of its products generally upon shipment. Effective June 4, 2000, the Company changed its method of recognizing revenue for sales of CMP systems to reflect the following approach: 1) for CMP system sales to a new customer, or CMP system sales of existing products with new specifications or acceptance criteria, and for all new CMP products, revenue is

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

Statement of Financial Accounting Standards (SFAS) No. 133, “Accounting for Derivative Instruments and Hedging Activities” and No. 138, “Accounting for Certain Derivative Instruments and Certain Hedging Activities”, 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 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) designs, develops, manufactures and markets chemical mechanical planarization (CMP) systems for use in the fabrication of semiconductor chips. The Company also supplies parts and provides ongoing support for these systems.

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

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

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

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

The Company’s total revenue consists of net sales of the products described above and service revenues, as well as revenue derived from the distribution by the Company in the U.S. and Europe of products manufactured by the former SpeedFam-IPEC, Co., Ltd. (the Far East Joint Venture). The Company distributes such products throughout the U.S. and Europe acting as sales agent, 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~~2002, ~~2000~~2001 and ~~1999~~2000, the CMP Group accounted for 8275%, 8481% and 7484% of revenues, respectively. For the quarter ended August 31, 2002, the CMP Group accounted for 83% of revenues.

The Company’s fiscal year consists of 52 or 53 weeks ending on the Saturday nearest May 31. Accordingly, the ~~2002~~2003 fiscal year ends on ~~June~~May 131, ~~2002~~2003 and the ~~2001~~2002 fiscal year ended on June 21, ~~2001~~2002. All references to quarters and years relate to fiscal quarters and fiscal years unless otherwise noted.

OnBeginning ~~August 30,~~in ~~2000,~~2001 ~~the Company~~ and ~~Obara~~continuing ~~Corporation~~into ~~(Obara)~~2003, ~~effectively dissolved~~there ~~the~~has ~~Far~~been ~~East~~a ~~Joint~~significant decrease ~~Venture.~~in ~~Under~~ the ~~terms~~worldwide ofdemand ~~the~~for ~~Master Reorganization~~semiconductor ~~Agreement~~capital ~~with~~equipment. ~~Obara,~~As ~~ownership~~a result of ~~the~~a ~~CMP~~rapid ~~sales~~decline ~~and~~in ~~service operations of~~ the ~~Far~~demand ~~East~~for ~~Joint~~semiconductor ~~Venture~~devices, ~~was transferred to the Company and~~inventory ~~specific~~buildups ~~personnel involved~~ in ~~CMP~~telecommunications ~~efforts~~products, ~~became~~slower ~~employees~~than ofexpected ~~the~~personal ~~Company.~~computer ~~Obara~~sales ~~continues~~and ~~the~~overall ~~non-CMP~~slower ~~activities~~global ofeconomic ~~the~~growth, ~~former~~many ~~Far East Joint Venture,~~semiconductor ~~which~~manufacturers ~~include~~reevaluated ~~the~~their ~~manufacturing~~capital ofspending ~~silicon~~plans. ~~wafer~~Accordingly, ~~and~~several ~~thin film memory disk~~of ~~polishing~~the ~~products. The~~ Company’s ~~will~~customers ~~not~~rescheduled ~~compete~~delivery ~~with~~or ~~the~~canceled ~~non-CMP~~existing ~~business and~~orders. ~~Obara~~Furthermore, ~~will not compete with~~ the ~~CMP business for an initial period of five years. The~~ Company has ~~indemnified~~experienced ~~Obara~~a ~~for~~substantial ~~any~~decline ~~claims~~in ~~relating~~new ~~to the CMP~~orders. ~~business~~In ~~and~~response ~~Obara~~to ~~has~~industry ~~indemnified~~conditions, the Company ~~for~~has ~~any~~recorded ~~claims relating to the~~significant ~~non-CMP~~inventory ~~business. Under the terms of a distributor agreement signed on August 31~~write-downs, ~~2000,~~charges ~~the~~related ~~Company continues~~ to ~~act~~asset asimpairments aand ~~direct~~severance ~~distributor~~ costs in ~~the~~connection ~~United States~~with ~~and Europe for~~ across-the-board ~~wafer~~headcount ~~and~~reductions. ~~disk~~Furthermore, ~~polishing products manufactured by~~the ~~Obara,~~Company ~~under~~implemented ameasures ~~five-year~~to ~~agreement,~~reduce ~~and~~discretionary ~~is prohibited from manufacturing these products~~spending.

1310

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

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

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

Prior to the implementation of SAB 101, the Company recognized revenue from the sale of its products generally upon shipment. Effective June 4, 2000, the Company changed its method of recognizing revenue for 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. In periods of declining business, such as the current environment, revenues would exceed shipments, and in periods of increasing revenues, shipments would exceed revenues.

In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 142, “Goodwill and Other Intangible Assets.” Under SFAS 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 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.

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:

		Third Quarter Ended						Three Quarters Ended
		First Quarter Ended
		March 2,			March 3,			March 2,			March 3,
		August 31,			September 1,
		2002			2001			~~2002~~			~~2001~~
Net sales			100.0	%		100.0	%		~~100.0~~	%		~~100.0~~	%
Cost of sales			7475.86			~~126~~77.02			~~117.8~~			~~87.1~~
	Gross margin		2524.24			~~(26~~22.08	)		~~(17.8~~	)		~~12.9~~
Research, development and engineering			2923.50			3130.42			~~40.9~~			~~23.0~~
Selling, general and administrative			2816.59			2119.58			~~24.5~~			~~20.4~~
Litigation settlement costs			—			—4.3			~~1.9~~			—
Restructuring charges			—			5.9			3.3			4.0
Operating loss			(15.5	)		(31.5	)
Operating loss			(32.8	)		(84.8	)		(88.4	)		(34.5	)
Other expense, net			(3.7	)		(3.7	)
Other expense, net			(8.7	)		(1.8	)		(5.6	)		(0.6	)
Loss before cumulative effect of Accounting change			(19.2	)		(35.1	)
Loss on sale of joint venture interest			—			—			—			(4.9	)
Cumulative effect of accounting change			—			(6.3	)
Loss before cumulative effect of accounting change			(41.5	)		(86.6	)		(94.0	)		(40.0	)
Net loss			(19.2	)%		(41.4	)%
Cumulative effect of accounting change			—			—			(2.8	)		(16.9	)
Net loss			(41.5	)%		(86.6	)%		(96.8	)%		(56.9	)%

Net Sales. Net sales for the ~~third~~first quarter of ~~2002~~2003 were $2533.18 million, down 5718% from net sales of $5841.81 million in the ~~third~~first quarter of ~~2001~~2002. Net sales of CMP products for the ~~third~~first quarter of ~~2002~~2003 totaled $1828.21 million, or 7383% of net sales, compared to $4732.76 million, or 8179% of net sales, in the ~~third~~first quarter of ~~2001. Net sales for the first three quarters of~~ 2002 ~~were $92~~.~~0 million,~~ down 57% from net sales of $215.7 million for the first three quarters of 2001. Net sales of CMP products for the first three quarters of 2002 totaled $68.7 million, or 75% of net sales, compared to $183.5 million, or 85% of net sales, in the first three quarters of 2001. Sales of CMP systems products decreased in ~~2002~~2003 due to the continued 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~~delivery and a decline in new orders and net sales.

~~Net~~Upon ~~sales~~implementation of ~~the~~SAB ~~Surface~~101 ~~Technology~~in ~~Group~~fiscal ~~(STG) in~~2001, the ~~third~~Company ~~quarter~~recorded ofa ~~2002~~non-cash ~~accounted~~charge ~~for~~of $436.15 million, orfor ~~16%~~the ofthree ~~net~~quarters ~~sales~~ended March 3, ~~compared~~2001 to ~~$5.2 million,~~ orreflect 9%the ofcumulative ~~net~~effect ~~sales,~~of in the ~~third~~accounting ~~quarter~~change as of ~~2001.~~the ~~Net~~beginning ~~sales~~ of fiscal ~~STG~~2001, ~~products~~June 4, ~~in the~~2000. ~~first~~The ~~three~~deferred ~~quarters~~systems ofrevenue ~~2002~~balance ~~accounted~~at ~~for $13.4~~June ~~million~~4, ~~or 15% of net~~ ~~sales~~2000, ~~compared~~was to $1760.98 million,. orThis 8%amount ofis ~~net~~comprised ~~sales,~~of inequipment ~~the~~that ~~first three~~was ~~quarters~~shipped ofand ~~2001.~~previously ~~During~~recorded ~~2002,~~as ~~the~~revenue ~~silicon~~but ~~wafer~~had ~~market~~not ~~has~~been ~~experienced continued~~accepted ~~softness~~or indid ~~demand~~not qualify ~~due~~for ~~to ongoing manufacturing over~~mulitple-~~capacity~~element ~~caused by~~accounting ~~various~~as ~~factors~~of ~~including~~June 3, ~~available~~2000. ~~capacity~~In ~~and~~addition ~~increased production~~to ~~efficiencies~~deferred ~~due to the fact that more chips can be produced on a given wafer.~~systems

~~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 first three quarters of 2002 is a result of the general economic slowdown.

~~Gross~~revenue, ~~Margin. In~~ the ~~third~~Company ~~quarter~~recorded ofdeferred ~~2002,~~amounts ~~gross~~related ~~margin~~to ~~was~~cost ~~$6.3 million, or 25%~~ of ~~net~~ sales, totaling ~~compared to (~~$1521.3) million, oras ~~(26%)~~ of ~~net sales~~June 4, ~~in the third quarter of 2001~~2000. InThis ~~the~~amount ~~first~~represents ~~three~~costs related ~~quarters~~to ofshipped ~~2002,~~systems ~~gross~~that ~~margin~~were ~~was ($16.4)~~pending ~~million,~~acceptance oras ~~(18%)~~ of ~~net sales~~June 3, ~~compared to $27~~2002.~~8 million,~~ orAs ~~13%~~ of ~~net sales~~June 4, ~~in the first three quarters of 2001. Because the length and severity of the industry downturn is longer that originally anticipated~~2000, the Company ~~believes~~ ~~that~~also ~~purchases~~reversed inaccruals ~~the~~associated ~~next upturn will be primarily for the~~with ~~Momentum™ products.~~its Aswarranty aand ~~result,~~installation ~~the~~costs ~~Company recorded a one-time charge~~ of $373.60 million to ~~cost of goods sold during the second quarter of 2002 for the write-down of inventory and recognition of liabilities~~ related to ~~outstanding purchase~~ ~~commitments~~shipped ~~for~~systems ~~the~~pending ~~Company’s~~customer ~~legacy tools~~acceptance. ~~Excluding this write-down, gross~~Of ~~margin~~the ~~was~~ $2160.28 million, orin ~~23%~~deferred ofsystems ~~net sales for the first three quarters of 2002. During the first three quarters of fiscal 2001~~revenue, ~~the Company recorded a one-time charge of~~ $311.73 million ~~to cost of goods sold related to the industry downturn,~~ and $310.45 million were ~~related~~recognized toas ~~the~~revenue, ~~exit~~respectively ~~from~~for the ~~manufacturing~~quarter ofended ~~wafer~~August 31, 2002 and ~~disk~~September 1, ~~polishing equipment~~2001. ~~Excluding~~Of ~~these~~the ~~charges, gross margin was~~ $6221.9 3 million ~~or 29% of net sales~~ in ~~the~~deferred ~~first~~cost ~~three quarters~~ of ~~fiscal~~sales ~~2001~~$6. ~~The~~5 ~~Company’s~~million ~~gross~~was ~~margins~~recognized ~~are~~as ~~below~~cost ~~historical~~of ~~levels~~sales ~~due~~for ~~primarily~~the toquarter ~~decreased production~~ended ~~volume resulting in lower overhead absorption on a reduced revenue~~September 1, ~~base~~2001. ~~During~~For the ~~industry~~quarter ~~downturn~~ended August 31, ~~the~~2002, ~~Company~~there ~~expects~~were ~~this~~no ~~trend~~deferred ~~of reduced~~costs ~~gross~~recognized ~~margins~~as tocost ~~continue.~~of ~~The~~sales ~~Company’s~~which ~~gross~~were ~~margin~~reflected ~~has fluctuated significantly~~ in the ~~past~~cumulative ~~and~~effect ~~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~~accounting ~~of new products~~change.

~~Research,~~Net ~~Development~~sales ~~and~~of ~~Engineering. In~~ the ~~third~~Surface ~~quarter~~Technology ofGroup ~~2002, research, development and engineering expenses decreased to $7.4~~(STG) ~~million, or 30% of net sales, compared to $18.5 million, or 31% of net sales,~~ in the ~~third quarter of 2001. In the~~ first ~~three~~quarter ~~quarters~~ of ~~2002, research, development~~ ~~and~~2003 ~~engineering~~accounted ~~expenses~~for ~~were~~ $373.64 million, or 4110% of net sales, compared to $495.40 million, or 2312% 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~~ inDuring ~~one-time~~2003, ~~charges related to~~ the ~~asset~~silicon wafer ~~impairment~~market ~~of certain~~has ~~legacy~~experienced ~~tools~~continued ~~located~~softness in ~~our~~demand ~~labs~~due ~~which~~to ~~will no longer be used for~~ ongoing ~~research and development programs, as well as capitalized costs~~ ~~associated~~manufacturing ~~with~~over-capacity ~~certain~~caused ~~patents. During the first quarter of 2001, research, development and engineering expenses included an asset impairment charge of $2.4 million for equipment that was designed~~ by ~~the~~various ~~Far~~factors ~~East~~including ~~Joint Venture.~~available ~~During~~capacity ~~the third quarter of 2001, research development~~ and ~~engineering~~increased ~~expenses included~~production anefficiencies ~~asset~~due ~~impairment charge of $3.6 million related~~ to the ~~asset impairment~~fact ofthat ~~certain~~more ~~tools used in our labs as a result of the industry~~chips ~~slowdown.~~can ~~Excluding~~be ~~charges,~~produced ~~research,~~on ~~development and engineering expenses in the first three quarters of fiscal 2002 decreased by $13.1 million or 30%, from the first three quarters of 2001, as~~ a ~~result~~given ~~of certain cost cutting measures which were implemented by the Company in response to the industry wide downturn~~wafer. ~~The Company expects to continue investing substantial resources in~~ ~~research, development and engineering programs.~~

~~Selling,~~Net ~~General~~sales ~~and~~of ~~Administrative. In~~ the ~~third~~Industrial ~~quarter~~Applications ofGroup ~~2002, selling, general and administrative expenses decreased to $7.2~~(IAG) ~~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~~ quarter of ~~2002,~~2003 ~~selling,~~totaled ~~general and administrative expenses decreased to~~ $222.62 million, or 257% of net sales, compared to $443.15 million, or 20 8% of net sales, in the first ~~three~~quarter ~~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™.

~~Litigation~~Gross ~~settlement~~Margin. ~~costs~~In the first quarter of 2003, gross margin was $8.3 million, or On24% ~~October~~of net sales, compared to $9.4 5million, ~~2001~~or 23% of net sales, in the first quarter of 2002. The increase in gross margin as a percentage of net sales was primarily due to the product mix of systems shipped. The Company’s gross ~~settled~~margins ~~its~~are below historical levels due primarily to decreased production ~~outstanding~~volume ~~litigation~~resulting ~~with~~in ~~MEMC~~lower overhead absorption on a reduced revenue base. During Inthe ~~connection~~industry ~~with~~downturn, the Company expects this ~~settlement~~trend ~~the~~of reduced gross margins to continue. The Company’s ~~agreed~~gross margin has significantly fluctuated in the past and will continue to ~~pay~~fluctuate ~~MEMC~~based ~~$1.8 million,~~on ~~which~~several ~~was~~factors ~~expensed~~including inthe severity and duration of the ~~first~~current industry downturn, product mix, overhead ~~quarter~~absorption levels and costs associated with the introduction of ~~2002~~new products.

~~Restructuring~~Research, ~~Charges.~~Development ~~During~~and ~~2001~~Engineering. ~~there~~In ~~was~~the afirst ~~significant~~quarter ~~decrease~~of ~~in the~~2003, ~~worldwide~~research, ~~demand~~development ~~for~~and ~~semiconductor~~engineering ~~capital~~expenses ~~equipment.~~decreased ~~This~~to ~~decline~~$7.8 million, ~~has~~or ~~continued~~23% inof ~~2002~~net ~~and~~sales, ~~has~~compared ~~resulted~~to ~~in inventory buildups in telecommunications products~~$12.4 million, ~~slower~~or ~~than~~30% ~~expected~~of ~~personal~~net ~~computer~~ sales, ~~and~~in ~~overall~~the ~~slower~~first ~~global~~quarter ~~economic~~of ~~growth~~2002. Research, ~~causing~~development ~~many~~and ~~semiconductor~~engineering ~~manufacturers~~expense todecreased ~~reevaluate~~by ~~their~~$4.6 million ~~capital~~or ~~spending~~37% ~~plans.~~as ~~Several~~a result of ~~the~~certain ~~Company’s~~cost ~~customers~~cutting ~~have~~measures, including a ~~rescheduled~~reduction ~~deliveries~~in orheadcount ~~canceled~~and ~~existing~~discretionary ~~orders~~spending, ~~and~~which were implemented by the Company ~~has experienced~~in aresponse ~~substantial~~to ~~decline~~the inindustry ~~new~~wide ~~orders~~downturn. ~~Because~~The ~~the~~Company ~~duration~~expects ~~of this~~to ~~downturn~~continue ininvesting ~~demand~~substantial isresources ~~longer~~in ~~than~~research, ~~originally~~development and engineering programs.

16 Selling, General and Administrative. In the first quarter of 2003, selling, general and administrative expenses decreased to $5.7 million, or 17% of net sales, compared $8.1 million, or 20% of net sales, in the first quarter of 2002. Selling, general and administrative expense decreased by $2.4 million or 30% as a result of certain cost cutting measures, including a reduction in headcount and discretionary spending, which were implemented by the Company in response to the industry downturn.

Litigation settlement costs. On October 5, 2001, the Company settled its outstanding litigation with MEMC. In connection with this settlement the Company agreed to pay MEMC $1.8 million.

Other Expense, net. Other expense, net decreased to ($1.3) million during the first quarter of 2003 from ($1.5) million during the same period a year ago. This decrease primarily resulted from higher average balances in cash and cash equivalents as a result of the $25.0 million of proceeds received in connection with the Company’s sale-leaseback transaction.

Provision for Income Taxes. At the end of the first quarter of 2003 and 2002, 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 first quarter of 2003 and 2002 was zero. While the Company will reassess its tax situation each quarter, the Company expects that its effective tax rate will approximate zero throughout 2003.

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 the third quarter of 2001, the Company recorded $3.5 million of restructuring and other special charges as a result of cost cutting actions implemented by the Company in response to the industry wide downturn. Included in these charges was $1.7 million of lease termination costs, $1.0 million of severance costs, and $0.8 million of other charges.

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

Other Expense, net. Other expense, net increased to $2.2 million during the third quarter of 2002 from $1.1 million during the same period a year ago. Other expense, net for the first three quarters of 2002 increased to $5.1 million compared to $1.3 million for the same period a year ago. This increase primarily resulted from lower average balances in cash, cash equivalents and short-term investments as well as a reduction in interest rates yielding lower interest income to offset interest expense on the Company’s long-term debt.

Provision for Income Taxes. At the end of the third 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 third quarter of 2002 and 2001 was zero.

In March, 2002 Congress passed the “Job Creation and Worker Assistance Act of 2002” (The Act) which temporarily extended the general net operating loss carryback period to five years. As a result, the Company expects to record a net tax benefit of approximately $2 million for a refund of taxes previously paid. This net income tax benefit will be recorded in the fourth quarter, the period in which the Act was passed, and will not impact future periods. While the Company will reassess its tax situation each quarter, the Company expects that its effective tax rate, exclusive of this net tax benefit, will approximate zero throughout 2002.

Loss on Disposal of Investment in Affiliates. At the end of the first quarter of 2001, the Company reported a $10.7 million loss on disposal of investment in affiliate in connection with the dissolution of the Far East Joint Venture. The 30-year-old Far East Joint Venture between the Company and Obara Corporation was officially dissolved on August 30, 2000.

Liquidity and Capital Resources

As of ~~March~~August 231, 2002, the Company had $3660.24 million in cash, and cash equivalents ~~and short-term investments~~, compared to $6033.84 million at June 21, ~~2001~~ 2002. During the first quarter ~~three quarters~~ of ~~2002~~2003, the Company ~~used~~had $~~22.~~1.9 million of cash inprovided ~~operating~~by operating activities compared to cash used of $119.05 million ~~used~~ in operating activities during the same period in ~~2001~~2002. The difference is primarily related to a reduction in the net loss in the first quarter of 2003 as compared to the first quarter of 2001. Approximately $895.16 million ~~included~~ ~~non-~~of cash ~~items~~was ~~totaling~~provided ~~$62.0 million:~~in the ~~cumulative~~first ~~effect~~quarter of ~~change~~ in2003 ~~accounting~~due ~~principle~~to ofa $2decrease in working capital.~~6 million,~~ ~~depreciation~~The ~~and~~net ~~amortization~~loss ~~expense~~ of $116.15 million, included ~~401(k)~~non-cash ~~stock~~items ~~match~~totaling of $0.2.8 million: depreciation and ~~one-time~~amortization expense ~~charges~~ of $482.16 million.; ~~Partially~~contribution ~~offsetting~~of ~~this~~stock ~~decrease~~to inemployee ~~cash~~benefit ~~was~~plan ~~the~~of ~~reduction in~~$0.1 ~~working~~million ~~capital~~and inloss ~~the~~on ~~first~~disposal ~~three quarters~~ of ~~2002~~assets ~~which provided cash~~ of $5.0 .1 million.

Net cash provided by investing activities totaled $1023.18 million during the first ~~three~~quarter ~~quarters~~ of ~~2002~~2003 compared with net cash ~~used~~provided of $45.4 million during the same period in ~~2001~~2002. ~~Cash~~Net ~~was~~cash ~~provided~~proceeds received from the ~~maturity~~sale of ~~short-term~~the ~~investments~~Company’s ofcorporate headquarters and research and development facilities (discussed below) provided $1325.50 million and was offset by ~~capital~~cash ~~expenditures~~used ~~and other~~for ~~investing~~capital ~~activities~~expenditures of $30.46 million during the first ~~three~~quarter ~~quarters~~of 2003. Cash provided by investing activities in the first quarter of 2002 primarily related to maturities- of short-term investments.

Financing activities provided cash of $1.10 million during the first ~~three~~ ~~quarters~~quarter of ~~2002~~2003 compared with approximately $2.0.5 million during the same ~~period~~ period of ~~2001~~2002. The sale of stock to employees and the exercise of stock ~~options~~ options generated proceeds of $1.1 million during the ~~first~~quarter ~~three~~ended ~~quarters~~August 31, of 2002.

17 On June 21, 2002, the Company completed a sale-leaseback transaction of its corporate headquarters and research and development facilities in Chandler, Arizona. As a result of the sale transaction, the Company received cash proceeds of $25.0 million. The book value of buildings and improvements removed from the balance sheet in the first quarter of 2003 was $25.1 million. The loss on the sale of the buildings was $0.1 million. The Company simultaneously entered into a 15-year lease for the buildings which contains provisions for three five-year extensions, requires minimum annual rental payments of $3.0 million and required a $0.7 million deposit which was paid at the time of closing. In addition, the Company recorded expenses related to the lease of $0.6 million at the time the transaction closed. Annual operating expenses will increase by approximately $2.4 million, reflecting the new rental payments, offset by interest income on the net proceeds and reduced depreciation expense.

Beginning in 2001 and continuing into 2003, there was a significant decrease in the worldwide demand for semiconductor capital equipment. As a result of a rapid decline in the demand for semiconductor devices, inventory buildups in telecommunications products, slower than expected personal computer sales and overall slower global economic growth, many semiconductor manufacturers reevaluated their capital spending plans. Accordingly, several of the Company’s customers rescheduled delivery or canceled existing orders. Furthermore, the Company experienced a substantial decline in new orders. In response to industry conditions and the introduction of new products that are technologically advanced, the Company recorded significant inventory write-downs, charges related to asset impairments and severance costs related to across-the-board headcount reductions. In addition, the Company implemented measures to reduce discretionary spending.

Due to the continuation and severity of the industry-wide downturn, the Company implemented additional cost-cutting measures during 2002, which included further decreases in discretionary spending and reductions in worldwide headcount. Despite the expected continuation of the industry-wide downturn and uncertainty associated with the introduction of new products, and taking into account the Company’s actions to restructure and downsize the Company, management believes that the Company’s current cash and investment balances will be sufficient to meet the Company’s anticipated cash needs for working capital and capital expenditures at least through May 31, 2003. However, due to significant uncertainties related to the duration and severity of the semiconductor industry downturn and overall economic conditions, the Company may require additional sources of funds in order to strengthen its working capital position. Based on discussions with various lenders, the Company believes that the sources of funds available include a line of credit facility and term debt. If the Company were to raise additional funds through the issuance of equity securities, the percentage ownership of the Company’s stockholders would be reduced. In addition, these equity securities may have rights, preferences or privileges senior to the Company’s common stock. Furthermore, the Company may need to raise additional funds in future periods through a public or private financing, or other sources, to fund working capital requirements driven by the expansion of the business during the industry’s upturn. There are no assurances that the Company will be able to consummate any of these

~~The~~ ~~Company has incurred operating losses of $81~~transactions.~~4 million~~ inFor ~~the~~more ~~first three~~detailed ~~quarters of 2002~~information, ~~and~~see ~~$74.4 million~~“Certain inFactors Affecting ~~2001.~~the ~~The~~ Company’s ~~has~~Business,” ~~incurred~~set ~~a decrease~~forth ~~in its cash and investment balances of $24~~below.~~6 million in the first~~ ~~three quarters of 2002.~~

~~Due~~The toterms ~~the continuation and severity~~ of the ~~industry-wide~~Agreement ~~downturn,~~and ~~the Company~~Plan ~~has implemented additional cost-cutting measures during the first three quarters~~ of ~~2002,~~Reorganization ~~which~~with ~~include further decreases in discretionary spending and~~Novellus ~~reductions~~substantially inlimits ~~worldwide~~our ~~headcount.~~ability ~~Despite~~to ~~the~~incur ~~expected~~indebtedness ~~continuation~~without of the ~~industry-wide~~ ~~downturn~~consent ~~and uncertainty associated with the introduction~~ of ~~new~~ ~~products,~~Novellus. ~~and~~In ~~taking into account the Company’s actions to restructure and downsize the Company~~addition, ~~management believes that~~ the ~~Company’s~~merger ~~current~~agreement ~~cash and investment balances along~~ with ~~net~~Novellus ~~cash~~precludes ~~generated through operations will be sufficient to meet~~ the ~~Company’s anticipated cash needs for working capital and~~ ~~capital~~issuance ~~expenditures~~of ~~for~~debt ~~the~~or ~~foreseeable~~equity ~~future.~~securities ~~However,~~except ~~due~~under tocertain ~~significant~~limited ~~uncertainties~~circumstances ~~related to the duration~~ and ~~severity~~only ofwith the ~~semiconductor industry~~prior ~~downturn~~consent ~~and overall economic conditions, the Company is currently evaluating additional sources~~ of ~~funds and reduction in expenses in order to strengthen its working capital position~~Novellus. ~~Specifically~~Further, ~~the~~we ~~Company is actively~~made ~~pursuing~~certain acovenants ~~sale/leaseback transaction of its Corporate headquarters~~ in ~~Chandler,~~ ~~Arizona.~~the ~~The~~merger ~~Company~~agreement isthat ~~also~~prevent ~~reviewing~~us ~~various~~from ~~other~~entering ~~ways of~~into ~~improving~~certain ~~its~~agreements ~~balance~~and ~~sheet.~~prevent ~~Based~~us onfrom ~~discussions~~taking ~~with~~certain ~~various~~actions ~~lenders,~~without the ~~Company~~consent ~~believes that the sources~~ of ~~funds~~Novellus ~~available~~except ~~include,~~agreements ~~but are not limited to, a line of credit facility, term debt,~~ and ~~the~~actions ~~issuance~~that ~~of additional~~arise ~~equity.~~in If the ~~Company were to raise additional funds, or~~ordinary ~~restructure~~course ~~its balance sheet through the issuance~~ of ~~equity,~~business ~~Company shareholders would be diluted~~ and ~~the~~which ~~dilution~~are ~~could~~consistent bewith ~~substantial.~~past ~~In addition, these equity securities may have rights, preferences or privileges senior to the Company’s common stock~~practices. ~~There can be no assurance that the~~ ~~Company will be able to complete a sale/leaseback or other financing on terms~~ acceptable to it, or at all. In such an event, and if the Company continues to suffer from negative cash flows, it could have insufficient liquidity to conduct its operations in the ordinary course of business.

~~Critical~~Related ~~Accounting~~Party ~~Policies~~Transactions

~~“Management’s~~On ~~Discussion~~June 21, ~~and~~2002, ~~Analysis~~the Company completed a sale-leaseback transaction of its ~~Financial~~corporate ~~Condition~~headquarters and ~~Results~~research and development facilities in Chandler, ofArizona. ~~Operations”~~The ~~discusses~~Company ~~our~~was ~~consolidated~~assisted ~~financial~~by ~~statements~~a ~~which~~national ~~have~~real ~~been prepared~~estate inconsulting ~~accordance~~firm, which ~~with~~obtained ~~accounting~~12 ~~principles~~qualified ~~generally~~offers ~~accepted~~from inacross the United States on behalf of the ~~America~~Company. The ~~preparation~~winning ofoffer ~~these~~was ~~financial~~made ~~statements~~by Phoenix Industrial Investment ~~requires~~Partners, usL.P. to(the ~~make~~“Buyer”), ~~estimates~~a ~~and~~firm ~~assumptions~~controlled ~~that~~by ~~affect~~Kenneth Levy, a director of the ~~reported~~Company, ~~amount~~in a competitive arms’ length bidding process. The offer was approved by the independent directors of ~~assets~~the ~~and~~Company, ~~liabilities~~based atin large part on the ~~date~~opinion of the ~~financial~~Company’s ~~statements,~~outside ~~the~~real estate consulting firm that it was ~~disclosure~~superior ofto ~~contingent~~all ~~assets~~other ~~and~~offers. ~~liabilities~~In atthis regard, the ~~date~~Buyer’s of$25.0 million cash purchase price offered the ~~financial statements,~~highest net proceeds and the ~~reported~~most ~~amounts~~favorable ofnet present ~~revenues~~value. ~~and~~Moreover, ~~expenses~~the ~~during~~offer ~~the reporting~~did ~~period~~not require a financing contingency.

OnIn anconnection ~~on-going~~with ~~basis,~~the wesale ~~evaluate~~of ~~our~~the ~~estimates~~buildings, ~~and~~the ~~judgments,~~Company ~~including~~has ~~those~~simultaneously ~~related~~entered tointo ~~revenue~~a ~~recognition, impairment of long~~15-~~lived~~year ~~assets, valuation~~lease ~~allowances~~ for ~~inventory~~the ~~and~~buildings. ~~accounts~~The ~~receivable~~lease, ~~and warranty. We~~which ~~base~~has ~~our~~been ~~estimates~~accounted ~~and~~for ~~judgments~~as onan ~~historical~~operating ~~experience~~lease ~~and~~in onaccordance ~~various~~with ~~other factors~~SFAS ~~that are believed to be reasonable under the circumstances~~No. ~~The result~~ 13, of“Accounting ~~these~~for ~~estimates~~Leases”, ~~and~~contains ~~judgements~~provisions ~~form the basis~~ for ~~making~~three ~~judgments~~five-year ~~about~~extensions ~~the carrying value of assets~~ and ~~liabilities that are not readily apparent from~~ ~~other~~requires ~~sources.~~minimum ~~Actual~~annual ~~results~~rental ~~may~~payments ~~differ~~of ~~from these estimates under different assumptions or conditions~~$3.0 million.

OnAs ~~December 20,~~a ~~2001,~~result of the ~~Securities~~transaction, ~~and~~the ~~Exchange~~Company ~~Commission~~received ~~(“SEC”) requested~~cash ~~that~~proceeds ~~all registrants list their most “critical accounting policies”~~of ~~in Management’s Discussion and Analysis~~$25.0 million. The ~~SEC~~book ~~indicated~~value ~~that a “critical accounting policy” is one which is both important to the portrayal~~ of ~~the Company’s~~buildings ~~financial condition~~ and ~~results~~improvements ~~and~~removed ~~requires~~from ~~management’s most difficult, subjective or complex judgments, often as a result of~~ the ~~need to~~ ~~make~~balance ~~estimates~~sheet ~~about~~in the ~~effect~~first quarter of ~~matters~~2003 ~~that~~is ~~are inherently uncertain~~$25. ~~Management~~1 million. ~~believes~~The ~~the~~loss ~~following~~on ~~critical accounting policies affect its more~~the ~~significant~~sale ~~judgments~~of ~~and estimates in~~ the ~~preparation~~buildings ofand ~~its~~improvements ~~consolidated financial~~was ~~statements~~$0.1 million.

~~Revenue~~Changes ~~Recognition~~in Accounting Principles

~~Prior~~In toJuly 2001, the ~~implementation~~Financial Accounting Standards Board issued Statement of Financial ~~SAB~~Accounting ~~101~~Standards (SFAS) No. 142, we“Goodwill ~~recognized~~and ~~revenue~~Other ~~from~~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 ~~sale~~and recorded a cumulative effect of ~~our~~change ~~products~~in ~~generally~~accounting ~~upon~~principle ~~shipment~~for the write-off of goodwill of ($2.6) ~~Effective~~million, or ($0.08) per share, as of the beginning of 2002 (June 43, ~~2000~~2001). The circumstances leading to the impairment of goodwill primarily relate to current operating losses, wethe absence of ~~changed~~positive ~~our~~cash ~~method~~flows and uncertainties resulting from the duration and severity of ~~recognizing~~the ~~revenue~~industry ~~for~~downturn. ~~sales~~The fair value of ~~CMP~~the ~~systems~~reporting tounits, ~~reflect~~which correspond to the ~~following~~Company’s ~~approach:~~business segments, were estimated using quoted market prices.

• In ~~For~~June ~~CMP~~2001, ~~system~~the ~~sales~~Financial toAccounting aStandards ~~new~~Board ~~customer~~issued SFAS No. 141, or“Business ~~CMP~~Combinations”. ~~system~~SFAS ~~sales~~No. 141 ofsupercedes ~~existing~~prior ~~products~~guidance ~~with~~and requires ~~new~~that ~~specifications~~all orbusiness ~~acceptance~~combinations ~~criteria,~~in ~~and~~the scope of this statement be accounted for using the purchase method. The provisions of this statement apply to all ~~new~~business ~~CMP~~combinations ~~products~~initiated after June 30, ~~revenue~~2001, isas ~~deferred~~well ~~until~~as all ~~customer~~business ~~acceptance,~~combinations ataccounted ~~which~~for ~~time~~using the ~~revenue~~purchase method for which the date of acquisition is ~~recognized~~July 1, 2001 or later. The ~~related~~Company ~~costs~~adopted ~~for~~this statement ~~systems~~as ~~for~~required ~~which~~on ~~this~~July 1, 2001 and it did not affect the financial statements.

18 In October 2001, the Financial Accounting Standards Board issued SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” SFAS No. 144, which replaces SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,” requires long-lived assets to be measured at the lower of carrying amount or fair value less the cost to sell. SFAS No. 144 also broadens disposal transactions reporting related to discontinued operations. SFAS No. 144 is effective for financial statements issued

~~approach~~ isfor ~~used~~fiscal ~~are~~years ~~recorded~~beginning asafter ~~shipped systems pending acceptance until customer acceptance~~December 15, ~~at which time cost of goods sold is recorded~~2001. •The ~~For~~Company ~~CMP~~has ~~system~~not yet ~~sales~~determined ~~to existing customers who have previously purchased~~ the ~~same~~effects ~~system~~SFAS ~~with the same customer-specified acceptance provisions, revenue is recognized under a multiple-element arrangement~~No. 144 ~~Accordingly,~~will ~~upon~~have ~~shipment,~~on ~~the~~its ~~contractual~~financial ~~amount payable by the customer is recorded as revenue and title is transferred. The remainder is recorded as deferred revenue and recognized as revenue upon customer acceptance. Ordinarily~~position, results ~~80%~~of tooperations ~~90%~~or ofcash ~~the~~flows ~~system~~but ~~sales~~does ~~price~~not isanticipate ~~payable~~that by the ~~customer upon shipment, while 10% to 20% (a “holdback”) is due upon acceptance. As a result, customer acceptance may also have an~~ impact will onbe ~~the timing of cash receipts associated with deferred revenue~~significant.

~~Revenue~~In ~~related~~April to2002, ~~non-CMP~~the ~~systems~~Financial Accounting Standards Board issued SFAS No. 145, “Rescission of FASB Statements No. 4, 44, and ~~spare~~64, ~~parts~~Amendment ~~for~~of ~~all~~FASB Statement ~~segments~~No. 13, and Technical Corrections.” SFAS No. 145 rescinds SFAS No. 4, ~~continue~~“Reporting toGains beand ~~recognized~~Losses ~~upon~~from ~~transfer~~Extinguishment of ~~title~~Debt,” ~~which~~and isan ~~generally~~amendment ~~upon~~of ~~shipment~~that Statement, SFAS No. 64, ~~Revenue~~“Extinguishments ~~related~~of Debt Made to ~~service~~Satisfy Sinking-Fund ~~contracts~~Requirements”. isSFAS ~~recognized~~No. 145 ~~ratably~~also ~~over~~rescinds ~~the~~SFAS No. 44, “Accounting ~~duration~~for Intangible Assets of ~~the~~Motor ~~contracts~~Carriers.” InSFAS ~~all~~No. 145 ~~cases~~amends SFAS No. 13, “Accounting ~~revenue~~for isLeases,” ~~only~~to ~~recognized~~eliminate ~~when persuasive~~an ~~evidence~~inconsistency ofbetween anthe ~~arrangement~~required accounting ~~exists,~~for ~~delivery~~sale-leaseback ~~has~~transactions ~~occurred~~and orthe ~~services~~required accounting for certain lease modifications that have ~~been~~economic ~~rendered,~~effects ~~the~~that ~~seller’s~~are ~~price~~similar isto sale-leaseback ~~fixed~~transactions. orSFAS ~~determinable~~No. 145 ~~and~~also amends other existing ~~collectibility~~authoritative ispronouncements ~~reasonably~~to ~~assured~~make various technical corrections, clarify meanings, or describe their applicability under changed conditions. ~~Normally~~The Company adopted SFAS No. 145 on June 2, we2002 doand it did not ~~incur~~have ~~returns~~a ofmaterial ~~CMP~~impact on the financial position or ~~non-CMP~~results ~~systems~~of operations of the Company.

Impairment of Long-lived Assets

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

Inventory Valuation

We value our inventory at the lower of cost or the current estimated market value. We regularly review inventory quantities on hand and record a provision for excess and obsolete inventory. The 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 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 recorded significant inventory write-downs for obsolete inventory and inventory 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.

Valuation Allowance for Accounts Receivable

We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. These allowances are established based upon historical experience, credit evaluations and specific customer collection issues we have identified. Since our accounts receivable are concentrated in a relatively few number of customers, a significant change in the liquidity or financial position of any one of these customers could have a material adverse impact on the collectibility of our accounts receivable and our future operating results. 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

acceptance was completed. If some of our customers refuse to pay the remaining “holdbacks”, the deferred revenue will not be recognized and future operating results may be adversely affected.

Warranty

We 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 ultimately accepted. While our warranty costs have historically been within our expectations and provisions established, we cannot guarantee that we will continue to experience the same warranty costs we have in the past. In addition, new technological changes and frequent product development may result in products requiring more extensive and frequent warranty service, which may have a material adverse impact on our operating results for the periods in which such additional costs materialize.

Contractual Obligations and Commercial Commitments

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

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

			Operating		Commercial
	Debt		Leases (1)		Commitments
	(in thousands)
Through August 2003	$	48	$	4,504	$	6,845
Through March 2003	$	81	$	2,463	$	4,020
September 2003 to August 2006		115,057		10,787		—
April 2003 to March 2006		115,065		2,798		—
September 2006 to August 2008		—		6,669		—
April 2006 to March 2008		—		170		—
Thereafter		—		32,337		—
Thereafter		—		734		—
Total	$	115,105	$	54,297	$	6,845
Total	$	115,146	$	6,165	$	4,020

(1) Reported amounts for operating leases have been reduced for income from subleases. Sublease income is as follows: $12,~~820~~326 through ~~March~~August 2003, $7,~~493~~584 ~~April~~September 2003 to ~~March~~August 2006; $5,~~100~~097 ~~April~~September 2006 to ~~March~~August 2008; $108,~~677~~822 thereafter.

Impact of Recently Issued Accounting Standards

In ~~October~~June 2001, the Financial Accounting Standards Board issued ~~Statement~~SFAS No. of143, ~~Financial~~ “Accounting ~~Standard~~for (Asset Retirement Obligations.” SFAS) No. ~~144,~~143 ~~“Accounting~~addresses financial accounting and reporting for ~~the~~obligations ~~Impairment or~~associated ~~Disposal~~with the retirement of ~~Long~~tangible long-~~Lived~~lived ~~Assets”~~assets and the associated asset retirement costs. ~~SFAS~~This ~~144,~~Statement ~~which~~applies ~~replaces~~to ~~SFAS~~all ~~121,~~entities and applies to legal obligations ~~“Accounting~~associated ~~for~~with the ~~Impairment~~retirement of ~~Long~~long-~~Lived~~lived ~~Assets~~assets ~~and~~that ~~for~~result ~~Long-Lived~~from ~~Assets~~the toacquisition, Beconstruction, ~~Disposed~~development ~~Of,”~~and ~~requires~~(or) the normal operation of a long-lived asset, ~~assets~~except tofor becertain ~~measured~~obligations atof lessees. It requires that the fair ~~lower~~value of a liability for an asset retirement obligation be recognized in ~~carrying~~the ~~amount~~period orin which it is incurred if a reasonable estimate of fair value ~~less~~can be ~~the~~made. ~~cost~~The toassociated ~~sell.~~asset ~~SFAS~~retirement ~~144~~costs ~~also~~would ~~broadens~~be capitalized as part of ~~disposal~~the ~~transactions~~carrying ~~reporting~~amount ~~related~~of tothe ~~discontinued~~long-lived ~~operations~~asset. SFAS ~~144~~No. 143 is effective for financial statements issued for fiscal years beginning after ~~December~~ June 15, ~~2001~~2002. The Company has not yet determined the effects SFAS ~~144~~No. 143 will have on its financial position, results of operations or cash flows ~~but does not anticipate that the impact will be significant~~.

20 In June 2002, the Financial Accounting Standards Board issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.” SFAS No. 146 requires that a liability for a cost associated with an exit

or disposal activity be recognized when the liability is incurred. Prior guidance required that a liability for an exit cost be recognized at the date of an entity’s commitment to an exit plan. This Statement also establishes that fair value techniques should be used to measure the liability. SFAS No. 146 is effective for exit or disposal activities that are initiated after December 31, 2002.

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

This 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) SpeedFam-IPEC’s expectation that the merger with Novellus will close; (iii) ~~continuing~~the ~~fluctuation~~continuation of the trend in ~~gross~~reduced or fluctuating gross margins; (iiiii) ~~continuing~~the continuation of investment in research, development, and engineering programs; (iv) SpeedFam-IPEC’s expectation that its effective tax rate will approximate zero throughout 2003; (v) SpeedFam-IPEC’s expectation that the industry-wide downturn in the semiconductor industry will continue; and (~~iii~~vi) 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 or that sources of additional financings may be available. 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~~the Company’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~~THE COMPANY’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~~may ~~using~~not ~~substantial~~achieve ~~cash reserves to fund operations during~~ the ~~industry~~ ~~downturn,~~benefits ~~and there can be no assurance~~ we ~~will~~expect befrom ~~able to achieve positive cash flow in~~ the ~~foreseeable~~merger ~~future.~~with ~~As of March 2, 2002, we had $36~~Novellus.2 ~~million~~We inentered ~~cash,~~into ~~cash~~the ~~equivalents~~merger ~~and~~agreement ~~short-term~~with ~~investments,~~Novellus ~~compared~~with tothe ~~$60.8 million~~expectation ~~at June 2, 2001. During~~ that the ~~first~~merger ~~three~~will ~~quarters~~result ~~of 2002, we used $22.1 million~~ in ~~operating~~significant ~~activities~~benefits ~~compared~~ to ~~$10~~both parties.~~9 million~~ ~~during~~Achieving the ~~same~~ ~~period~~benefits of the ~~prior~~merger ~~year.~~depends Weon ~~are~~the ~~currently~~timely, ~~exploring~~efficient ~~options~~and ~~to restructure our~~successful ~~balance~~execution ~~sheet~~of ~~and~~a ~~generate~~number ~~positive~~of ~~cash~~post-merger ~~flow~~events, including aintegrating ~~reduction in~~the ~~operating~~operations, ~~expenses~~products, personnel and atechnologies ~~sale-leaseback~~of ~~transaction~~the ~~involving~~two ~~our~~companies. ~~headquarters~~In ~~in Chandler~~addition, ~~Arizona.~~the ~~However,~~attention ~~we have experienced a significant decrease in revenues~~ and ~~orders~~effort ~~and~~devoted ~~we are unable~~ to ~~determine~~the ~~when~~integration ~~demand~~of ~~for~~the ~~our products~~two ~~will~~companies ~~resume,~~could ifsignificantly ~~ever.~~divert ~~Accordingly,~~management’s weattention ~~can~~from ~~provide no assurances that we will~~other ~~achieve~~important aissues, ~~positive~~and ~~cash~~could ~~flow~~seriously ~~position~~harm in the ~~future~~combined ~~or obtain or generate sufficient cash proceeds from financings to sustain operations~~company.

~~Our~~There ~~future~~may ~~operating~~be ~~performance~~fluctuations ~~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~~price ~~amount~~ of ~~approximately $115 million. We incurred a $10.4 million net loss in~~ the ~~third~~common ~~quarter~~stock of ~~fiscal 2002 and~~Novellus, ~~net~~which, ~~losses~~based ofon ~~$134 million~~the infixed ~~fiscal~~exchange ~~2001~~ratio ~~and~~set ~~$14 million~~forth 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~~merger ~~operating~~agreement ~~performance~~with ~~and~~Novellus ~~cash flow. Our operating performance~~ and ~~cash~~investors’ ~~flow~~belief ~~are~~that ~~subject, in part, to economic factors beyond our control, primarily~~ the ~~market~~merger ~~for~~will ~~semiconductor capital~~be ~~equipment,~~consummated ~~which~~at ~~in turn depends in part on demand for semiconductor~~such ~~chips.~~stock ~~If we cannot generate sufficient cash flow from operations to service our debt~~price, we may ~~need~~affect tothe ~~further~~market ~~refinance~~price ~~our debt, dispose~~ of ~~assets,~~our ~~issue equity,~~common orstock ~~undertake~~which ~~other~~could ~~actions to obtain the necessary funds. We do not~~result ~~know~~in ~~whether~~substantial welosses ~~will~~for ~~be able to accomplish any of such transactions on a timely basis or on terms satisfactory to us, or at all~~investors.

~~Our~~Failure ~~common~~to ~~stock~~complete ~~may~~the bemerger ~~delisted~~could bynegatively ~~Nasdaq~~impact ifour ~~we do not comply with its listing maintenance requirements. Our common~~ stock isprice ~~listed on the Nasdaq National~~and ~~Market.~~future Webusiness ~~are~~and ~~currently in compliance with Nasdaq’s continued listing requirements~~operations. ~~However,~~If if the ~~price~~merger ofis ~~our~~not ~~common~~completed ~~stock falls below $3~~ for ~~30 consecutive~~any ~~days and if our stockholder’s equity falls below $10 million~~reason, ~~or if~~ we ~~are~~may ~~not otherwise able to demonstrate to Nasdaq our ability to comply with its other listing standards, our shares of common stock might~~ be ~~delisted.~~subject ~~A delisting is likely~~ to ~~make~~a ~~the~~number ~~price~~ of ~~our~~material ~~common~~risks, ~~stock~~including ~~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~~following: ~~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~~we ~~business~~may ~~model~~be isrequired ~~predicated~~under oncertain ~~the~~circumstances ~~successful~~to ~~launch~~pay ~~and market~~Novellus ~~acceptance~~a oftermination ~~our~~fee ~~Momentum™~~in ~~and~~cash ~~Momentum300™~~equal ~~products~~to $5.0 ~~Our~~million ~~failure~~and ~~to win~~reimburse ~~qualification~~Novellus ~~contests~~for ~~and~~its ~~obtain~~expenses; ~~volume~~• ~~orders~~the ~~for~~price of our ~~200~~common ~~and~~stock ~~300 millimeter~~may ~~would~~decline ~~materially~~to ~~adversely~~the ~~affect~~extent that the current market price of our ~~cash~~common ~~flow~~stock reflects a market assumption that the merger will be completed; and ~~operations.~~• ~~A significant~~costs ~~portion~~related ofto ~~our~~the ~~projected~~merger, ~~revenue~~such ~~depends~~as onlegal, ~~sales~~accounting ofand ~~our~~financial ~~Momentum™ product.~~advisor ~~Although~~fees, ~~initial~~must ~~customer~~be ~~response~~paid to even if the merger is not completed.

2116

~~MomentumTM~~ Additionally, ~~through~~our ~~evaluation~~customers ~~testing~~and ~~has been positive~~suppliers, ~~this~~in response ~~may~~to ~~not~~the announcement ~~translate~~of ~~into~~the ~~sales~~merger, ofmay ~~MomentumTM~~delay onor ~~the~~defer ~~scale~~decisions concerning us or indecide ~~the~~to terminate ~~time~~their ~~frame~~relationship ~~we anticipate~~with us. IfAny wedelay ~~are~~or ~~unable~~deferral in those decisions or any decision to ~~close~~terminate ~~anticipated~~such ~~orders,~~relationships ~~sell~~by ~~products~~our atcustomers or suppliers ~~profitable~~could ~~levels,~~have ora ~~fulfill~~material ~~orders~~adverse ~~for~~effect on our business, regardless of whether the merger ~~MomentumTM~~is ~~product~~ultimately completed. Similarly, this may adversely affect our ability ~~revenues~~to attract and retain key management, ~~cash~~ ~~flow~~sales, marketing and ~~profitability~~technical personnel ~~will~~to bethe ~~adversely~~extent ~~affected~~we need to keep such personnel.

~~In particular~~Further, weif ~~must~~the ~~succeed~~merger inis ~~selling~~terminated ~~CMP~~and ~~equipment~~our ~~for~~board ~~leading-edge~~of directors determines ~~technologies~~to ~~such~~seek asanother ~~300~~merger ~~millimeter~~or ~~wafer~~business ~~processing~~combination, ~~.13~~there ~~micron~~can ~~and~~be ~~below processing,~~no ~~and~~assurance ~~copper~~that it ~~applications~~will inbe ~~order~~able to ~~increase~~find ~~our~~a ~~cash~~partner ~~flows~~willing ~~and maintain~~to ~~market~~pay ~~share.~~an Toequivalent ~~compete~~or ~~for~~more attractive ~~market~~price ~~share~~than inthe ~~these~~price ~~leading-edge technologies,~~to webe ~~must~~paid ~~enter~~in ~~into~~the ~~qualification~~proposed ~~contests~~merger. ~~that~~In ~~will result in~~addition, ~~manufacturers~~during ~~choosing~~the aperiod ~~line~~in ofwhich ~~equipment~~the ~~and~~merger ~~purchasing~~agreement ~~such~~is ~~equipment~~ in ~~volume.~~ Ifeffect weand ~~fail~~subject to very ~~win~~narrowly ~~qualification~~defined ~~contests~~exceptions, ~~for~~we ~~300~~are ~~millimeter~~prohibited from soliciting, ~~.13~~initiating ~~micron~~or ~~and~~encouraging ~~below~~or ~~processing,~~entering ~~and~~into ~~copper~~certain ~~applications~~extraordinary transactions, wesuch ~~may~~as ~~experience~~a ~~difficulty~~merger, ~~achieving~~sale ~~volume sales~~ of ~~next-generation~~assets ~~equipment~~or toother ~~semiconductor manufacturers~~business combination, ~~which~~with ~~would~~any ~~adversely~~party ~~affect~~other ~~revenues and cash flows~~than Novellus.

~~The~~ We ~~rollout~~are ofusing ~~MomentumTM~~substantial cash reserves to fund operations during the industry downturn, and ~~Momentum300TM~~there ~~may~~can be ~~slowed~~no ~~due~~assurance we will be able to: achieve positive cash flow in the foreseeable future. Although during the first quarter of 2003, we generated $1.9 million in cash from operating activities, we remained cash flow negative. We are currently exploring options to generate positive cash flow, including continued reduction in operating expenses. However, we continue to experience depressed revenues and orders and we are unable to determine when increasing demand for our products will resume, if ever. Accordingly, we can provide no assurances that we will achieve a positive cash flow position in the future or obtain or generate sufficient cash proceeds from financings to sustain our operations.

• Our ~~manufacturing~~common ~~problems;~~stock •may ~~unforeseen~~be ~~technical~~delisted ~~problems~~by Nasdaq if we do not comply with ~~the~~its listing ~~MomentumTM~~maintenance orrequirements. ~~Momentum300TM~~Our ~~product~~common ~~itself;~~stock •is ~~changes~~listed on the Nasdaq National Market. We are currently in compliance with Nasdaq’s continued listing requirements. However, if the ~~CMP~~price ~~marketplace~~of ~~that~~our ~~differ~~common ~~from~~stock falls below $3.00 for 30 consecutive days and if our ~~expectations;~~stockholder’s equity falls below $10.0 million, or if •we ~~competitive~~are ~~factors~~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 August 31, 2002 our stockholders equity was $8.5 million and our stock price as quoted on Nasdaq was $3.71 per share as of September 30, 2002.

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

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

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

	•		continuation of the semiconductor industry downturn;

	•		manufacturing problems;

	•		unforeseen technical problems with the Momentum or Momentum300 product itself;

	•		changes in the CMP marketplace that differ from our expectations; or

	•		competitive factors.

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

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~~following customers each represented more than 10% of SpeedFam-IPEC’s revenues for the fiscal years indicated: Intel Corporation and United Microelectronics for the fiscal year ended June 1, 2002; Intel Corporation, United Microelectronics and Silterra Malaysia Sdn. Bhd for the fiscal year ended June 2, 2001; and Intel Corporation and United Microelectronics for the fiscal year ended June 3, 2000. 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~~ 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~~Momentum products, we are moving toward an outsourced production model, in in which a limited number of key vendors will supply a limited number of ~~modules~~ modules designed to our specifications that we will assemble into our products. Historically, we have manufactured our own products from parts, components ~~and~~ 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~~fiscal ~~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.

22 The downturn in the semiconductor industry has led and may continue to lead to decreased revenues. Beginning in 2001 and continuing into 2003, slowing worldwide demand for semiconductors resulted in significant inventory buildups for semiconductor companies and a rapid decline in demand for semiconductor manufacturing equipment. Presently, we have little visibility regarding how long the semiconductor industry downturn will last or how severe the downturn will be. During fiscal 2002, we experienced cancellations and suspensions of orders for

~~The~~ ~~downturn~~our inproducts ~~the semiconductor industry has led~~ and ~~may~~a ~~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~~decrease ~~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~~may ~~continue to~~ experience additional cancellations and/or suspensions of orders for our products and a continuing slowdown in orders.

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

• industry demand for our products, which depends on economic conditions in the semiconductor, ~~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 directly or indirectly 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; and • foreign currency exchange rates.

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

	•		enhanced credit risk associated with our debt;

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

	•		delays in orders;

	•		announcements by our competitors;

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

	•		government regulation;

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

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

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

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

~~We face intense competition, including from companies with greater~~19 ~~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.

• We ~~Some~~face ~~competitors~~intense ~~may~~competition, ~~supply~~including afrom ~~broader~~companies ~~range~~with ofgreater resources. ~~semiconductor~~This ~~capital~~competitive ~~equipment,~~pressure ~~enabling~~could ~~them~~lead to ~~serve~~continued ~~more~~decreases orin ~~all~~our revenues, ofwhich ~~their~~would ~~customers’~~adversely ~~needs.~~affect ~~This~~our ~~could~~operating ~~limit~~results. ~~sales~~Several ~~for~~companies currently usmarket ~~and~~CMP ~~strengthen~~systems ~~existing relationships~~ that ~~competitors~~directly ~~have~~compete with ~~semiconductor~~our ~~manufacturers~~products, including Applied ~~our~~Materials, ~~current and potential customers~~Inc. ~~• Some competitors may be able to better adapt to changing market conditions~~ and ~~customer~~Ebara ~~demand~~Corporation. •For ~~Competitors~~several ~~are~~reasons, ~~expected~~we tomay ~~continue~~not compete toeffectively ~~improve~~with ~~their~~ existing ~~technology~~ and ~~introduce~~potential ~~new products~~competitors. These ~~products~~reasons 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. 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.20

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~~We ~~accounted~~incur ~~for~~substantial ~~62%~~costs ofto ~~our~~ensure ~~total revenue for~~ the ~~first three~~functionality ~~quarters~~and reliability of ~~2002,~~products ~~61%~~early ~~for~~in ~~2001,~~their ~~and~~life ~~70% for 2000~~cycle. We• ~~expect~~Repeated ~~that international~~defects ~~sales~~or ~~will~~bugs ~~continue~~can toreduce ~~account~~orders, ~~for~~increase amanufacturing ~~significant~~costs, ~~portion~~adversely ofimpact ~~total revenue~~working incapital ~~future~~and ~~periods.~~increase Ifservice ~~international~~and ~~sales~~warranty ~~are~~expenses. ~~adversely~~• ~~effected~~We asrequire ~~a result~~significant oflead-times ~~any~~between ofproduct ~~the~~introduction ~~foregoing risks or uncertainties, our cash flows~~ and ~~financial~~ ~~condition~~commercial ~~would be similarly effected~~shipment.

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

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

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

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

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

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

	•		collection of accounts receivable;

	•		inadequate intellectual property protection;

	•		potentially adverse tax consequences; and

	•		intense price competition.

International sales accounted for 63% of our total revenue in the first quarter of 2003, 64% for 2002 and 61% for 2001. 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.

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~~and our inability or failure to 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~~parts, components and subassemblies, 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~~ 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 21, ~~2001~~2002.

ITEM 4. Controls and Procedures.

Based on the evaluation of the Company’s disclosure controls and procedures as of a date within 90 days of the filing date of this quarterly report, each of the Company’s Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures are effective in ensuring that information required to be disclosed by the Company in the reports that it files or submits under the Securities and Exchange Act of 1934, as amended, is recorded, processed, summarized and reported, within the time period specified by the Securities and Exchange Commission’s rules and forms.

There were no significant changes in the Company’s internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

PART II — OTHER INFORMATION

Item 1. Legal Proceedings

~~For a discussion of recent legal proceedings, see Footnote 9 of the Notes to Condensed Consolidated Financial Statements.~~ None

Item 2. Changes in Securities

None

Item 3. Defaults upon Senior Securities

None

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

None

Item 5. Other Information

None

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

	(a)		Exhibits.

			See Exhibit Index

	(b)		Reports on Form 8-K.

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

A report on Form 8-K, Item 5 was filed on August 13, 2002 concerning the execution of an Agreement

and Plan of Reorganization pursuant to which SpeedFam-IPEC will become a wholly-owned subsidiary of Novellus Systems, Inc. through the merger of a wholly-owned subsidiary of Novellus with and into SpeedFam-IPEC. The consummation of the merger is contingent upon receiving requisite approval of SpeedFam-IPEC shareholders.

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.


		/s/ J. Michael Dodson

Date: October 15, 2002		By J. Michael Dodson Secretary and Chief Financial Officer (Principal Financial Officer)









		/s/ G. Michael Latta

Date: October 15, 2002		By G. Michael Latta Corporate Controller (Principal Accounting Officer)

~~Item 6.~~CERTIFICATION ~~Exhibits~~OF ~~and~~PRINCIPAL ~~Reports~~EXECUTIVE ~~on Form 8-K~~OFFICER

~~(a) Exhibits~~I, Richard J. Faubert, certify that:

Exhibit		Description
3.1*		Articles of Incorporation of SpeedFam-IPEC, Inc.
3.2*		Bylaws of SpeedFam-IPEC, Inc.

	1.		I have reviewed this quarterly report on Form 10-Q of SpeedFam-IPEC, Inc. (the reigstrant);

	2.		Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

	3.		Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present, in all material respects, the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

	4.		The Company’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

			a) designed such disclosure controls and procedures to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

			b) evaluated the effectiveness of the Company’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

			c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

	5.		The Company’s other certifying officer and I have disclosed, based on our most recent evaluation, to the Company’s auditors and the audit committee of Company’s board of directors:

			a) all significant deficiencies in the design or operation of internal controls which could adversely affect the Company’s ability to record, process, summarize and report financial data and have identified for the Company’s auditors any material weaknesses in internal controls; and

			b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Company’s internal controls; and

	6.		The Company’s other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

*Date: ~~Filed~~October 15, ~~herewith~~2002

~~(b) Reports~~/s/ onRichard ~~Form 8-K~~J. Faubert

Richard J. Faubert
Chief Executive Officer

None

~~SpeedFam-IPec,~~CERTIFICATION ~~Inc.~~OF PRINCIPAL FINANCIAL OFFICER

~~Signature~~I, J. Michael Dodson, certify that:

~~Pursuant~~1. I have reviewed this quarterly report on Form 10-Q of SpeedFam-IPEC, Inc. (the registant); 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the ~~requirements~~statements made, in light of the ~~Securities~~circumstances ~~Exchange~~under ~~Act~~which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present, in all material respects, the financial condition, results of ~~1934~~operations and cash flows of the registrant as of, and for, the ~~Registrant~~ ~~has~~periods ~~duly~~presented ~~caused~~in this quarterly report; 4. The Company’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to beensure ~~signed~~that onmaterial information relating to the Company, including its ~~behalf~~consolidated subsidiaries, is made known to us by others within those entities, particularly during the ~~undersigned~~ ~~thereunto~~period ~~duly~~in ~~authorized~~which this quarterly report is being prepared; b) evaluated the effectiveness of the Company’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The Company’s other certifying officer and I have disclosed, based on our most recent evaluation, to the Company’s auditors and the audit committee of Company’s board of directors: a) all significant deficiencies in the design or operation of internal controls which could adversely affect the Company’s ability to record, process, summarize and report financial data and have identified for the Company’s auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Company’s internal controls; and 6. The Company’s other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

		/s/ J. Michael Dodson
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)

Date: October 15, 2002

/s/ J. Michael Dodson

J. Michael Dodson
Chief Financial Officer

EXHIBIT INDEX

Exhibit		~~Description~~
3.1*		Articles of Incorporation of SpeedFam-IPEC, Inc.
Number		Description
3.2*		Bylaws of SpeedFam-IPEC, Inc.
*3.1		Articles of Incorporation of SpeedFam-IPEC, Inc. (incorporated by reference to Exhibit 3.1 to the Registrant’s Form 10-Q for the quarter ended March 2, 2002 (File No. 0-26784))
*3.2		By-laws of SpeedFam-IPEC, Inc. (incorporated by Reference to Exhibit 3.2 to the Registrant’s Form 10-Q for the quarter ended March 2, 2002 (File No. 0-26784))
99.1		Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

* ~~Filed~~Previously ~~herewith~~filed.

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Filing Compare · SPEEDFAM IPEC INC