UNITEDTable STATES of Contents

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

~~Annual~~ANNUAL ~~Report~~REPORT ~~Pursuant~~PURSUANT toTO ~~Section~~SECTION 13 or OR 15(d) of

~~the~~OF ~~Securities~~THE ~~Exchange~~SECURITIES ~~Act~~EXCHANGE ofACT OF 1934

For the fiscal year ended June 31, ~~2000~~ 2002

Commission file number 0-26784

SpeedFam-IPEC, Inc.

(Exact name of registrant as specified in its charter)

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


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

Registrant’s ~~Telephone~~telephone ~~Number~~number: (480) 705-2100

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

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

Common Stock, No Par Value

(Title of Class)

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

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

~~State~~The ~~the~~ aggregate market value of the voting ~~and non-voting~~ stock held by non-affiliates of the registrant: was approximately $~~408~~56 million based on the closing price of $2.85 per share of common stock as reported on the Nasdaq Stock Market on July 31,~~323~~ 2002. For purposes of this determination,~~953~~ asshares of common stock held by each officer and director and by each person who owns 5% or more of the outstanding common stock have been excluded in that such persons may be deemed to be affiliates of the registrant. This determination of affiliate status is not necessarily a conclusive determination for other purposes. The number of outstanding shares of the registrant’s common stock as of the close of business on July 31, ~~2000~~2002 was 31,058,793.

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

Documents incorporated by reference:


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

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

TABLE OF CONTENTS

Item
No.			Caption	Page
Part I			~~Part I~~
	1.		Business	1	1
	2.		Properties	8	9
	3.		Legal Proceedings	8	9
	4.		Submission of Matters to a Vote of Security Holders	8	9
Part II			~~Part II~~
	5.		Market for Common Equity and Related Stockholder Matters	8	9
	6.		Selected Financial Data	10	10
	7.		Management’s Discussion and Analysis of Financial Condition and Results of Operations	12	12
	7	A.	Quantitative and Qualitative Disclosures about Market Risk	25
	7A.		Quantitative and Qualitative Disclosures about Market Risk		29
	8.		Financial Statements and Supplementary Data	26	31
	9.		Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	75	59
Part III			~~Part III~~
	10.		Directors and Executive Officers of the Company	75	59
	11.		Executive Compensation	75	61
	12.		Security Ownership of Certain Beneficial Owners and Management	75	67
	13.		Certain Relationships and Related Transactions	75	70
Part IV			~~Part IV~~
	14.		Exhibits, Financial Statement Schedules, and Reports on Form 8-K	75	70
			Signatures	76	71
			List of Exhibits	EXHIBIT INDEX
			List of Exhibits EXHIBIT INDEX

Item 1. Business

SpeedFam-IPEC, Inc. (the Company) ~~was~~is ~~incorporated~~a ~~in Illinois in~~leading global ~~1959 as SpeedLap Corporation. Effective April 6, 1999, Integrated Process Equipment Corp. (IPEC), a~~ supplier of chemical mechanical planarization (or CMP) systems, ~~merged~~with ~~into~~more athan ~~wholly owned subsidiary of SpeedFam International~~1,300 ~~Inc.~~systems ~~Following the~~installed ~~merger, SpeedFam International, Inc~~worldwide. ~~changed its name to SpeedFam-IPEC, Inc.~~ The Company ~~operates~~designs, ~~through three wholly owned subsidiaries~~develops, ~~SpeedFam-IPEC Corporation in the U.S. (SpeedFam-IPEC U.S.)~~manufactures, ~~and SpeedFam-IPEC Limited (SpeedFam-IPEC~~markets ~~U.K.)~~ and ~~SpeedFam-IPEC~~supports ~~GmbH~~CMP ~~(SpeedFam-IPEC~~systems ~~Germany)~~for use in ~~Europe. The~~the ~~Company~~fabrication ~~also owns 50%~~ of ~~SpeedFam-IPEC Co., Ltd. (together~~advanced ~~with~~semiconductor ~~its subsidiaries and joint ventures, the Far East Joint Venture)~~devices.

~~The~~Semiconductor ~~Company~~chips ~~designs~~are built on a base of silicon, ~~develops~~called a wafer, ~~manufactures~~and include multiple layers of wiring, which ~~markets~~connect a variety of circuit components, such as transistors and ~~supports~~other structures. The construction of semiconductor ~~CMP~~chips ~~systems~~is ~~used~~accomplished inthrough the ~~fabrication~~deposition ofonto a ~~semiconductor~~wafer ~~devices~~of ~~and~~ layers ~~also~~of ~~manufactures~~metal ~~other~~for ~~high-throughput~~wire ~~precision~~connections ~~surface~~and silicon ~~processing~~dioxide ~~systems~~for insulation. ~~The~~Copper ~~Company’s~~is ~~flat~~fast ~~surface~~becoming ~~processing~~the metal of ~~systems~~choice ~~are~~among ~~used~~chip inmanufacturers ~~general~~due ~~industrial~~to ~~applications~~its ~~markets.~~superior ~~The~~conductivity ~~Company~~capability. ~~also~~Insulators, ~~markets~~or ~~and~~dielectrics, ~~distributes~~of ~~polishing~~which ~~liquids~~silicon dioxide ~~(slurries),~~is ~~parts~~the ~~and~~conventional ~~consumables~~material, are used into ~~its~~prevent ~~customers’~~interference ~~manufacturing~~between ~~processes~~closely spaced metal interconnects.

~~Unless~~Deposition ~~the~~is ~~context~~done ~~otherwise~~with ~~requires,~~varying ~~the~~degrees ~~“Company”~~of thickness and ~~“SpeedFam-IPEC”~~uniformity, ~~refer~~leaving behind bumpy or uneven layers of metal or insulating material. CMP is used to planarize — ~~SpeedFam-IPEC,~~or ~~Inc~~smooth — the surface of the wafer to prepare it for the next layer of processing., anThis ~~Illinois~~smoothing ~~corporation~~is accomplished through a polishing process using high-performance equipment, ~~and~~consumables, ~~its~~such ~~wholly~~as ~~owned~~slurries, ~~subsidiaries~~and related technologies. ~~The Company’s~~A ~~principal~~slurry ~~executive~~is ~~offices~~a ~~are~~suspension ~~located~~of atabrasives ~~305~~in ~~North~~reactive ~~54th~~chemicals. ~~Street~~In some instances, ~~Chandler~~slurry may contain no abrasives, ~~Arizona~~but ~~85226~~may ~~and~~consist ~~its~~only ~~telephone~~of reactive chemicals. Different ~~number~~metals isor ~~(480)~~oxides ~~705-2100~~require different slurries.

~~Effective~~CMP ~~December 1,~~has ~~1999,~~become ~~the~~an ~~Company~~increasingly ~~changed its fiscal~~critical ~~year~~processing ~~from~~step ~~the~~as ~~twelve-month~~semiconductor ~~period~~manufacturers ~~ended~~are ~~May 31 to a 52 or~~continually ~~53 week~~designing ~~period~~chips ~~ending~~with onsmaller ~~the~~feature ~~Saturday~~sizes ~~nearest~~that ~~May 31.~~utilize thinner ~~Accordingly,~~and ~~the~~more ~~2000~~numerous ~~fiscal~~layers ~~year~~of ~~ended~~interconnect on ~~June~~increasingly ~~3 and contained~~larger ~~53 weeks,~~wafers. ~~whereas~~CMP facilitates the ~~previous~~production ~~two~~of ~~fiscal~~smaller, ~~years~~faster ~~ended on May 31~~ and ~~contained 52 weeks. All references to years~~ ~~relate~~more tocomplex ~~fiscal~~chips ~~years~~at ~~unless~~a ~~otherwise~~lower ~~noted~~cost.

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

~~Since~~The ~~1971, the~~ Company ~~has~~was ~~owned~~incorporated ain ~~50%~~Illinois ~~interest~~ in ~~the Far East~~1959 ~~Joint~~as ~~Venture.~~SpeedLap ~~The remaining 50% is owned by Obara~~ Corporation~~, a publicly traded Japanese company that supplies products to the automotive industry~~. ~~The~~Effective ~~Far~~April 6, ~~East Joint Venture designs and~~1999, ~~manufactures~~Integrated ~~most~~Process ofEquipment ~~the equipment sold by the Company to the thin film memory disk media and silicon wafer markets in the U~~Corp.S. ~~and Europe. It also distributes such products in the Far East and provides sales and service channels in the Far East for products manufactured by the Company~~(IPEC), ~~including~~a ~~distribution~~supplier of ~~the~~ ~~Company’s~~ CMP ~~systems to manufacturers of semiconductor~~ ~~devices. In June 2000~~systems, ~~the~~merged ~~Company~~into ~~announced~~a anwholly ~~agreement which~~owned ~~will~~subsidiary ~~transfer full ownership~~ of ~~the CMP operations in the~~SpeedFam ~~Far~~International, ~~East to the Company~~Inc. ~~Per~~Following the ~~agreement~~merger, ~~Obara Corporation~~SpeedFam ~~will~~International, ~~assume the business operations for non CMP activities~~Inc. ~~This agreement~~changed isits ~~expected~~name to ~~close~~SpeedFam-IPEC, ~~during the first six months of 2001~~Inc.

InOn ~~1984~~August 30, 2000, the Company and ~~Fujimi~~Obara Corporation ~~Incorporated~~(Obara) ~~formed~~restructured ~~Fujimi Corporation~~SpeedFam-IPEC Co., Ltd. (together with its subsidiaries and joint ventures, the ~~Fujimi~~Far East Joint Venture), aneffectively ~~Illinois~~dissolving ~~corporation~~their joint venture. ~~Fujimi~~Prior ~~Incorporated~~to ~~and~~the dissolution, the Company and Obara each owned a 50% ~~of the~~ ~~common~~interest ~~stock~~in of the ~~Fujimi~~Far East Joint Venture. ~~Fujimi~~Under ~~Incorporated~~the isterms of the aMaster ~~publicly~~Reorganization ~~traded~~Agreement ~~Japanese~~with ~~manufacturer~~Obara, ownership of ~~abrasives.~~the InCMP sales and service operations of the Far East Joint Venture was ~~second~~transferred ~~quarter~~to ofthe ~~2000,~~Company allowing the Company ~~sold~~to ~~its~~have ~~50%~~direct control ~~interest~~over CMP operations in Asia. Obara continues the non-CMP ~~Fujimi~~activities of the former Far East Joint Venture, towhich ~~its~~include the ~~50%~~manufacture ~~partner,~~of ~~Fujimi~~silicon ~~Incorporated~~wafer polishing products. ~~The~~Under the terms ~~Fujimi~~of ~~Joint~~a ~~Venture~~distributor ~~sold~~agreement ~~slurries~~signed ~~manufactured~~on byAugust 31, ~~Fujimi Incorporated~~2000, the ~~primarily~~Company continues to ~~silicon~~act ~~wafer,~~as ~~thin~~a ~~film~~direct ~~memory~~distributor ~~disk~~in the United States and ~~general~~Europe ~~industrial~~for ~~manufacturers~~the inwafer ~~North~~polishing ~~and~~products manufactured ~~South~~by ~~America~~Obara.

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

~~The~~Recent ~~semiconductor industry has experienced significant growth~~Events ~~over the past decade due to increased demand for personal~~ computers and the internet; the expansion of the telecommunications industry (especially wireless communications); the emergence of new applications such as consumer electronics products; and the increased semiconductor content in electronics systems. Significant performance advantages and lower prices for integrated circuits have contributed to the growth and expansion of the semiconductor industry over time.

~~The~~On ~~semiconductor~~August 11, ~~market~~2002, isthe ~~cyclical~~Company byentered ~~nature, however,~~into ~~characterized~~an byAgreement ~~short-term~~and ~~periods~~Plan of ~~either~~Reorganization ~~under~~with orNovellus ~~over~~Systems, ~~supply~~Inc. ~~for~~(Novellus), ~~both~~a ~~memory~~Delaware corporation and ~~logic~~the ~~devices.~~leader ~~When~~in ~~demand decreases,~~thin ~~semiconductor~~film ~~manufacturers~~deposition ~~typically~~technology ~~slow~~for ~~their~~the ~~purchasing~~semiconductor ofindustry. ~~capital~~Novellus ~~equipment;~~will ~~conversely,~~acquire ~~when~~all ~~demand~~outstanding ~~increases,~~shares soof ~~does~~SpeedFam-IPEC in ~~capital~~a stock-for-stock

spending.Table The late 1990’s also saw the emergence of a new trend, driven by the increasingly rapid pace with which the size of the circuitry on the chip is decreasing. When chips decrease in size, circuits can operate more quickly. With size reduction more chips can also be produced on a given wafer size, and the yield per manufacturing machine increases. So, with decreasing chip size, more chips can be produced per machine, and the need to build new manufacturing plants decreases, in particular, for pure capacity expansion. New equipment featuring the latest technological advances, however, must often be purchased to manufacture the smaller-sized chips and in many cases is retrofitted into existing manufacturing facilities. Contents

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

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

~~CMP~~The issemiconductor aindustry ~~process~~experienced significant ~~used~~growth tothroughout ~~change~~ the ~~characteristics~~1990s ofdue ~~the surface~~to ofincreased ~~a semiconductor wafer. CMP is a complex science, often~~demand for ~~involving~~electronic ~~multiple steps~~products, ~~each~~increased atsemiconductor acontent ~~specified set of process~~in ~~parameters~~electronics ~~such as polishing speed~~products, ~~pressure, time,~~ and ~~temperature,~~ asthe ~~well~~preparation asfor ~~slurry~~the pHyear ~~and particle size, hardness and~~2000 systems ~~shape~~conversion. ~~CMP~~The ~~improves~~popularity ~~the flatness (planarity), smoothness and optical properties~~ of apersonal ~~surface.~~computers; ~~One typical flat polishing~~the ~~system~~expansion ~~consists~~ of athe ~~moving~~telecommunications ~~platen~~industry ~~that is covered with a~~(especially ~~polishing~~wireless ~~pad, in combination with a polishing liquid (or slurry~~communications) ; ~~containing~~and ~~abrasive particles that impinge on~~ the ~~surface, thereby~~emergence ~~creating~~of ~~the~~new ~~desired surface qualities. This liquid~~applications ~~slurry~~within ~~can~~consumer beelectronics ~~chemically~~continue ~~active~~to ~~such~~drive ~~that~~ the ~~surface~~demand ~~of the~~for ~~component being polished is chemically modified~~faster, ~~thus accelerating~~smaller and ~~improving~~cheaper ~~the~~integrated ~~polishing~~circuit ~~process~~devices.

~~Orbital~~The ~~CMP~~semiconductor ~~Systems.~~industry ~~The~~is ~~Company’s~~highly ~~orbital~~cyclical. ~~CMP~~In ~~systems~~recent ~~incorporate~~periods, anthe ~~advanced~~industry ~~polishing~~has ~~technique~~experienced ~~developed~~a insevere downturn. ~~conjunction~~According ~~with~~to aIC ~~major~~Insights, ~~semiconductor~~an ~~manufacturer. Planarization~~industry inresearch ~~these~~and ~~systems~~analysis firm, istotal ~~achieved~~integrated bycircuits ~~the~~revenues ~~downward~~from semiconductor ~~pressure~~manufacturers ~~from~~declined ~~and~~by ~~rotational~~33% ~~motion~~in ofcalendar ~~the~~year ~~upper~~2001 ~~wafer~~to ~~carrier~~an ~~against~~estimated ~~the~~$118.5 billion, ~~orbital~~from ~~motion~~the of$176.9 billion estimated ~~the~~in ~~lower~~2000. ~~polishing~~As ~~platen~~a result, ~~which~~the semiconductor equipment industry has undergone a ~~polishing~~significant ~~pad~~down ~~attached~~cycle. toDataquest, another ~~its~~industry ~~surface.~~research ~~The~~and ~~use~~analysis offirm, ~~orbital~~estimates that, ~~polishing~~between ~~technology~~the inyears ~~conjunction~~2000 ~~with~~and ~~other~~2001, ~~enhancements offered~~overall onsemiconductor ~~the~~equipment sales ~~Company’s~~declined ~~orbital~~from ~~platforms~~$33.1 billion ~~provides customers~~in ~~with~~shipments ~~improved~~to ~~polish~~an estimated ~~flexibility~~$23.7 billion in arevenues ~~smaller~~(generally ~~footprint~~accounted for ~~tool.~~under ~~Moreover,~~ the ~~Company~~Securities and Exchange Commission’s ~~orbital~~Staff Accounting ~~systems~~Bulletin ~~incorporate an~~No. 101 ~~innovative~~(SAB 101), ~~polish~~“Revenue Recognition ~~slurry~~in ~~delivery~~Financial ~~method~~Statements”), ~~that~~or ~~delivers~~28.6%. ~~the~~Dataquest ~~slurry~~added ~~through~~that ~~the~~CMP ~~polishing~~sales ~~pad~~declined ~~directly~~from to$1.5 billion ~~the~~in shipments ~~wafer~~to ~~surface~~$1.0 billion in revenues (generally accounted ~~This~~for ~~slurry~~under ~~delivery~~SAB 101), ~~method~~or is29.3%. ~~designed~~The todownturn ~~increase~~has ~~throughput~~been ~~and~~characterized ~~improve~~by ~~process~~a ~~control~~dramatic ~~and~~reduction ~~planarity,~~in ~~and~~new ~~therefore~~orders, ~~yield to~~cancelled or ~~the~~suspended ~~device~~existing ~~manufacturer~~purchase orders, asand ~~well~~the asscaled-back purchase ~~reduce~~of ~~the~~parts ~~consumption~~and ~~of slurry~~consumables ~~compared~~in tolimited ~~conventional~~amounts ~~methods,~~necessary to ~~which~~maintain ~~deposit~~device ~~slurry~~manufacturers’ ~~on the~~reduced ~~pad~~production ~~surface~~levels.

• Semiconductor ~~The~~manufacturers ~~AvantGaard~~continually ~~676~~strive ~~features~~to produce ~~four independent heads~~faster, ~~allowing~~more ~~simultaneous~~complex ~~polishing~~devices ofat ~~four~~a ~~wafers~~lower ~~and~~cost. Historically, ~~offers~~this ~~one~~has ofbeen ~~the~~accomplished ~~industry’s~~by ~~smallest~~producing ~~footprints.~~devices ~~This~~on larger ~~system~~wafers, isutilizing ~~capable~~smaller ofdesign ~~polishing~~feature ~~either~~sizes ~~oxide~~and ~~or metal~~ more layers. ~~The~~of ~~AvantGaard~~interconnect ~~676~~material. ~~was~~During ~~initially~~the ~~designed~~downturn, ~~solely~~device manufacturers tohave ~~planarize~~aggressively ~~metal layers and has~~ been ~~adopted~~evaluating ~~for~~next-generation production ~~this~~equipment ~~purpose~~that inwill ~~volume~~prepare ~~production~~them byfor a ~~majority~~fast oframp when the ~~customers~~industry ~~that have purchased the system~~rebounds. •Prior ~~The~~to ~~AvantGaard 776 is based on~~ the ~~same~~current ~~four-head~~industry ~~orbital polishing technology as the AvantGaard 676. The AvantGaard 776 integrates CMP~~downturn, most ~~metrology~~semiconductor ~~and~~equipment ~~wafer~~sales ~~cleaning~~were infor asystems ~~single~~capable ~~unit~~of producing ~~that~~devices ~~requires~~on ~~less~~200-millimeter ~~clean~~wafers ~~room~~with ~~space~~device ~~than~~feature sizes ~~separate~~down ~~CMP~~to ~~and post~~0.18-~~CMP cleaning equipment~~micron. •Semiconductor ~~The~~manufacturers ~~MomentumTM~~are currently ~~product,~~designing ~~announced~~devices inwith ~~July~~feature ~~2000,~~sizes isof a0.13-micron and ~~highly flexible~~below, ~~universal~~utilizing ~~tool that processes~~ copper, ~~shallow-trench~~interconnect ~~isolation~~and ~~(STI), tungsten,~~ oxide ~~and other advanced applications~~insulation. These ~~MomentumTM~~devices ~~was~~may ~~developed~~be tomanufactured ~~address~~on ~~the~~either ~~industry’s~~200- ~~growing~~or 300-millimeter ~~need~~wafers. ~~for~~Analysts ananticipate ~~advanced~~that ~~level~~300-millimeter wafers ofwith ~~process~~device ~~capability~~feature ~~for~~sizes ~~geometry~~of ~~shrinks to~~ 0.13 -micron. ~~The~~and ~~tool~~below ~~features~~will reach asignificant ~~new~~commercial ~~polishing~~production ~~system~~when ~~that~~the ~~combines SpeedFam-IPEC’s~~ industry rebounds. ~~proven~~Similarly, ~~rotational~~Dataquest ~~and~~projects ~~orbital~~that ~~technologies.~~new ~~The~~fabrication facilities ~~system~~coming ~~integrates~~on ~~tunable,~~line ~~adaptable~~will ~~carrier~~use ~~technology~~primarily 300-millimeter equipment and ~~edge~~that ~~control~~this ~~(APT™),~~market ais ~~stable,~~expected ~~highly~~to ~~flexible~~dominate the new equipment ~~polishing~~purchases ~~technique~~by ~~(Next™), and a newly designed cleaner~~2004. ~~The~~In ~~system~~addition, ~~also~~Dataquest ~~integrates~~anticipates that ~~Intelligent~~the ~~In-line~~use ~~Inspection~~of ~~technology~~copper ~~(I3TM)~~will ~~with~~continue ~~closed-loop~~to ~~control~~grow ~~metrology~~faster ~~for~~relative ~~maximum~~to other ~~effective~~metal ~~throughput~~interconnect materials, and ~~reduced~~that ~~cost~~silicon ofdioxide will ~~ownership.~~continue ~~The~~to ~~system~~command ~~and~~a ~~processes~~significant ~~for~~share of the dielectric — ~~MomentumTM~~or ~~product~~insulator — ~~are scalable to 300mm~~market.

~~Rotational~~ Company ~~CMP Systems.~~Solution

• We ~~The~~recently ~~Avanti®~~developed ~~472,~~two ~~introduced~~CMP systems — marketed inunder ~~1994,~~the Momentum trademark — that are specifically designed to process 200- and 300-millimeter wafers with device feature sizes of 0.13-micron and below. We believe MomentumTM is on course to meet the coming demand for next-generation equipment and offers a ~~fully~~number ~~automated,~~of ~~single~~advantages ~~wafer~~over ~~planarization~~competitive ~~system~~products for all ~~polishing~~CMP ~~oxide~~applications — orand ~~metal~~particularly ~~layers~~for onadvanced applications ~~silicon~~such ~~wafers~~as copper. Momentum differentiators include tight process control parameters enabled by our unique through-the-pad slurry distribution, broadband endpoint detection and our patented HexazoneTM carrier. We believe that the Momentum technology is differentiated from ~~four~~our competition as it has been specifically designed to ~~eight~~meet ~~inches~~the stringent inprocessing ~~diameter~~requirements for the 0.13-micron node. Additionally, it is already meeting and exceeding certain processing requirements at the 0.10-micron processing node. In contrast, ~~addition~~many toof the ~~planarization~~competitive systems available on the market today were designed for process requirements at the 0.25 and 0.18-micron processing nodes. While these systems may be adapted for

ofTable oxide layers, the system planarizes layers of metal interconnects, including tungsten, aluminum and copper. • The Company’s AurigaTM system is a five head, two polishing table CMP system capable of processing 50-60 wafers per hour. The AurigaTM system, which began shipping commercially in November 1996, is used for oxide and metal (tungsten) applications. The system incorporates full cassette-to-cassette automation. Robotics remove the wafers from the cassette and places them into the buffer tray. The wafers are then staged for batch pickup by the polishing heads. Once secured by the polishing heads, the wafers are moved onto the primary polishing pad and the process is initiated. The polishing table, covered with a flat polishing pad, rotates at a variable speed throughout the polishing cycle. Upon completion of the initial polish, the wafers are transported either to a rinsing station or to a second polishing table for an additional polishing or buffing step. The wafers are then rinsed and placed into the output buffer tray, scrubbed on both sides with a wet polyvinyl alcohol brush and placed wet into the output cassettes. The system is self-enclosed, and has its own air filtration and air flow management system. The AurigaTM offers compatibility with all commonly used slurry chemistries. • In 1998, the Company introduced the Auriga-CTM, which integrates cleaning and drying technology into the Company’s CMP system thereby providing a complete dry-in/dry-out system. The design of the Auriga-CTM is based upon the replacement of the automation module on the AurigaTM with a new automation module, which incorporates the cleaning technology. • The Auriga VisionTM is the latest tool derived from the industry proven AurigaTM platform. Announced in July 2000, the Auriga VisionTM provides complete dry-in/dry-out CMP processing in a high throughput tool. With an advanced carrier design, in-table end-point system, HF capable dual-station cleaner and computer integrated manufacturing automation, this low cost of ownership tool is suited for fabs producing devices in the most cost-competitive markets. The Auriga VisionTM is targeted at the 0.18 and 0.13 micron technology nodes for memory manufacturers.Contents

~~Thin Film Memory Disk Media Polishing Products~~0.13-micron ~~The Company sells polishing machines~~processing, ~~pre-deposition~~we ~~cleaning machines~~do ~~and~~not ~~grinding~~believe ~~machines for producing aluminum,~~they ~~nickel-plated~~are ~~and~~able ~~alternative~~to ~~substrates~~consistently ~~for~~meet the ~~thin~~more ~~film~~stringent ~~memory~~requirements of advanced ~~disk~~applications. ~~media~~Momentum’s ~~market.~~productivity advantages include:

~~Semiconductor~~• ~~Wafer~~yield-enhancing ~~Polishing~~performance ~~Products.~~metrics ~~The~~that ~~Company supplies~~enable ~~chemical~~the ~~mechanical~~consistent ~~polishing,~~production ~~double~~of devices with advanced feature sizes of 0.13-~~sided~~micron ~~lapping~~and below; • lower cost of ownership and ~~edge~~ ~~polishing~~environmental ~~systems~~impact tothrough a proprietary design that significantly reduces the ~~semiconductor~~use ~~substrates~~of ~~market~~consumables (such as pads, slurries and deionized water), as well as waste to be disposed of; and • more robust and flexible processing features, which increase wafer throughput by up to 30%.

~~The~~Currently, ~~Company’s~~there ~~line~~are ofmore ~~double-sided~~than ~~lapping~~30 Momentum-based systems ~~is available~~(both in200- ~~various sizes~~ and is300-millimeter) ~~used~~on toorder ~~create~~or ~~the~~installed ~~initial~~at ~~flatness~~fabrication facilities and ~~thickness~~foundries ofin the ~~silicon~~United ~~wafer~~States, Europe, ~~after~~and ~~it has been sliced~~Asia. ~~The~~We ~~lapping~~have ~~process~~installed ~~removes~~Momentum-based ~~saw~~technology ~~marks remaining after~~at ~~slicing~~numerous 200- and ~~provides~~300-millimeter aevaluation ~~surface~~sites, ~~finish~~some ~~suitable~~of ~~for subsequent~~which ~~polishing~~have ~~processes~~multiple units. ~~The~~Installed ~~double-sided~~units ~~polishers~~are ~~for~~in ~~silicon~~varying ~~wafer~~stages of product ~~polishing~~testing, ~~are~~and ~~also~~in ~~available~~most cases in competitive situations.

~~The~~Although ~~Company~~we ~~also~~have ~~utilizes~~achieved limited sales for our Momentum products, numerous integrated circuit manufacturers have selected Momentum as the CMP “tool of record” for 200-millimeter processing. Selection as a ~~line~~tool ~~whereby~~of record is a precedent ~~chemical~~to ~~mechanical~~a manufacturer making equipment orders in volume. ~~polishing~~We ~~process~~believe ~~removes~~we ~~the~~are ~~shallow~~achieving ~~damage~~success ~~layer~~in ~~remaining~~other ~~from~~evaluations, which will ~~previous~~lead ~~process~~to ~~steps~~additional tool of record designations. In this regard, our future success is highly dependent upon our ability to ~~attain~~win current and future evaluations, and to become the ~~specified~~tool ~~flatness~~of record to several top semiconductor manufacturers, for both our 200-millimeter and 300-millimeter Momentum systems. We ~~surface~~anticipate ~~finish~~that numerous tool of record decisions will be made over the next several quarters, paving the way for significant equipment sales when the semiconductor market rebounds and new fabrication facilities are built.

~~The~~We ~~edge~~are ~~polishing~~generally ~~technology~~able ~~was~~to ~~developed~~produce and ~~introduced~~ship ~~for~~our ~~the~~tools ~~purpose~~within 90 to 120 days of ~~making~~receipt ~~the~~of ~~wafer’s~~a ~~edge~~written ~~easier~~order from a customer. Customers are generally obligated to ~~clean,~~pay up to ~~thereby~~90% ~~increasing~~of ~~semiconductor~~the ~~device~~purchase ~~manufacturing~~price ~~yields~~of a tool within 30 days of shipment. The balance of the purchase price is due upon final acceptance of the tool.

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

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

~~The~~Orbital Company sells its products to leading manufacturers of semiconductor devices, thin film memory disks, semiconductor wafers and various general industrial applications. During the last three years, the majority of the Company’s total revenue has been derived from the sale of CMP ~~products and services. In~~ Systems

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

3 ~~2000, 1999 and 1998, sales to semiconductor device manufacturers~~ ~~were 84.0%, 74.2% and 74.8% of total revenue, respectively. In~~ ~~2000, 1999 and 1998, sales to thin film memory disk media and~~ silicon wafer manufacturers were 10.6%, 19.6% and 21.4% of total revenue, respectively. In 2000, 1999 and 1998, sales to manufacturers of general industrial components were 5.4%, 6.2% and 3.8% of total revenue, respectively

SalesTable to two customers in 2000 accounted for 11.1% and 11.8% of the Company’s total revenue. In 1999, sales to two customers accounted for 10.5% and 11.4% of the Company’s total revenue and in 1998 sales to one customer accounted for 19.4% of the Company’s total revenue. No other customer accounted for 10% or more of the Company’s total revenue during these periods. The Company’s ten largest customers accounted for 64.9%, 60.8% and 53.4% of the Company’s total revenue in 2000, 1999 and 1998, respectively. Contents

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

~~The~~• ~~Company markets and sells its products in North America through~~ a ~~combination~~tunable/ ofadaptive ~~direct~~carrier ~~sales~~design; ~~personnel~~• ~~and distributors. The Company sells directly to all the industries it serves and in addition uses~~ a ~~network of 10 regional distributors for its general industrial product lines. In its European operations~~stable, ~~the~~ highly ~~Company~~flexible ~~uses~~polishing ~~direct sales personnel and a small number of distributors. For CMP products~~technique, ~~the~~which ~~Company~~combines ~~uses~~an aadvanced ~~distributor who~~hard ~~sells~~platen inwith ~~Germany,~~orbital ~~France,~~motion; ~~the Netherlands, Belgium, Italy, Scandinavia, Spain~~ and ~~Switzerland.~~• ~~After the merger, SpeedFam~~closed-~~IPEC’s~~loop ~~relationship~~control ~~with~~metrology afor ~~distributor~~maximum ineffective ~~Japan~~throughput ~~was discontinued because the Company markets~~ and ~~sells~~reduced ~~its~~cost ~~products in the Far East through the sales and marketing arm~~ of ~~the Far East Joint Venture. Most of the equipment sold to the thin film memory disk media and silicon wafer markets is manufactured by the Far East Joint Venture.~~ ownership

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

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

The ~~Company’s~~conventional ~~marketing~~CMP ~~strategy~~process ~~includes~~consists ~~involvement~~of ~~with~~a ~~SEMATECH,~~rotating ~~Inc.~~upper wafer carrier, athat ~~consortium~~holds ofthe ~~major~~wafer ~~semiconductor~~against ~~manufacturers~~a rotating ~~and~~polishing ~~equipment~~platen ~~suppliers,~~that ~~attendance~~has ata ~~Semicon,~~polishing ~~Diskcon,~~pad ~~IMTS~~attached to ~~and~~its ~~other~~surface. ~~trade~~On ~~shows~~a ~~worldwide~~rotating ~~and participation in technical conferences~~system, ~~which~~slurry ~~include~~is ~~the~~deposited ~~presentation~~on ~~of technical papers~~the ~~written~~pad bysurface ~~customers~~during polishing, ~~university scientists~~ and ~~the Company’s~~pressure ~~own~~is ~~senior~~placed ~~technologists.~~against ~~The Company believes~~the ~~these~~wafer ~~initiatives~~until ~~serve to promote acceptance of~~ the ~~Company’s~~ ~~products~~desired ~~and~~surface ~~process~~features ~~technologies~~are inachieved. ~~the~~Our line ~~semiconductor,~~of ~~thin~~rotational ~~film~~CMP ~~memory~~equipment ~~disk~~utilizes ~~and~~this ~~other industries~~technology.

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

4 ~~The Company believes that providing highly responsive service is~~ ~~an essential factor in providing a total solution to its~~ ~~customers. In order to provide customers with experienced service~~ and support personnel, the Company has structured its service operations into distinct service units responsible for each of the semiconductor device, thin film memory disk media, semiconductor wafer and general industrial products industries. Elements of the Company’s service and support program include system installation and process certification, process support, machine repair, providing spare parts inventories, internal training programs, external customer training, documentation and formation of customer user groups. For large users of the Company’s systems, the Company often creates a customized service arrangement designed to meet the specific requirements of the customer.

TheTable Company generally provides a one-year warranty on all equipment it sells and in certain instances the Company has provided a warranty period in excess of one year. Field and technical service personnel provide Contents

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

~~warranty~~Semiconductor ~~service,~~Wafer ~~post-warranty~~Polishing service, and equipment installations. Additionally, the Company utilizes a distributor in Europe for CMP field and technical services in Germany, France, the Netherlands, Belgium, Italy, Scandinavia, Spain and Switzerland. A sales and service distributor is also used in Israel. Field and technical service engineers are located in other various locations throughout the world, including dedicated site-specific engineers in place at certain customer locations pursuant to contractual arrangements. The Company also provides service and maintenance training as well as process application training for its customers’ personnel. The Company maintains an extensive inventory of spare parts at its primary locations and at its satellite service sites. This provides the Company the ability to provide same day or overnight delivery for many parts. Products

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

~~Backlog~~Our line of ~~orders~~double-sided ~~for~~lapping ~~capital~~systems ~~equipment, parts, consumables and~~is ~~slurries~~available ~~was~~in ~~approximately~~various ~~$93.1~~sizes ~~million~~and onis ~~July 31,~~used ~~2000, compared~~ to ~~$45.4~~create ~~million on July 31, 1999. The Company’s backlog does not include orders for capital equipment or other products manufactured by~~ the ~~Far East Joint~~initial ~~Venture~~flatness and ~~distributed~~thickness byof the ~~Company~~silicon inwafer ~~the~~after ~~U.S.~~it ~~and~~has ~~Europe for~~been ~~which the Company receives commissions~~sliced. The ~~time~~lapping ~~between~~process ~~the placing~~removes ofsaw ~~orders~~marks ~~and~~remaining ~~shipment of parts, consumables and slurries~~after slicing ~~is significantly less than for capital equipment~~ and asprovides a ~~result,~~ ~~the~~surface ~~Company’s~~finish ~~backlog~~suitable ~~consists mostly of orders~~ for subsequent ~~capital~~polishing ~~equipment~~processes. ~~The~~Double-sided ~~Company~~polishers ~~includes in its backlog only those customer orders~~ for ~~which~~silicon ~~it has accepted signed purchase orders~~wafer polishing ~~with~~are ~~assigned~~also ~~delivery dates within 12 months~~available. ~~Orders~~ ~~generally carry a stipulation that customers may incur a penalty~~ ~~in the event of cancellation. However, there can be no assurance~~ that orders will not be canceled by customers or that the Company will obtain a meaningful penalty payment. As a result of systems and equipment ordered and shipped in the same quarter, possible changes in delivery schedules, occasional cancellation of orders and delays in product shipments, the Company’s backlog at any particular date may not be indicative of actual sales for any succeeding period.

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

~~The~~General ~~capital~~Industrial equipment market, and in particular the semiconductor capital equipment market in which the Company competes, is characterized by rapid technological development and product innovation. The Company’s research and development efforts are currently focused on enhanced performance for finer geometries in oxide and tungsten applications while developing new process capabilities for emerging shallow-trench isolation, copper, and 300mm applications. The Company’s research and development expenditures during 2000, 1999 and 1998 were approximately $53.7 million, $61.8 million and $67.2 million, respectively. Products

~~Because~~We ofoffer ~~the~~a ~~complex~~broad ~~and~~line ~~highly specialized design, testing, and manufacturing requirements~~ of ~~the Company~~lapping, ~~research~~grinding and ~~development~~polishing ~~employees~~systems ~~must~~for bethe ~~experienced~~general inindustrial amarket. ~~wide~~The ~~range of~~line ~~engineering~~includes ~~disciplines.~~approximately ~~These~~35 models ~~primary~~of ~~disciplines~~single-side ~~include~~processing ~~process development~~machines, ~~mechanical~~double-side ~~engineering,~~processing ~~software engineering,~~machines ~~electrical engineering~~ and ~~test~~in-line ~~engineering.~~grinding ~~Development~~systems. ~~programs~~The ~~are~~product ~~organized~~offering ~~around~~is ~~cross-functional project~~available ~~teams~~in ~~including~~a ~~leaders~~wide ~~for~~range ~~engineering, manufacturing,~~of ~~marketing~~sizes ~~and~~from ~~customer~~a ~~support.~~12-inch ~~Teams~~plate ~~are~~diameter ~~lead~~up byto ~~program~~a 150-inch plate ~~managers~~diameter. ~~responsible~~Each ~~for~~system ~~concurrent~~typically ~~activity~~consists ~~across~~of ~~all~~a specialized ~~functional~~machining ~~areas.~~plate, ~~The~~a ~~Company~~rotating ~~believes~~spindle, ~~that~~a ~~this~~means ~~approach provides~~to ~~flexibility~~fix and ~~allows~~apply pressure ~~the Company~~ to ~~shorten~~the ~~time~~workpieces, ~~to market~~an ~~for~~abrasive ~~new~~distribution ~~products~~system and a ~~processes~~control system.

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

We sell our products to leading manufacturers of semiconductor devices, silicon wafers and various general industrial applications. During ~~2000~~the last three years, the majority ~~Company~~of ~~developed~~our ~~its~~total ~~advanced~~revenue has been derived from the sale of CMP ~~system~~products and services. In 2002, ~~which~~2001 and 2000, sales to semiconductor ~~combines~~device ~~SpeedFam-IPEC’s~~manufacturers ~~industry-proven~~were ~~rotational~~75%, 81%, and 84% of ~~orbital~~total ~~technologies~~revenue, respectively. ~~The~~In ~~MomentumTM~~2002, ~~product~~2001 ~~was developed~~and 2000, sales to silicon ~~address~~wafer ~~the~~manufacturers ~~industry’s~~were ~~growing~~13%, ~~need~~11% ~~for~~and an11% of total ~~advanced~~revenue, ~~level~~respectively. ofIn ~~process~~2002, ~~capability~~2001 and 2000, ~~continued~~sales ~~geometry~~to manufacturers ~~shrinks~~of general industrial components were 12%, 8% and ~~down~~5% toof 0total revenue, respectively.13 ~~micron~~In ~~and~~2002, ~~CMP~~sales ~~challenges~~to two customers accounted for ~~applications~~14% ~~such~~and as11% of our total revenue. In ~~copper~~2001, sales to three customers accounted for 15%, 11% and ~~STI~~10% of our total revenue and in ~~advanced~~2000, ~~semiconductor~~sales ~~device~~to ~~manufacturing~~two customers accounted for 12% and 11% of our total revenue. No other customer ~~MomentumTM~~accounted isfor a10% ~~highly~~or ~~flexible~~more ~~system,~~of ~~which~~our ~~can~~total berevenue during these ~~configured~~periods. toOur ~~provide~~ten ~~world-class~~largest ~~process~~customers ~~results~~accounted for ~~oxide~~56%, ~~tungsten,~~ ~~copper~~60% and 65% ~~STI.~~of Inour ~~addition~~total revenue in 2002, ~~the~~2001 ~~Company~~and ~~developed~~2000, ~~the~~respectively. ~~Auriga VisionTM~~

5 Sales and Marketing

~~which~~We ~~extends~~market ~~the~~and ~~capabilities~~sell ofour ~~the~~products ~~AurigaTM system~~worldwide ~~down~~directly to ~~0.13~~all ~~micron,~~the ~~with~~industries awe ~~new~~serve ~~carrier,~~due ~~end-point~~to ~~detection,~~the highly ~~enhanced~~technical ~~cleaner~~nature ~~and~~of ~~computer-integrated manufacturing automation~~our products. ~~These~~We ~~systems~~use ~~were~~distributors ~~both~~in ~~introduced~~Europe and inChina ~~July 2000~~for our CMP product lines and a network of regional distributors for our general industrial product lines.

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

5 ~~The Company generally assembles its equipment and systems from~~ ~~components and fabricated parts manufactured and supplied by~~ third parties, including stainless steel plates, gears, frames and weldments, power supplies, process controllers, robots and polishing heads. Certain of the items manufactured by others are made to the Company’s specifications. All final assembly and system tests are performed within the Company’s manufacturing/assembly facilities. Quality control is maintained through incoming inspection of components, in-process inspection during equipment assembly and final inspection and operation of all manufactured equipment prior to shipment. Substantially all of the Company’s products sold to manufacturers of general industrial components are manufactured in its Illinois facility. Most of the equipment sold to the thin film memory disk media and silicon wafer markets is manufactured by the Far East Joint Venture. The Company’s CMP system development and manufacturing are located at the Company’s headquarters in Chandler, Arizona and in June 2000, the Company completed the expansion of this CMP manufacturing facility, which nearly doubled the overall manufacturing space.

Competition Table of Contents

~~The~~Our ~~Company~~business ~~competes~~is innot ~~several~~seasonal ~~distinct~~but ~~markets.~~is ~~These~~cyclical ~~markets~~in ~~include~~nature ~~the~~because ~~semiconductor~~it ~~device~~is ~~equipment~~based ~~market~~on ~~(specifically for CMP),~~ the ~~thin~~capital ~~film memory disk media~~ equipment ~~market, the~~investment ~~semiconductor~~patterns ~~wafer~~of ~~equipment~~major ~~market,~~semiconductor ~~the~~manufacturers. ~~general~~These ~~industrial~~expenditure ~~applications~~patterns ~~market,~~are ~~and~~based ~~the related parts and consumables market. In all markets, the Company competes~~ on ~~the~~many ~~basis of technology~~factors, ~~overall cost of ownership, product quality, price,~~including: ~~availability, size of installed base, breadth of product line and~~ ~~customer service and support.~~

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

~~Competition~~Our insales ~~the~~offices ~~general~~are ~~industrial products market is fragmented with no one competitor currently holding a dominant position. The Company faces significant competitive pressure~~ in ~~the~~ ~~sale of slurries~~Chandler, ~~particularly~~Arizona; ~~with regard to pricing~~Des Plaines, ~~which has~~Illinois; ~~resulted in decreased margins for certain products of~~ the ~~Company~~ inUnited ~~recent~~Kingdom; ~~periods.~~Germany; InTaiwan; ~~the thin film memory disk slurry~~Korea; ~~market,~~Singapore; ~~the~~Malaysia ~~Company competes primarily with Praxair, a large chemical company that manufactures~~ and ~~sells its own products~~Japan.

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

AsService ~~of July 31, 2000, the Company had approximately 1,020 full time employees in the U.S.~~ and ~~Europe. From time to time,~~Support ~~the Company uses temporary employees to respond more rapidly to~~ ~~fluctuations in assembly and product demand and to better control the labor component of its manufacturing costs. None of~~

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

~~the~~We ~~Company’s~~generally ~~employees~~provide isa ~~represented~~one-year bywarranty on all equipment we sell and in certain instances provide a ~~labor~~warranty period ~~union~~in excess of one year. An extensive network of field and technical service personnel in place throughout the ~~Company~~United States, ~~has~~Europe, ~~never~~and ~~experienced~~Asia provide warranty service, post-warranty service and equipment installations. In addition, dedicated site-specific engineers are also in place at certain customer locations pursuant to contractual arrangements. We also utilize distributors in Europe and China for CMP field and technical services and a ~~work~~distributor ~~stoppage~~in orIsrael ~~strike~~for service support. ~~The~~We ~~Company~~also ~~considers~~provide ~~its~~service ~~employee~~and ~~relations~~maintenance training as well as process application training for our customers’ personnel. We maintain an inventory of spare parts at our primary locations and at our satellite service sites. This provides us the ability to beprovide ~~good~~same day or overnight delivery for many parts.

~~Intellectual Property~~ Backlog

Backlog of orders for capital equipment, parts and consumables was approximately $22.4 million on July 31, 2002, compared to approximately $40.0 million on July 31, 2001. The ~~Company~~time ~~currently~~between ~~holds~~the ~~127~~placing ~~United~~of ~~States~~orders and ~~patents~~shipment of parts, consumables and ~~113~~slurries is significantly ~~foreign~~less ~~patents~~than infor ~~Japan~~capital equipment and ~~several~~as ~~Asian~~a ~~and~~result, ~~European~~our backlog ~~countries.~~consists Asmostly of ~~July 31,~~orders ~~2000,~~for ~~the~~capital ~~Company~~equipment. ~~has~~We ~~143~~include ~~United~~in ~~States~~our ~~patent~~backlog ~~applications~~only ~~pending~~those ~~and~~customer ~~226~~orders ~~foreign~~for ~~patent~~which we have ~~applications~~accepted ~~pending~~signed purchase orders with assigned delivery dates within 12 months. InOrders ~~addition,~~generally carry a stipulation that customers may incur a penalty in the ~~Company~~event ~~believes~~of cancellation. However, there is no assurance that ~~such~~customers will not cancel orders ~~factors~~or asthat ~~continued~~we ~~innovation,~~will ~~technical~~obtain ~~expertise~~a ~~and~~meaningful penalty payment. As a ~~know-how~~result of ~~its~~systems ~~personnel~~ and ~~other~~equipment ~~factors~~ordered ~~are~~and ~~also~~shipped ~~important.~~in the same ~~The~~quarter, ~~Company~~possible ~~also~~changes ~~owns~~in 10delivery ~~U.S.~~schedules, ~~trademark~~cancellation ~~registrations~~of orders and delays in product shipments, our backlog at any ~~numerous~~particular ~~foreign~~date ~~trademarks~~may not be indicative of actual sales for any succeeding period.

~~The~~Research ~~Company licenses the right to manufacture CMP machines employing the orbital motion used in its AvantGaard 676, 776, 876~~ and ~~MomentumTM products from a semiconductor~~Development ~~manufacturer.~~

~~There~~The ~~can~~capital beequipment nomarket, ~~assurance~~and ~~that~~in ~~the Company’s pending patent~~particular ~~applications will be allowed or that~~ the ~~issued~~semiconductor orcapital ~~pending patents~~equipment ~~will~~market ~~not~~in bewhich ~~challenged~~we ~~or circumvented by competitors.~~operate, ~~There~~is ~~can~~characterized ~~be no assurance that any of these rights held~~ by ~~the Company~~rapid ~~will~~technological ~~not~~development beand ~~challenged, invalidated or circumvented, or~~product ~~that~~innovation. ~~such~~Our ~~rights~~research ~~will provide competitive advantages to the~~and ~~Company.~~

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

ExecutiveTable Officers of the Company Contents

				Held Present		Other Positions Held
Name and Position		Age		Office Since		During Past Five Years
Makoto Kouzuma			60		1999	President and Chief Executive Officer,
	Vice Chairman of the Board					Chief Operating Officer, Executive Vice President
Richard J. Faubert			52		1999	Vice President of the T.V. and
	President and Chief Executive Officer					Telecommunications Test Business Unit of Tektronix, Inc.
J. Michael Dodson			39		1999	Vice President, Corporate Controller and
	Chief Financial Officer					Chief Accounting Officer of Novellus Systems, Inc.
Giovanni N. Nocerino			48		2000	Executive Vice President of CVC, Inc.
	Executive Vice President of Sales, Marketing and Service					(now Veeco Instruments); Vice President and General Manager at Varian; Executive Vice President and member of the Board at Sony Materials Research Company
Saket Chadda			34		2000	Senior Section Manager at Atmel
	Chief Technical Officer					Corporation; Project Manager at OnTrak Systems, Inc; Senior Development Engineer Specialist at Philips Semiconductors
Robert R. Smith			56		1974
	Managing Director of SpeedFam-IPEC, U.K.

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

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

~~Item~~ We 2augment our internal development capabilities by seeking cooperative research and product development relationships with other industry participants in order to respond to developing technologies in the semiconductor industry. ~~Properties~~Three such relationships are currently active: alliances with other capital equipment suppliers; joint development projects with customers; and sponsorship of university research.

~~The~~During ~~Company’s operations are conducted primarily in three buildings in Chandler~~2001, ~~Arizona~~we ~~and~~developed ~~one building in Des Plaines~~Momentum300, ~~Illinois.~~ ~~Two of the Chandler buildings are owned by the Company~~a ~~and~~300-millimeter ~~consist~~tool ofthat ~~approximately~~delivers ~~245,000 square feet~~0.13-micron ~~The other building is leased~~ and isbelow ~~approximately 26,000 square feet. These~~process metrics ~~buildings~~for ~~house~~copper/ ~~the main manufacturing operation~~low k, ~~research~~direct ~~and development~~STI, ~~various~~tungsten ~~administrative~~ and ~~customer support offices,~~oxide. Our ~~corporate~~pressure-controlled ~~headquarters~~Hexazone™ ~~and a state~~multi-~~of-the-art~~channel ~~applications~~carrier ~~and~~is ~~customer demonstration lab. In June 2000,~~ the ~~Company completed~~industry’s ~~the~~most ~~expansion~~advanced ofpolish ~~its~~carrier ~~CMP~~for ~~manufacturing facility, which~~optimized ~~nearly~~removal ~~doubled~~rate ~~the~~and ~~overall~~total ~~manufacturing~~wafer ~~space~~metrics control. The ~~Des Plaines,~~system ~~Illinois~~provides ~~building~~ease isof ~~owned~~process bytransfer ~~the~~from ~~Company~~200-millimeter ~~and consists of~~to ~~approximately~~300-millimeter ~~42,000~~wafer ~~square feet~~processing. ~~It houses the Industrial~~ ~~Applications Group.~~

~~The~~During ~~Company~~2002, ~~also~~we ~~leases~~developed ~~22,000~~additional ~~square~~features ~~feet~~and process incapabilities ~~Portland,~~for ~~Oregon~~both Momentum and Momentum300, and ~~which~~enhanced isthe ~~used~~cost ~~for~~of ~~research~~ownership and ~~development~~productivity ~~and~~benefits ~~also~~of ~~houses~~ the ~~northwest~~systems. ~~field~~We ~~service~~made ~~operation.~~overall ~~The~~improvements ~~central~~to ~~region~~our ~~field~~cost of ownership ~~service~~through ~~operation~~decreased isslurry ~~housed~~usage, inlonger apad 20life,~~000~~ ~~square~~higher throughput ~~foot~~and ~~leased facility~~enhanced inreliability. ~~Austin~~In addition, ~~Texas~~we continued to enhance our total wafer metric control capabilities.

~~SpeedFam-IPEC U.K. is located in Hinckley, England and owns a~~Manufacturing ~~9,000 square foot facility used for demonstration, customer~~ ~~service, sales and administration purposes. SpeedFam-IPEC GmbH leases 2,000 square feet of office space in Ingelfingen, Germany.~~

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

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

The Company ~~owns~~competes ~~approximately~~in 30several ~~acres~~distinct ofmarkets. These ~~vacant~~markets ~~land~~include inthe semiconductor device equipment market ~~Chandler~~(specifically for CMP), ~~Arizona~~the ~~close~~semiconductor towafer equipment market, the ~~current~~general ~~facilities~~industrial applications market, ~~which~~and isthe related ~~being~~parts and consumables market. In all markets, the Company ~~held~~competes ~~for~~on ~~future~~the ~~expansion~~basis ~~needs~~of technology, overall cost of ownership, product quality, price, availability, size of installed base, breadth of product line and customer service and support.

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

ItemTable 3.of Legal Proceedings.Contents

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

~~Item~~ Competition 4in the general industrial products market is fragmented with no one competitor currently holding a dominant position. ~~Submission~~The Company faces significant competitive pressure in the sale of ~~Matters~~slurries, particularly with regards to pricing, awhich ~~Vote~~has resulted in decreased margins for certain products of ~~Security~~the ~~Holders~~Company in recent periods.

~~None~~Employees

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

~~Item~~ Intellectual ~~5. Market for Common Equity and Related Stockholder Matters.~~Property

	Number of
	Stockholders of
	Record as of
Title of Class	July 31, 2000
Common Stock, no par value		176

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

The Company’s ~~Common~~licenses ~~Stock~~the isright ~~traded~~to onmanufacture ~~the Nasdaq National~~CMP ~~Market~~machines ~~under~~employing the ~~symbol~~orbital ~~“SFAM.”~~motion ~~Public~~used ~~trading~~in ofits ~~the Common~~676, ~~Stock commenced on October 10~~776, Momentum ~~1995.~~and ~~Prior~~Momentum300 toproducts ~~that time,~~from ~~there~~a ~~was no public~~semiconductor manufacturer.

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

~~market~~There ~~for~~are no pending lawsuits against the Company regarding infringement of any existing patents or other intellectual property rights or any unresolved claims made by third parties that the Company is infringing intellectual property rights of such third parties. There can be no assurance that infringement claims will not be asserted by third parties in the future. There also can be no assurance in the event of such claims of infringement that the Company will be able to obtain licenses on reasonable terms, if at all. The Company’s ~~Common~~involvement ~~Stock~~in any patent dispute or other intellectual property dispute or action could have a material adverse effect on the Company’s business. ~~The~~Adverse determinations ~~following~~in ~~table~~any litigation relating to intellectual ~~sets~~property ~~forth~~could possibly subject the ~~high~~Company ~~and~~to ~~low~~significant liabilities ~~closing~~to ~~sale~~third ~~prices~~parties, ~~for~~require the ~~Common~~Company to seek ~~Stock~~licenses asfrom ~~reported~~third byparties ~~Nasdaq~~and ~~for~~prevent the ~~periods~~Company ~~indicated:~~from manufacturing and selling one or more of its products. Any of these events could have a material adverse effect on the Company.

		High			Low
1999
	First Quarter	$	20	3/4	$	12	3/8
	Second Quarter		18	5/16		9	1/4
	Third Quarter		21	5/16		14
	Fourth Quarter		16	11/16		10	1/16
2000
	First Quarter	$	18	3/8	$	8	11/16
	Second Quarter		14	3/8		9	9/16
	Third Quarter		29	7/8		10
	Fourth Quarter		29	1/8		11	1/8
2001
	First Quarter through July 31, 2000	$	22	1/4	$	13	14/16

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

9 Item 2. Properties

~~Item~~ The 6Company’s operations are conducted primarily in two buildings in Chandler, Arizona and one building in Des Plaines, Illinois. ~~Selected~~The ~~Financial~~Chandler ~~Data~~buildings, which were previously owned by the Company, were sold in June 2002, as part of a sale-leaseback transaction. These two buildings consist of approximately 250,000 square feet and house the main manufacturing operation, research and development, various administrative and customer support offices, corporate headquarters and a state-of-the-art applications and customer demonstration lab. As part of the Company’s cost reduction measures, the Chandler, Arizona operations were consolidated into the Research and Development Center during 2002. The Company plans to leave the former administration and manufacturing facility vacant until additional manufacturing space is needed. The Des Plaines, Illinois building, which houses the Industrial Applications Group, is owned by the Company and consists of approximately 40,000 square feet.

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

The ~~consolidated~~Company ~~statements~~also ofleases ~~operations~~various ~~data for the years~~smaller ~~ended~~facilities ~~June 3~~worldwide, ~~2000~~which ~~and~~are ~~May 31,~~used ~~1999 and 1998 and the consolidated balance sheet data~~ as ofsales ~~June 3, 2000~~ and ~~May 31,~~ ~~1999 are derived from the Company’s~~customer ~~consolidated~~service ~~financial statements and notes thereto which have been audited by KPMG LLP~~centers, ~~independent~~including ~~public~~facilities ~~accountants~~in ~~and are included elsewhere herein. The consolidated statements of operations data for the years ended May 31~~Germany, ~~1997 and 1996 and the consolidated balance sheet data as of May 31~~Japan, ~~1998~~Taiwan, ~~1997~~Korea, ~~and~~Singapore 1996 are derived from the Company’s consolidated financial statements but are not included herein. The selected consolidated financial data presented below should be read in conjunction with “Management’s Discussion and ~~Analysis of Financial Condition and Results of Operations” and with the Company’s consolidated financial statements, appearing elsewhere herein~~Malaysia.

	Fiscal Year Ended
	2000			1999			1998			1997			1996
	(in thousands, except per share data)
Consolidated Statements of Operations Data:
Net sales	$	274,048		$	216,425		$	374,268		$	318,112		$	268,860
Cost of sales		184,527			194,989			231,332			186,343			163,722
Gross margin		89,521			21,436			142,936			131,769			105,138
Operating expenses:
Research, development and engineering		53,714			61,817			67,182			43,717			27,373
Selling, general and administrative		52,356			68,237			72,916			56,234			45,575
Purchased research and development		—			—			—			—			36,961
Merger, integration and restructuring		—			40,300			—			17,601			—
Operating profit (loss)		(16,549	)		(148,918	)		2,838			14,217			(4,771	)
Other income (expense)		5,649			4,297			3,510			(1,162	)		(108	)
Income (loss) before income taxes		(10,900	)		(144,621	)		6,348			13,055			(4,879	)
Income tax expense (benefit)		—			(3,930	)		29,584			5,086			(2,133	)
Income (loss)		(10,900	)		(140,691	)		(23,236	)		7,969			(2,746	)
Equity in net earnings (loss) of affiliates(1)		(3,278	)		916			4,418			7,068			5,204
Net income (loss) from continuing operations		(14,178	)		(139,775	)		(18,818	)		15,037			2,458
Loss from discontinued operations		—			—			(10,578	)		(28,564	)		(1,294	)
Net income (loss)		(14,178	)		(139,775	)		(29,396	)		(13,527	)		1,164
Cumulative dividend on preferred stock		—			(174	)		(244	)		(284	)		(579	)
Net income (loss) attributable to common stockholders	$	(14,178	)	$	(139,949	)	$	(29,640	)	$	(13,811	)	$	585
Net income (loss) per common share:
Basic:
From continuing operations	$	(0.48	)	$	(4.84	)	$	(0.69	)	$	0.67		$	0.13
From discontinued operations	$	—		$	—		$	(0.39	)	$	(1.27	)	$	(0.07	)

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

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

	Fiscal Year Ended
	2000			1999			1998			1997			1996
	(in thousands, except per share data)
Net income (loss) attributable to common stockholders	$	(0.48	)	$	(4.84	)	$	(1.08	)	$	(0.62	)	$	0.03
Diluted:
From continuing operations	$	(0.48	)	$	(4.84	)	$	(0.69	)	$	0.62		$	0.11
From discontinued operations	$	—		$	—		$	(0.39	)	$	(1.19	)	$	(0.06	)
Net income (loss) attributable to common stockholders	$	(0.48	)	$	(4.84	)	$	(1.08	)	$	(0.57	)	$	0.03
Weighted average shares used in per share calculations:
Basic		29,503			28,890			27,469			22,441			19,592
Diluted		29,503			28,890			27,469			24,088			21,953
Consolidated Balance Sheet Data:
Working capital	$	238,196		$	243,735		$	374,426		$	205,918		$	84,893
Total assets		435,080			443,778			575,653			404,565			292,685
Long-term debt, less current maturities		115,162			116,129			117,078			19,818			25,346
Stockholders’ equity		236,970			246,750			384,136			288,317			188,376

Item 3. Legal Proceedings

~~(1)~~ The ~~Includes~~Company ~~$(3.8)~~is ~~million,~~subject ~~$0.1~~to ~~million,~~various ~~$2.8~~legal proceedings ~~million,~~and ~~$5.5 million~~claims, ~~and~~either ~~$4.8~~asserted ~~million~~or ~~for the 2000 through 1996 years~~unasserted, ~~respectively,~~that arise ~~attributable~~in to the ~~Company’s~~ordinary ~~share~~course of ~~net earnings (loss) from the Far East Joint Venture, accounted for on the equity method~~business. ~~See~~Management ~~the~~believes that ~~consolidated~~these ~~financial~~matters ~~statements~~will ofbe ~~the~~resolved ~~Far~~without ~~East~~a ~~Joint~~material ~~Venture~~effect ~~included elsewhere herein. The remainder represents~~ on the Company’s ~~share~~financial ofposition ~~net~~or ~~earnings~~results ~~from~~of ~~the Fujimi Joint Venture~~operations.

~~Set~~Item ~~forth~~4. ~~below~~Submission isof ~~certain~~Matters ~~selected financial information with respect~~ to ~~the~~a ~~Far~~Vote East Joint Venture, which has been derived from consolidated financial statements, which have been audited by KPMG LLP. Such information should be read in conjunction with the consolidated financial statements and notes thereto of ~~the Far~~Security ~~East Joint Venture (SpeedFam-IPEC Co., Ltd.) appearing elsewhere herein.~~ Holders

	Year Ended April 30,
	2000			1999		1998
	(in thousands)
Consolidated Statements of Operations Data:
Net sales	$	108,000		$	136,232	$	221,738
Gross profit		29,631			36,956		56,586
Operating profit (loss)		(9,355	)		2,330		10,964
Net earnings (loss) (1)		(7,526	)		206		5,863
Consolidated Balance Sheet Data (at period end):
Working capital	$	18,782		$	23,971	$	21,614
Total assets		127,533			128,522		173,282
Long-term debt, less current portion		20,894			20,430		18,945
Stockholders’ equity		39,616			43,527		41,086

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

~~(1)~~ PART ~~Approximately one-half of such amount is recognized by the Company on the equity method as “equity in net earnings (loss) of affiliates.”~~II

~~Item~~ Market 7.for Common ~~Management’s Discussion and Analysis of Financial Condition and Results of Operations.~~Stock

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

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

TheTable Company designs, develops, manufactures, markets and supports chemical mechanical planarization (or CMP) systems used in the fabrication of semiconductor devices and other high-throughput precision surface processing systems. The Company’s flat surface processing systems are used in the general industrial components market. In addition, the Company markets and distributes parts, consumables and slurries. The Company’s total revenue consists of net sales of the products described above and service revenues, as well as commissions from affiliates (Commissions) which consist primarily of revenue derived from the distribution by the Company in the U.S. and Europe of products manufactured by SpeedFam-IPEC, Co., Ltd. (the Far East Joint Venture). The Company distributes such products throughout the U.S. and Europe acting as sales agent and receives Commissions thereon. Such amount reflects the difference between the imported equipment’s cost to the Company and sales price to the customer. Contents

~~The Company sells its products and services to three~~ market ~~segments:~~ ~~(1) semiconductor~~for device manufacturers (CMP Group), (2) thin film memory disk media and silicon wafer manufacturers (Surface Technology Group or STG), and (3) manufacturers of general industrial components (Industrial Applications Group or IAG). Over the ~~last three years, the majority of the~~ Company’s ~~total~~Common ~~revenue~~Stock. ~~has been~~The ~~derived~~following ~~from~~table ~~the~~sets ~~sales~~forth ofthe ~~products~~high and ~~services~~low byclosing ~~the~~sale ~~CMP Group.~~prices for Inthe ~~2000,~~Common ~~1999~~Stock ~~and~~as ~~1998,~~reported ~~sales~~by toNasdaq ~~semiconductor~~for ~~device manufacturers~~the ~~were 84.0%, 74.2% and 74.8% of total revenue,~~periods ~~respectively.~~indicated:

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


		High		Low

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

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

OnAs ~~June 27, 2000, the Company announced an agreement with Obara Corporation to transfer 100%~~ of ~~the CMP sales and service operations in the Far East region to SpeedFam-IPEC. Per the agreement~~July 31, ~~Obara Corporation will assume the business operations for non-CMP activities. In conjunction with this agreement~~2002, ~~the Company~~we ishad ~~evaluating its impact on SpeedFam-IPEC’s domestic~~approximately 210 ~~non-CMP~~holders ~~operations. Based upon this ongoing review, as well as the terms~~ of ~~the~~record ~~agreement reached with Obara Corporation, the Company believes it will incur a one-time non-cash charge to operations in the range~~ of ~~$10~~our ~~million~~common ~~to $20 million in the first half of 2001~~stock. ~~The Company believes there will be no~~ ~~material cash outlays in conjunction with finalizing this~~

12 Dividends

~~transaction~~The Company has never declared or paid cash dividends on its Common Stock. ~~After~~The ~~this~~Company ~~transaction~~currently isintends ~~completed,~~to retain any future earnings to finance the ~~Company~~growth and development ~~will~~of ~~have~~its nobusiness ~~ownership~~and does not intend to pay any cash dividends on its Common Stock in the ~~Far~~foreseeable ~~East~~future. ~~Joint~~Payment ~~Venture~~of ~~and,~~dividends ~~accordingly~~in the future, if any, will ~~not~~be ~~record~~made ~~equity~~at ~~interest~~the indiscretion of the Board ~~joint~~of Directors of the Company. Such decisions will depend on ~~venture~~a number of factors, including the future earnings, capital requirements, financial condition and future prospects of the Company and such other factors as the Board of Directors may deem relevant.

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

~~The~~During ~~Company~~fiscal ~~generally enters into foreign exchange contracts to hedge certain firm commitments denominated in foreign currencies~~2002, ~~principally~~we indid ~~Japanese~~not ~~yen.~~issue ~~The~~any ~~terms of the contracts are~~equity ~~rarely~~securities ~~more~~that ~~than~~were ~~one~~not ~~year.~~registered ~~Currency~~under ~~exchange rate variations have had an immaterial effect on~~ the ~~Company’s~~Securities ~~results~~Act of ~~operations~~1933, ~~for~~as ~~the periods presented~~amended. ~~The results of operations~~ ~~of the Company’s subsidiaries and its equity in the net~~ ~~earnings (loss) of the Far East Joint Venture are translated for~~ ~~financial statement purposes based upon average exchange rates~~ ~~during the period covered. As a result, fluctuations in exchange rates may have an adverse effect on the Company’s results of operations.~~

~~Effective~~Item ~~December 1, 1999, the Company changed its fiscal year from the twelve-month period ended May 31 to a 52 or 53 week period ending on the Saturday nearest May 31~~6. ~~Accordingly,~~ ~~the~~Selected ~~2000~~Financial fiscal year ended on June 3 and contained 53 weeks, whereas the previous two fiscal years ended on May 31 and contained 52 weeks. All references to years relate to fiscal years unless otherwise noted. Data

~~Results~~ SELECTED ofCONSOLIDATED ~~Operations~~FINANCIAL DATA

The ~~following~~selected ~~table~~consolidated ~~sets~~financial ~~forth~~data presented ~~certain~~below ~~consolidated~~is ~~statements~~not necessarily indicative of results of future operations ~~data~~and ~~for~~should ~~the~~be ~~periods~~read ~~indicated~~in asconjunction awith “Management’s ~~percentage~~Discussion and Analysis of Financial ~~total~~Condition ~~revenue:~~and Results of Operations” and with the Company’s consolidated financial statements, appearing elsewhere in this report.

	2000			1999			1998
Net sales		100.0			100.0			100.0
Cost of sales		67.3			90.1			61.8
Gross margin		32.7			9.9			38.2
Operating expenses:
Research, development and engineering		19.6			28.6			18.0
Selling, general and administrative		19.1			31.5			19.4
Merger, integration and restructuring		—			18.6			—
Operating profit (loss)		(6.0	)		(68.8	)		0.8
Other income, net		2.0			2.0			0.9
Income (loss) before income taxes		(4.0	)		(66.8	)		1.7
Income tax expense (benefit)		—			(1.8	)		7.9
Loss		(4.0	)		(65.0	)		(6.2	)
Equity in net income (loss) of affiliates		(1.2	)		0.4			1.2
Net loss from continuing operations		(5.2	)%		(64.6	)%		(5.0	)%

2000Table Comparedof with 1999 Contents

Net Sales. Net sales for 2000 were $274.0 million, up 26.6% from net sales of $216.4 million in 1999. Sales of CMP systems totaled $230.2 million, or 84.0% of net sales, up 43.3% from the $160.6 million of CMP system sales in 1999. Sales of CMP systems increased significantly in 2000 as a reflection of strong demand for semiconductor manufacturing equipment, which was caused by an increasing demand from semiconductor device manufacturers. Sales volume was higher in 2000 than in 1999 because the semiconductor and



		Fiscal Year Ended

		2002			2001			2000			1999			1998


					(In thousands, except per share data)
Consolidated Statements of Operations Data:
Net sales		$	119,166		$	267,080		$	274,048		$	216,425		$	374,268
Net loss from continuing operations			(91,490	)		(97,946	)		(14,178	)		(139,775	)		(18,818	)
Loss from discontinued operations			—			—			—			—			(10,578	)
Cumulative effect of accounting changes(1)			(2,582	)		(36,542	)		—			—			—

Net loss(2)(3)			(94,072	)		(134,488	)		(14,178	)		(139,775	)		(29,396	)
Cumulative dividend on preferred stock			—			—			—			(174	)		(244	)

Net loss attributable to common stockholders		$	(94,072	)	$	(134,488	)	$	(14,178	)	$	(139,949	)	$	(29,640	)

Net loss per common share:
Basic and diluted:
From continuing operations		$	(3.01	)	$	(3.27	)	$	(0.48	)	$	(4.84	)	$	(0.69	)

From discontinued operations		$	—		$	—		$	—		$	—		$	(0.39	)

From cumulative effect of accounting changes		$	(0.08	)	$	(1.22	)	$	—		$	—		$	—

Net loss attributable to common stockholders		$	(3.09	)	$	(4.49	)	$	(0.48	)	$	(4.84	)	$	(1.08	)

Weighted average shares used in per share calculation —
Basic and diluted			30,414			29,961			29,503			28,890			27,469

Consolidated Balance Sheet Data:
Working capital		$	69,868		$	139,520		$	238,196		$	243,735		$	374,426
Total assets			176,827			314,885			435,080			443,778			575,653
Long-term debt, less current maturities			115,054			115,124			115,162			116,129			117,078
Amounts as if the accounting changes were applied retroactively(4):
Net loss		$	(91,490	)	$	(97,003	)	$	(35,240	)	$	(139,006	)	$	(28,697	)

Net loss per share:
	Basic and diluted	$	(3.01	)	$	(3.24	)	$	(1.19	)	$	(4.81	)	$	(1.04	)


(1)	Fiscal year 2002 reflects the adoption of the Financial Accounting Standards Board’s Statement of Financial Accounting Standards (SFAS) No. 142, “Goodwill and Other Intangible Assets”, which resulted in a non-cash charge of $2.6 million related to the cumulative effect of the accounting change as of June 3, 2001. Refer to Note 5 of the Consolidated Financial Statements. Fiscal year 2001 reflects the adoption of SAB 101, which resulted in a non-cash charge of $36.5 million related to the cumulative effect of the accounting change as of June 4, 2000. Refer to Note 5 of the Consolidated Financial Statements.

(2)	Includes $0.1 million, $(3.8) million, $0.1 million and $2.8 million for the 2001 through 1998 fiscal years, respectively, attributable to the Company’s share of net earnings (loss) from the Far East Joint Venture, accounted for on the equity method. The remainder represents the Company’s share of net earnings from the Fujimi Joint Venture.

(3)	Includes merger, integration and restructuring charges of $48.1 million, $58.3 million, and $53.9 million for 2002, 2001, and 1999, respectively. There were no merger, integration and restructuring charges for 2000 and 1998. Refer to Notes 2, 3, and 4 of the Consolidated Financial Statements.

11 ~~semiconductor manufacturing equipment industries recovered from a~~ ~~severe industry downturn (that started in 1998) and entered a~~ ~~new period of growth, driven by customer investments in both capacity and advanced technology to meet rising demand.~~

SalesTable of thin film memory and silicon wafer products in 2000 accounted for $29.2 million, or 10.6% of net sales, as compared to $42.4 million, or 19.6% of net sales in 1999. During 2000, thin film memory disk manufacturers continued to experience manufacturing over-capacity which in turn reduced capital spending. In addition, this over-capacity situation has created a larger market for used equipment making it even more difficult to sell new equipment. While the Company continues to actively pursue consumable sales, the Company does not foresee a return of high volume equipment sales to this market. The silicon wafer market also experienced continued softness in demand due to the ongoing manufacturing over-capacity caused by various factors including available capacity and increased production efficiencies due to the fact that more chips could be produced on a given wafer per machine. Contents

~~Sales~~(4) ofData ~~products~~is ~~for~~not ~~general~~available ~~industrial~~in ~~applications~~sufficient ~~increased~~ detail to ~~$14.7~~show ~~million,~~pro orforma ~~5.4%~~information offor ~~net~~1999 ~~sales~~and in1998 ~~2000~~for ~~compared~~the ~~with $13~~impact of SAB 101.3 ~~million~~Therefore, or1999 ~~6.2%~~and of1998 ~~net~~only ~~sales~~reflect inthe ~~1999~~elimination ~~due~~of togoodwill ~~increased shipments~~amortization inunder ~~European~~SFAS ~~markets~~No. 142.

~~Included~~Item ~~in net sales are commissions from affiliates which increased to $2~~7.9 ~~million in 2000, compared to $2.2 million in 1999 due to an increase in the Company~~Management’s ~~distribution~~Discussion ~~in the U.S.~~ and ~~Europe~~Analysis of ~~products~~Financial ~~manufactured~~Condition byand ~~the~~Results ~~Far~~of ~~East Joint Venture.~~ Operations

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

~~Management believes that SAB 101 and SAB 101B~~SpeedFam-IPEC, toInc. (the ~~extent~~ ~~that they impact the~~ Company) designs, develops, ~~will~~manufactures ~~not~~and ~~affect~~markets ~~the~~chemical mechanical ~~underlying~~planarization ~~strength~~(CMP) orsystems ~~weakness~~for ofuse in the ~~business~~fabrication ~~operations as~~of ~~measured~~semiconductor bychips. ~~the~~The ~~dollar~~Company ~~value~~also ofsupplies ~~the~~parts ~~Company’s product~~and ~~shipments~~provides ~~and~~ongoing ~~cash~~support ~~flows~~for these systems.

~~Gross~~Semiconductor ~~Margin.~~chips Inare ~~2000,~~built ~~gross~~on ~~margin~~a ~~was~~base ~~$89.5 million, or 32.7%~~ of ~~total revenue, compared to $21.4 million, or 9.9% of~~ ~~total revenue~~silicon, incalled ~~1999.~~a ~~Gross margin~~wafer, ~~both in dollars~~ and asinclude ~~a percentage~~multiple layers of ~~total revenue~~wiring, ~~was up year over year primarily due~~ towhich anconnect ~~increase~~a invariety ~~total~~of ~~revenue~~circuit ~~during 2000 compared to the prior year period~~components, assuch ~~well~~ as transistors ~~increased~~and ~~production~~other ~~efficiencies~~structures. asThe aconstruction of ~~merged~~semiconductor ~~Company.~~chips Inis ~~addition,~~accomplished ~~during~~through ~~1999~~ the ~~Company~~deposition ~~wrote down~~onto ~~inventory~~a inwafer ~~the~~of ~~amount~~layers of ~~$13.6~~metal ~~million~~for inwire ~~connection~~connections ~~with~~and ~~the~~silicon ~~merged~~dioxide ~~Company’s new strategic plan to discontinue certain product lines and also increased its allowance~~ for ~~excess inventory and obsolescence~~insulation. InCopper ~~1999,~~is ~~the~~fast ~~Company~~becoming ~~faced significant competition in~~ the ~~sale~~metal of choice ~~its~~among ~~products~~chip ~~from other equipment~~ manufacturers, indue ~~addition~~ to ~~increased~~its ~~customer demands~~superior ~~to meet changing process requirements and develop new~~conductivity ~~technologies~~capability. AsInsulators, ~~these~~or ~~factors grew in significance in 1999~~dielectrics, ~~the Company~~of ~~determined~~which ~~that~~silicon ~~additional excess and obsolescence~~dioxide ~~reserves~~is ~~were necessary considering~~ the ~~weakness~~conventional inmaterial, ~~order activity~~are ~~and~~used ~~lower~~to ~~demand~~prevent ~~for the Company’s products that~~interference ~~became~~between ~~apparent~~closely inspaced ~~the~~metal ~~fourth quarter of 1999~~interconnects.

~~Research,~~Deposition ~~Development~~is ~~and~~done ~~Engineering.~~with Invarying ~~2000,~~degrees ~~research,~~of ~~development~~thickness and ~~engineering~~uniformity, ~~expense~~leaving ~~decreased~~behind tobumpy ~~$53.7~~or ~~million,~~uneven layers of metal or 19insulating material.6% ofCMP ~~total~~is ~~revenue,~~used ~~compared~~ to planarize — ~~$61.8~~or ~~million,~~smooth — orthe ~~28.6%~~surface of the wafer ~~total~~to ~~revenue,~~prepare init ~~1999~~for the next layer of processing. ~~The~~This smoothing ~~decrease~~is inaccomplished ~~research~~through a polishing process using high-performance equipment, ~~development~~consumables — such as slurries, and ~~engineering~~related ~~expense~~technologies. ~~was~~A ~~due~~slurry tois ~~management’s~~a ~~efforts~~suspension toof ~~realign~~abrasives ~~the~~in ~~Company’s~~reactive ~~research~~chemicals. ~~and~~In ~~development~~some ~~efforts~~instances, slurry may ~~around~~contain ~~critical~~no ~~and~~abrasives, ~~key~~but ~~programs~~may ~~while~~consist ~~eliminating~~only ~~duplicate~~of reactive ~~projects~~chemicals. Different metals or oxides require different slurries.

14 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.

~~Selling, General and Administrative.~~ In ~~2000,~~addition ~~selling, general and administrative expense decreased~~ to ~~$52.4~~CMP ~~million~~systems, or the ~~19.1%~~Company ofmarkets high-throughput ~~total~~precision ~~revenue~~surface ~~from~~processing ~~$68.2~~equipment ~~million,~~for ~~or 31.5% of total~~the ~~revenue,~~wafer ~~in 1999. The decrease in selling~~market, ~~general~~ and ~~administrative~~ ~~expense,~~consumables ~~both~~used in ~~dollars~~surface ~~and~~processing. ~~as a percentage of~~The ~~total~~Company ~~revenue,~~also ~~resulted~~manufactures ~~primarily~~and ~~from~~markets ~~management’s~~polishing ~~efforts to~~systems ~~control expenses which includes eliminating functional~~for ~~duplications~~general ~~throughout~~industrial ~~the merged Company~~applications.

~~Merger,~~The ~~Integration~~Company’s ~~and~~total ~~Restructuring.~~revenue Inconsists ~~the~~of ~~fourth~~net ~~quarter~~sales of ~~1999,~~ the ~~Company~~products ~~recorded~~described ~~the~~above ~~following merger, integration~~ and ~~restructuring~~service ~~costs~~revenues, ~~totaling $53.9 million: $6.9~~as ~~million~~well ~~direct~~as ~~merger~~revenue ~~costs;~~derived ~~$16.9~~from ~~million~~the ~~lease~~distribution ~~termination costs~~by ~~including~~the ~~$2.3~~Company ~~million~~ in ~~lease improvement write-offs;~~ $4the U.2S. ~~million~~and ~~write-down~~Europe of ~~equipment~~products ~~and~~manufactured ~~$19.4~~by ~~million~~the ~~write-down~~former SpeedFam-IPEC, ofCo., ~~inventory due to certain discontinued product lines; $4~~Ltd.~~7 million~~ ~~related~~(the toFar ~~severance~~East ~~costs~~Joint ~~and $1~~Venture).8 ~~million related to~~The ~~other~~Company ~~merger,~~distributes ~~integration~~such ~~and~~products ~~restructuring~~throughout ~~write-offs~~the ~~and costs~~U. S. ~~In 1999, merger, integration~~ and ~~restructuring expenses included~~Europe acting inas ~~operating~~sales ~~expenses were $40~~agent.3 ~~million,~~Related orcosts ~~18.6% of total revenue. These charges were incurred primarily~~ to ~~close~~import ~~duplicate~~ this ~~facilities, record transaction costs, account for certain~~equipment ~~employee~~are ~~termination~~recorded ~~benefits~~as ~~and~~cost ~~record~~of ~~adjustments~~goods ~~and accruals resulting from strategic decisions to discontinue certain product lines and sales and marketing activities as a merged Company~~sold. The ~~severance~~Company’s ~~and~~CMP segment ~~other~~has ~~related employee costs~~ provided ~~for~~ the ~~reduction~~substantial majority of ~~approximately~~our ~~70 employment positions~~revenues ~~resulting~~during ~~from facility closures, and~~ the ~~elimination~~last ~~of duplicate~~several ~~positions~~years. orIn ~~positions~~fiscal noyears ~~longer~~2002, ~~necessary~~2001 ~~due~~and 2000, to the ~~streamlining~~ ofCMP ~~operations.~~Group ~~Notification~~accounted offor ~~the~~75%, ~~planned~~81% ~~severance~~ and ~~the~~84% ~~amount~~ of ~~the related benefits were made to employees prior to May 31~~revenues, ~~1999~~ respectively.

~~During~~The ~~2000, the~~ Company’s ~~completed~~fiscal ~~the~~year ~~majority~~consists of ~~its restructuring~~52 ~~activities in accordance with its previously~~or ~~established and announced plans. Through June~~53 3,weeks ~~2000,~~ending ~~the Company~~on ~~incurred $27.0 million in asset write-downs and paid and charged to~~ the ~~liability~~Saturday ~~$17.7~~nearest ~~million~~May 31. ~~The remaining~~ ~~restructuring accrual for lease termination~~Accordingly, ~~severance and other expenses associated with~~ the ~~merger~~2002 ~~was~~fiscal ~~approximately~~year ~~$9.2 million~~ended ason of June 31, ~~2000~~2002, ~~which the Company believes is~~ ~~adequate to cover~~ the ~~remaining~~2001 ~~liabilities.~~fiscal ~~Cash~~year ~~expenditures related~~ended toon ~~the merger~~June 2, ~~integration and restructuring charges are expected to be $2.0 million for~~ 2001 and ~~paid~~the ~~from cash generated from operations. During~~ 2000~~, lease terminations payments on~~ ~~certain~~fiscal ~~vacated~~year ~~facilities~~ended ~~(which were included in the restructuring charge) primarily related to remaining rent, related utilities and common area maintenance~~ on ~~the closed Phoenix~~June 3, ~~Arizona manufacturing and administrative facility~~2000. ~~The Company~~All ~~also~~references ~~estimated in May 1999, given the then-current real estate market conditions, that it would take approximately 9-12 months~~ to ~~sublease the facility. Sublease activity~~ ~~began~~quarters ~~in May 2000 (as reflected in the remaining accrual)~~ and isyears ~~projected~~relate to befiscal ~~carried~~quarters ~~out through the Company’s lease term. The Company’s management has been~~ and ~~is currently~~fiscal ~~in the process of securing additional subleases or~~years ~~other~~unless ~~negotiated~~otherwise ~~agreements for the Phoenix, Arizona manufacturing and administrative facility~~noted.

~~During~~On August 30, 2000, the Company and ~~going~~Obara Corporation ~~forward,~~(Obara) ~~lease~~effectively ~~termination~~dissolved ~~payments~~the Far East Joint ~~associated~~Venture. ~~with~~Under ~~its~~the ~~Phoenix,~~terms ~~Arizona~~of ~~facility~~the ~~not~~Master ~~recovered~~Reorganization Agreement ~~through~~with ~~sublease~~Obara, ~~activity~~ownership ~~have~~of ~~been~~the CMP sales and ~~are~~service ~~projected~~operations of the Far East Joint Venture was transferred to bethe Company and ~~offset~~specific bypersonnel ~~savings~~involved ~~associated~~in ~~with~~CMP ~~consolidation~~efforts became employees of the Company. Obara continues the ~~merged~~non-CMP activities of the former Far East Joint Venture, which include the manufacturing of silicon wafer polishing products. The Company’s ~~facilities~~will not compete with the non-CMP business and ~~administrative~~Obara ~~functions~~will not compete with the CMP business for an initial period of five years. The Company has indemnified Obara for any claims relating to the CMP business and Obara has indemnified the Company for any claims relating to the non-CMP business. Under the terms of a distributor agreement signed on August 31, 2000, the Company continues to

12 ~~Other Income (Expense). Other income (expense) increased~~ ~~to $5.6 million in 2000 from $4.3 million in 1999. This increase~~ ~~from prior year resulted from a $6.1 million gain recorded in the~~ second quarter of 2000 on the sale of the Company’s 50% interest in its joint venture, Fujimi Corporation. In the first quarter of 1999, the Company recorded a gain arising from the collection of insurance proceeds for a CMP tool, which was destroyed in transit. Other income in 1999 also included an increase in interest income due to the Company’s decision in the first quarter of 1999 to transfer a significant portion of the Company’s short-term investments to higher yielding taxable securities.

ProvisionTable for Income Taxes. At the end of 1999, as well as at the end of 2000, the Company established a valuation allowance for deferred tax assets generated by its operating losses and is in a net operating loss carryforward position. As a result, the effective tax rate for 2000 was zero. Income tax benefit was $3.9 million for 1999. The effective tax benefit rate for 1999 was approximately 2.7%. In 1999, the expected tax benefit computed by applying the statutory rate to the current year loss was offset by a $51.5 million increase to the Company’s deferred tax valuation allowance. The deferred tax valuation allowance fully offsets the Company’s net deferred tax assets at June 3, 2000 and May 31, 1999. Contents

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

~~Equity~~During in2001 ~~Net~~there ~~Earnings~~was ~~(Loss)~~a ofsignificant ~~Affiliates.~~decrease ~~Equity~~ in ~~net~~ the ~~loss~~worldwide ofdemand ~~affiliates~~for ~~was~~semiconductor $3capital equipment.3 ~~million~~This decline has continued in ~~2000~~2002 ~~compared~~and tohas ~~equity~~resulted in inventory buildups in ~~net~~telecommunications ~~earnings~~products, ofslower ~~$0.9~~than ~~million~~expected personal incomputer ~~1999.~~sales ~~This~~and ~~decline~~overall ~~compared~~slower toglobal economic growth, ~~the~~causing ~~prior~~many ~~year~~semiconductor ~~was~~manufacturers ~~due~~ to ~~significantly~~reevaluate their ~~decreased~~capital ~~sales~~spending ~~revenue~~ plans. Several of the ~~Far~~Company’s customers ~~East~~have ~~Joint~~rescheduled ~~Venture.~~deliveries ~~Investments~~or bycanceled ~~manufacturers of~~existing ~~both~~orders ~~silicon~~and ~~wafers~~the ~~and~~Company ~~thin~~has ~~film~~experienced ~~memory~~a ~~disks~~substantial ~~continued~~decline toin ~~weaken~~new orders. Because the duration of this downturn in ~~2000.~~demand ~~Also~~has been ~~during~~longer ~~2000~~than originally anticipated, the ~~Far~~Company ~~East~~believes that ~~Joint~~purchases ~~Venture recorded~~in athe ~~charge~~next upturn will be primarily for ~~certain~~the Company’s ~~asset~~Momentum ~~impairments~~products. As a result, ~~severance~~during ~~costs~~the second ~~and~~quarter ~~other~~of ~~reorganization~~2002, ~~charges~~the Company recorded significant inventory write-downs related to ~~account~~its ~~for~~older ~~the~~generation ~~slowdown~~products, incharges ~~the~~related ~~thin~~to ~~film~~asset ~~memory~~impairments, ~~disk~~charges ~~media~~related ~~market~~to ~~and~~ the ~~transition~~downsizing and consolidation of ~~CMP research~~operations and ~~development~~severance ~~operations~~costs toin connection with across-the-board ~~Company.~~headcount ~~The~~reductions. Furthermore, the Company’s ~~share~~implemented ofmeasures ~~this~~to ~~charge~~reduce discretionary ~~was~~spending ~~approximately~~throughout $22002.9 ~~million.~~

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

~~1999~~ On ~~Compared~~August 11, 2002, the Company entered into an Agreement and Plan of Reorganization with ~~1998~~Novellus Systems, Inc., a Delaware corporation and the leader in thin film deposition technology for the semiconductor industry. Novellus will acquire all outstanding shares of SpeedFam-IPEC in a stock-for-stock merger transaction. If the merger is completed, the Company would become a wholly-owned subsidiary of Novellus. Each share of SpeedFam-IPEC common stock outstanding as of the closing date will be converted into 0.1818 shares of Novellus common stock on a fixed exchange ratio basis. The merger is intended to qualify as a tax-free reorganization under IRS regulations. The transaction has been approved by the board of directors of both companies and is expected to formally close in the second quarter of fiscal 2003.

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

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

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


	2002			2001			2000

Net sales		100.0			100.0			100.0
Cost of sales		108.2			85.6			67.3

Gross margin		(8.2	)		14.4			32.7
Operating expenses:
Research, development and engineering		37.5			24.0			19.6
Selling, general and administrative		23.6			19.6			19.1
Merger, integration and restructuring		4.0			3.2			—

Operating loss		(73.3	)		(32.4	)		(6.0	)
Other expense, net		(5.6	)		(0.3	)		(0.2	)
Gain (loss) on disposal of investment in affiliate		—			(4.0	)		2.2
Equity in net loss of affiliates		—			—			(1.2	)

Loss before income taxes		(78.9	)		(36.7	)		(5.2	)
Income tax benefit		(2.1	)		—			—

Loss before cumulative effect of accounting change		(76.8	)		(36.7	)		(5.2	)
Cumulative effect of accounting change		(2.2	)		(13.7	)		—

Net loss		(79.0	)%		(50.4	)%		(5.2	)%

Gross Margin. In 1999, gross margin was $21.4 million, or 9.9% of total revenue, compared to $142.9 million, or 38.2% of total revenue, in 1998. Gross margin, both in dollars and as a percentage of total revenue, was down year over year, primarily due to higher material costs for some of the Company’s mainline tools, higher overhead costs due to excess production capacity spread over a smaller revenue base, lower commission revenue, pricing pressure in all markets and shifts in the product mix. In addition, in the fourth quarter of 1999, the Company recorded approximately $13~~.6 million in integration~~ ~~inventory charges associated with the new Company’s~~ ~~strategic plan to discontinue certain product lines and~~ ~~accordingly increased its reserves for excess inventory and~~ obsolescence. In 1999, the Company faced significantly increased competition in the sale of its products to equipment manufacturers, in addition to increased customer demands to meet changing process requirements and develop new technologies. As these factors grew in significance in 1999, the Company determined to record an increase in its allowance for excess and obsolescence to inventory to coincide with the increased weakness in order activity and demand for the Company’s products in the fourth quarter of 1999.

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

16 2002 Compared with 2001

~~finer~~Net ~~geometries~~Sales. Net sales for 2002 were $119.2 million, down 55% from net sales of $267.1 million in ~~oxide~~2001. ~~and~~Sales ~~tungsten~~of ~~applications~~CMP ~~while~~systems totaled ~~developing~~$88.8 million, ~~new~~or ~~process~~75% ~~capabilities~~of net sales, down 59% from $217.4 million, or 81% of net sales in 2001. Sales of CMP systems decreased in 2002 due to the slowing of worldwide demand for ~~emerging~~semiconductor ~~shallow-trench~~manufacturing equipment caused by a rapid ~~isolation~~decline in demand for semiconductor devices. Inventory buildups in telecommunication products, ~~copper~~slower than expected personal computer sales and ~~300mm~~slower ~~applications~~global economic growth have caused semiconductor companies to reevaluate their capital spending plans. A number of the Company’s customers revised the timing of their capital spending and rescheduled delivery or canceled existing orders, resulting in the postponement of equipment delivery and a decline in new orders and net sales.

~~Selling,~~Sales ~~General~~of ~~and~~silicon ~~Administrative.~~wafer Inproducts ~~1999,~~in ~~selling, general~~2002 ~~and administrative expense~~ decreased to $6816.2 million ~~from~~, ~~$72.9~~or ~~million~~13% inof ~~1998.~~net ~~In 1999~~sales, ~~selling,~~as ~~general~~compared ~~and~~to ~~administrative~~$29.1 million, ~~expense~~or ~~increased~~11% asof anet ~~percent~~sales, ofin ~~total~~2001. ~~revenue~~During to2002, the ~~31.5%~~silicon ~~from~~wafer ~~19.4%~~market experienced continued softness in demand ~~1998.~~due ~~Selling,~~to ~~general~~ongoing ~~and~~manufacturing ~~administrative expense,~~over-capacity incaused ~~dollars~~by various factors, ~~declined~~including inavailable ~~1999~~capacity ~~from~~and ~~1998~~increased production efficiencies due to ~~management’s~~ ~~efforts~~the tofact ~~control~~that ~~expenses~~more tochips ~~align~~can ~~them with~~be ~~lower~~produced ~~revenue~~on ~~expectations,~~a ~~including~~given ~~decreased~~wafer. ~~travel,~~This ~~an across~~over-~~the-board~~capacity ~~reduction~~situation inhas created ~~all~~a ~~management~~larger ~~salaries,~~market afor ~~freeze on~~used ~~new hires~~equipment, ~~and~~resulting ~~reductions~~in even greater difficulty in the ~~Company’s~~sale ~~global workforce.~~of ~~Selling,~~new ~~general~~equipment. ~~and~~While ~~administrative~~the Company ~~expense~~continues into ~~1999~~actively as pursue asales ~~percentage~~ of ~~total~~consumable products, ~~revenue~~the ~~increased~~Company ~~substantially~~does ~~from~~not ~~prior~~ foresee ~~year~~a ~~primarily~~return ~~due~~of tohigh ~~reduced~~volume equipment ~~revenues~~sales into ~~1999~~this market.

~~Merger,~~Sales ~~Integration and Restructuring. In the fourth quarter~~ of ~~1999,~~products ~~the~~for ~~Company~~general ~~recorded the following merger,~~industrial ~~integration~~applications ~~and~~decreased restructuring costs totaling $53.9 million: $6.9 million direct merger costs; $16.9 million lease termination costs including $2.3 million in lease improvement write-offs; $4.2 million write-down of equipment and $19.4 million write-down of inventory due to ~~certain discontinued product lines;~~ $414.~~7 million related to severance costs and $1.8 million related to other merger, integration and restructuring write-offs and costs. Through May~~2 ~~31, 1999, the Company incurred $26.8~~ million ~~in asset write-downs and paid and charged to the liability $4.1 million. The remaining restructuring accrual for lease termination~~, ~~severance~~or ~~and~~12% ~~other expenses associated with the merger was approximately $23.0 million as~~ of ~~May 31, 1999 which~~net ~~the Company believed was adequate to cover the remaining liabilities. In 1999~~sales, ~~merger, integration and restructuring expenses included~~ in ~~operating~~2002 ~~expenses~~compared ~~were~~with $4020.3 6 million, or ~~18.6~~ 8% of ~~total revenue. These charges were incurred primarily to~~net ~~close~~sales ~~duplicate~~in ~~facilities,~~2001 ~~record~~due ~~transaction costs, account for certain employee termination benefits and record adjustments and accruals resulting from strategic decisions~~ to ~~discontinue certain~~the ~~product~~general ~~lines~~economic ~~and sales and marketing activities as a merged Company~~slowdown.

~~Other~~Gross ~~Income~~Margin. Gross margin for 2002 was (~~Expense)~~$9.7) million, ~~Other~~or ~~income~~ (~~expense~~8) ~~increased~~% of net sales, compared to $438.3 5 million, inor ~~1999~~14% ~~from~~of $3net sales, in 2001.5 ~~million~~Because the length and severity of the industry downturn has been longer than originally anticipated, the Company believes that purchases in ~~1998.~~the ~~This~~next ~~increase~~upturn ~~was~~will ~~due~~be primarily tofor the Momentum products. As a ~~gain~~result, the Company recorded a one-time ~~arising~~charge ~~from~~of $37.6 million to cost of goods sold during 2002 for the ~~collection~~write-down of ~~insurance~~inventory ~~proceeds~~and recognition of liabilities related to outstanding purchase commitments for athe Company’s ~~CMP~~legacy ~~tool~~tools. Excluding this write-down, gross margin ~~which~~was $27.9 million, or 23% of net sales for 2002. During 2001, the Company recorded a one-time charge of $31.7 million to cost of goods sold related to the industry downturn and $3.4 million related to the exit from the manufacturing of wafer and disk polishing equipment. Excluding these charges, gross margin was ~~destroyed~~$73.6 million inor ~~transit~~28% of net sales for 2001. ~~Other~~The ~~income~~Company’s ~~also~~gross ~~increased~~margins inare below ~~1999~~historical levels due primarily to decreased production volume resulting in lower overhead absorption on a reduced revenue base. During the industry downturn, the Company expects this trend of reduced gross margins to continue. The Company’s gross ~~decision~~margin has fluctuated significantly in the ~~first~~past ~~quarter~~and ofwill ~~1999~~continue to ~~transfer~~fluctuate abased ~~significant~~on ~~portion~~several factors, including the severity and duration of the ~~Company’s~~current industry downturn, product ~~short-term~~mix, ~~investments~~overhead toabsorption ~~higher~~levels, ~~yielding~~and ~~taxable~~costs ~~securities~~associated with the introduction of new products.

~~Provision~~Research, ~~for~~Development ~~Income~~and ~~Taxes~~Engineering. In ~~Income~~2002, ~~tax~~research, ~~benefit~~development ~~was~~and engineering expense decreased to $344.9 7 million, ~~for~~or ~~1999~~38% of net sales, compared to an$64.0 million, ~~income~~or ~~tax~~24% ~~expense~~ of ~~$29~~net sales, in 2001.6 Research, development and engineering expenses in 2002 included $7.3 million in ~~1998.~~one-time ~~The~~charges ~~effective~~related ~~tax~~to ~~expense~~the asset ~~(benefit)~~impairment ~~rates~~of ~~for~~certain legacy tools located in our labs, ~~1999~~which ~~and~~will ~~1998~~no ~~were~~longer ~~approximately~~be ~~(2.7)%~~used for ongoing research and development ~~466%~~programs, ~~respectively. Tax~~as ~~expense~~well inas ~~1998~~capitalized ~~resulted~~costs ~~primarily~~associated with ~~from~~certain apatents ~~$25~~that were written off.9 ~~million~~During ~~net~~2001, ~~charge~~research, ~~which~~development ~~increased~~and ~~the~~engineering ~~Company’s~~expenses ~~deferred~~included ~~tax~~an ~~valuation~~asset impairment ~~allowance.~~charge Inof ~~1999,~~$2.4 million ~~the~~for ~~tax~~equipment ~~benefit~~that ~~created~~was designed by the ~~current~~Far ~~year loss~~East ~~was~~Joint ~~offset~~Venture byand aan asset impairment charge of $513.5 6 million ~~increase~~related to ~~the~~certain ~~Company’s~~tools no longer used ~~deferred~~in ~~tax~~our ~~valuation~~labs ~~allowance~~as a result of the industry slowdown. ~~This~~Excluding these ~~increase~~charges, research, development and engineering expenses in 2002 ~~the~~decreased ~~deferred~~by $20.7 million, or 36%, from 2001 as a ~~tax~~result ~~valuation~~of ~~allowance~~certain ~~fully~~cost ~~offset~~cutting measures which were implemented by the Company’s ~~net~~in response to the industry wide downturn. The ~~deferred~~Company ~~tax~~expects ~~assets~~to continue investing substantial resources in research, development and engineering programs.

~~Equity~~Selling, inGeneral ~~Net~~and ~~Earnings of Affiliates~~Administrative. In ~~For~~2002, ~~1999~~selling, ~~equity~~general inand ~~net~~administrative ~~earnings~~expense ~~of affiliates~~ decreased to $028.9 1 million, or 24% of net sales, compared to $452.4 million, inor ~~1998.~~20% ~~Equity in the net earnings~~ of ~~affiliates~~net ~~was~~sales, ~~down~~in ~~from~~2001 ~~the~~as ~~prior~~a ~~year~~result ~~primarily due to significantly decreased sales revenue~~ of ~~the~~certain ~~Far~~cost ~~East~~cutting ~~Joint~~measures ~~Venture.~~that ~~Investments~~were implemented by ~~manufacturers~~the ofCompany ~~both~~in ~~silicon~~response ~~wafer~~to ~~and~~the ~~thin~~industry ~~film~~wide ~~memory~~downturn. ~~disks~~These ~~were~~cost ~~reduced~~cutting ~~significantly~~measures inwere ~~1999~~partially ~~compared~~offset ~~to 1998.~~by increased ~~This~~legal ~~reduced~~fees ~~manufacturing~~incurred ~~volume~~related ~~also~~to ~~resulting~~the insettlement ~~lower sales~~ of ~~consumable goods.~~

~~Liquidity and Capital Resources~~14

AsTable of June 3, 2000, the Company had $100.3 million in cash, cash equivalents and short-term investments compared to $147.0 million at May 31, 1999. The Company used $45.2 million of cash in operating activities during 2000 compared to $51.6 million in 1999. During 2000, cash primarily decreased due to a $52.7 million increase in accounts receivable as a result of the revenue growth during 2000. Changes in other working capital accounts provided cash of $7.0 million in 2000. In 2000, the net loss was $14.2 million, adjusted for non-cash items of $17.4 million for depreciation and amortization expense and $3.3 million in equity in the net loss of the Far East Joint Venture which were offset by a $6.1 million gain on the sale of Fujimi Corporation and other items. Contents

17 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.

~~Net~~Litigation ~~cash~~settlement ~~provided by investing activities totaled $18~~costs.~~4 million~~ inOn ~~2000 compared with $41.~~October 5, ~~million in 1999. The Company incurred capital expenditures of $15.1 million and $31.4 million in 2000 and 1999~~2001, ~~respectively. The majority of~~ the ~~cash was used to fund~~Company settled ~~building~~its ~~improvements,~~outstanding ~~software~~litigation ~~and~~with ~~equipment purchases in 2000~~MEMC. ~~During~~In ~~1999,~~connection ~~the majority of cash expenditures were used to fund the construction of a 109,000 square foot Technology Center next to the corporate headquarters in Chandler, Arizona~~ with ~~the~~ ~~remaining~~this ~~expenditures~~settlement ~~relating to purchase of equipment and software. During~~ the ~~second quarter of 2000, the~~ Company ~~sold~~agreed ~~its 50% interest in its joint venture, Fujimi Corporation,~~ to ~~its 50%~~pay ~~partner, Fujimi Incorporated which generated proceeds of~~MEMC $101.0 8 million~~. In addition~~, ~~cash~~which ~~of $2.3 million~~ was ~~provided from~~expensed in the ~~licensing~~first ofquarter ~~certain technologies and transferring associated assets. During 2000, cash was also used to purchase short-term investments~~ of ~~$64.3 million offset by proceeds of~~ ~~maturing investments totaling $85~~2002.~~8 million.~~

~~Financing~~Merger, ~~activities~~Integration ~~provided~~and $2Restructuring.3 During ~~million~~2001 and ~~$1.6~~continuing ~~million~~in 2002, ~~during~~there ~~2000~~was ~~and~~a ~~1999,~~significant ~~respectively.~~decrease ~~The~~in ~~sale~~the ofworldwide ~~stock~~demand tofor ~~employees~~semiconductor ~~and~~capital ~~the~~equipment, ~~exercise~~which ofhas ~~stock~~resulted ~~options~~in ~~generated~~inventory buildups ~~proceeds~~in oftelecommunications products, slower than expected personal ~~$3.4~~computer ~~million~~sales ~~during~~and ~~each~~overall ~~year~~slower global economic growth. ~~Principal~~This ~~payments~~has oncaused ~~capital lease~~many ~~obligations~~semiconductor ~~amounted~~manufacturers to reevaluate $1their capital spending plans.2 ~~million~~Several inof ~~2000~~the Company’s ~~compared~~customers tohave rescheduled deliveries or canceled ~~$1.1~~existing ~~million~~orders inand ~~1999.~~the ~~Total~~Company ~~long-term~~has ~~debt~~experienced ~~decreased~~a tosubstantial decline ~~$116~~in new orders.~~2 million~~ atAs ~~June 3~~a result, ~~2000~~the ~~compared~~Company toimplemented additional ~~$117.4~~cost ~~million~~cutting atmeasures in 2002 including the ~~May 31,~~downsizing ~~1999.~~and ~~Total~~consolidation ~~long-term~~of ~~debt~~operations asin athe ~~percentage~~Phoenix, ofAZ, ~~stockholder’s~~Portland, ~~equity~~OR ~~increased~~and toAustin, ~~49.0%~~TX asareas and recorded lease termination costs of ~~June~~$1.1 ~~3, 2000~~million ~~from~~and 47asset impairments of $1.6%9 million asfor a total of ~~May~~$3.0 ~~31,~~million ~~1999~~related to these actions.

~~The~~During the year ended June 2, 2001, the Company ~~believes~~recorded ~~that~~restructuring ~~its~~charges ~~current~~of ~~cash~~$8.6 million. Approximately ~~position~~$3.5 million of restructuring charges related to the industry downturn and ~~cash~~$5.1 million related to the ~~generated~~restructuring ~~through~~associated ~~operations~~with ~~will~~the beCompany’s ~~sufficient~~exit from the manufacturing of silicon wafer and thin film memory disk polishing equipment. In 2001, slowing worldwide demand for semiconductors resulted in a rapid decline in demand for manufacturing equipment. In response, the Company took actions to ~~meet~~substantially reduce overall operating expenses. Cost-cutting measures included an 18-percent reduction in workforce, a 10-percent salary cutback for executives, the deferment of management raises until business conditions improve and a decrease in overall discretionary spending. As a result, the Company recorded approximately $3.5 million in restructuring and other special charges related to lease termination costs of $1.7 million; severance costs of $1.0 million for 247 employees, primarily manufacturing technicians, engineers and field service representatives; and $0.8 million of other charges. By the end of 2001, the Company completed the majority of its restructuring activities in accordance with its previously established plans. In regards to the $5.1 million of restructuring charges, $2.7 million related to fixed asset impairments, $1.2 million related to severance costs for three employees including a former executive of the Far East Joint Venture; and $1.2 million related to other restructuring charges associated with the Company’s ~~cash~~plan ~~needs~~to ~~during~~exit the manufacturing ~~next~~of ~~12 months~~wafer and disk polishing products.

OnDuring ~~June 27,~~ 2000, the Company ~~announced~~completed ~~that~~the ~~it reached an~~majority ~~agreement~~of ~~with~~ its ~~partner~~merger, inintegration ~~the~~and ~~Far~~restructuring ~~East~~activities ~~Joint Venture, Obara~~in ~~Corporation,~~accordance ~~that~~with ~~will~~its ~~transfer~~previous ~~full~~plans ~~ownership~~established ofin ~~CMP~~1999 ~~sales~~at ~~and~~the ~~service~~time ~~operations~~of inthe ~~that~~merger ~~region~~between toSpeedFam ~~the~~International, ~~Company~~Inc. ~~Per the~~and ~~agreement,~~Integrated ~~Obara~~Process ~~Will~~Equipment ~~assume~~Corporation ~~the~~(IPEC). ~~business operations for non-CMP~~Through ~~activities.~~June 1, ~~In conjunction with this agreement~~2002, the Company isrecorded $27.0 million in ~~evaluating~~asset ~~its~~impairment ~~impact~~charges onand ~~its~~paid ~~domestic~~and ~~non-CMP~~charged ~~operations.~~to ~~Based~~the liability ~~upon~~$22.3 million. ~~this~~The ~~ongoing~~remaining ~~review,~~restructuring asaccrual ~~well~~for lease astermination ~~the~~expenses ~~terms~~associated ofwith the ~~agreement~~merger was ~~reached~~approximately ~~with~~$4.6 million ~~Obara~~as ~~Corporation~~of June 1, 2002, which the Company believes itis ~~will incur~~adequate ~~a special, non-cash charge~~ to ~~operations~~cover in the ~~range~~remaining ofcash ~~$10.0~~outlays, ~~million~~primarily tolease ~~$20.0~~termination ~~million~~payments inon ~~the~~certain ~~first~~vacated facilities ~~six~~not ~~months~~offset ofby ~~2001~~sublease income. ~~The~~ ~~Company~~Sublease ~~believes~~activity began ~~there~~in ~~will~~May be2000 nois ~~material~~projected ~~cash~~to ~~outlays~~continue inthrough the ~~conjunction~~Company’s ~~with~~lease ~~finalizing this transaction~~term.

~~Statement~~Other ~~of Financial Accounting Standards (SFAS) No. 133~~Expense, ~~“Accounting for Derivative Instruments and Hedging Activities” and No~~net. ~~138,~~ ~~“Accounting~~Other ~~for Certain Derivative Instruments and Certain Hedging Activities”~~expense, ~~establishes~~net ~~accounting~~increased ~~and reporting~~to ~~standards~~($6.6) million ~~for~~in ~~derivative~~2002 ~~financial~~from ~~instruments and hedging activities~~($0.8) million ~~These~~in ~~statements require that the Company recognize~~2001. ~~all~~Interest ~~derivatives~~expense astotaled ~~either~~$7.8 million ~~assets~~in orboth ~~liabilities~~2002 ~~on the balance sheet~~ and ~~measure those instruments at fair value. Derivatives~~ ~~that~~2001, ~~are~~offset ~~not~~by ~~hedges~~interest ~~must be adjusted to fair value through~~ income. ~~If the derivative is a hedge, depending on the nature~~ of ~~the~~ ~~hedge,~~$1.1 million ~~changes~~ in ~~the~~2002 ~~fair value of derivatives will either~~and be$4.7 million ~~offset against changes~~ in ~~the~~2001. ~~fair~~The ~~value~~decrease ofin ~~the~~interest ~~hedged assets,~~income resulted ~~liabilities,~~from orlower ~~firm~~average ~~commitments~~balances ~~through~~in ~~earnings~~cash, orcash ~~recognized~~equivalents inand ~~other~~short-term ~~comprehensive~~investments ~~income~~as ~~until~~well ~~the~~as ~~hedged~~a ~~item~~reduction isin ~~recognized~~interest rates inthat ~~earnings.~~occurred ~~The~~during ~~ineffective~~2002 ~~portion~~yielding oflower ainterest ~~derivative’s~~income ~~change~~when incompared ~~fair~~to ~~value will be immediately recognized in earnings~~2001. ~~The~~ ~~Company~~In ~~will~~addition, ~~adopt~~a ~~SFAS No~~$1.8 ~~133~~million ~~and~~gain ~~No. 138 in the~~on ~~first~~sale ~~quarter~~ of ~~2002,~~land ~~and~~was ~~does~~recorded ~~not~~in ~~expect the adoption to have a material effect on its financial condition or results of operations~~2001.

InGain ~~December 1999, the Staff of the Securities and Exchange Commission~~ (~~SEC~~Loss) ~~issued~~ ~~Staff Accounting Bulletin (SAB) No. 101, “Revenue Recognition in Financial Statements”. SAB 101 provides guidance~~ on ~~the recognition,~~Disposal ~~presentation and disclosure~~ of ~~revenue~~Investment in ~~financial~~ ~~statements of all publicly held companies~~Affiliate. ~~The~~In ~~semiconductor capital equipment industry association and a number of association members have met with~~ the ~~Staff~~first ofquarter ~~the SEC to discuss and evaluate the applicability~~ of ~~SAB 101 and various~~ ~~practical implementation considerations. On June 26~~2001, ~~2000,~~ the ~~Staff~~Company ofrecorded ~~the~~a ~~SEC issued Staff Accounting Bulletin No~~$10.8 ~~101B~~million ~~(SAB 101B),~~loss ~~which~~on ~~permitted the delay in the~~disposal ~~Company’s implementation date~~ of ~~SAB 101~~investment until the fourth quarter of 2001. Accordingly, any shipments previously reported as revenue, including revenue reported during the first nine months of 2001, which do not meet SAB 101’s guidance will be recorded as revenue in ~~future~~an ~~periods.~~affiliate ~~Changes~~ in ~~our~~connection ~~revenue~~with ~~recognition policy resulting from~~ the ~~interpretation~~ ~~of SAB 101 and SAB 101B would not~~dissolution ~~involve the restatement~~ of ~~prior financial statements, but would, to~~ the ~~extent~~Far ~~applicable,~~East beJoint ~~reported~~Venture asthat aoccurred ~~change~~on ~~in accounting~~August 30, ~~principle in the fourth quarter of 2001~~2000.

1815

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

~~Year~~ Equity ~~2000~~in Net Earnings of Affiliates. Equity in net earnings of affiliates was $0.1 million in 2001. During 2001, the Company and Obara restructured the Far East Joint Venture effectively dissolving the joint venture; therefore, equity in earnings of affiliates was only recorded for the first quarter of 2001 and was not recorded in 2002.

InProvision ~~calendar~~for ~~year~~Income ~~1999, the Company completed all of its Year 2000 review and conversion projects to address all necessary changes, testing and implementation issues~~Taxes. ~~This project encompassed~~ ~~three~~At ~~major~~the ~~areas~~end of ~~review;~~2002 ~~internal systems (hardware~~ and ~~software),~~ ~~supplier compliance and Company products. To date~~2001, the Company ~~has~~established ~~not~~a ~~experienced~~valuation ~~any~~allowance ~~interruption~~for todeferred ~~its business~~tax ~~activities~~assets orgenerated ~~incurred~~by ~~any impairment to~~ its ~~financial~~operating ~~condition or~~losses ~~results~~and ofis ~~operations~~in as a ~~result~~net operating ofloss ~~entering~~carryforward ~~calendar year 2000~~position. ~~The~~As ~~Company~~a ~~will~~result, ~~continue~~the ~~to monitor its own internal~~effective ~~systems~~tax ~~and~~rate ~~products~~for to2002, ~~determine~~exclusive of the ~~impact,~~net iftax ~~any,~~benefit ~~of problems~~discussed below, ~~associated~~and ~~with~~2001 ~~the~~was ~~Year 2000~~zero.

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

~~This~~ 2001 ~~report contains forward-looking statements within the~~Compared meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Actual results could differ materially from those projected in the forward-looking statements because of a number of factors, risks and uncertainties, including the risk factors described in this discussion and elsewhere in this report. Such forward-looking statements include, but are not limited to, statements that relate to the Company’s future revenue, product development, product backlog, customers, demand, acceptance and market share, competitiveness, gross margins, levels of research and development and operating expenses, intellectual property, management’s plans and objectives for current and future operations of the Company, the effects of the Company’s reorganization of the Far East Joint Venture, the ability of the Company to complete the reorganization of the Far East Joint Venture, and the markets in which the Company does business. In addition, the words “anticipate”, “expect”, “intend”, “believe” and similar expressions generally identify forward-looking statements. The information included in this report is as of the filing date with ~~the~~2000 ~~Securities and Exchange Commission and future events or~~ ~~circumstances could differ significantly from the forward-looking statements included herein.~~

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

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

~~The~~Sales ~~Company’s~~of ~~business~~products isfor ~~subject~~general ~~to numerous risks,~~industrial ~~including~~applications ~~those~~increased ~~discussed~~to ~~below~~$20.6 million, Ifor ~~any~~8% of ~~the events described~~net sales, in ~~these~~2001 ~~risks~~compared ~~occurs~~with $14.7 million, ~~the~~or ~~Company’s~~5% ~~business,~~of ~~financial~~net ~~condition~~sales ~~and~~in ~~results~~2000 ofdue ~~operations~~to ~~could~~increased beshipments ~~seriously~~in ~~harmed~~European markets.

~~The~~Gross ~~Company~~Margin. Excluding ~~faces~~special ~~intense~~charges ~~competition,~~of $31.7 million ~~including~~(primarily ~~from~~inventory writedowns) recorded in ~~companies~~response ~~with~~to ~~greater~~the ~~resources.~~industry ~~Several~~slowdown ~~companies~~and ~~currently~~$3.4 million related to ~~market~~the ~~CMP~~exit ~~systems~~from ~~that~~the ~~directly~~manufacturing ~~compete~~of ~~with~~wafer ~~the~~and ~~Company’s~~disk polishing equipment, ~~products~~gross margin for 2001 was $73.6 million, ~~including~~or ~~Applied~~28% of ~~Materials~~net sales, ~~Inc~~compared to $89.5 million, ~~and~~or ~~Ebara~~33% of net ~~Corporation~~sales, for 2000. ~~For~~The ~~several~~decrease ~~reasons~~in gross margin was primarily due to decreased production volume resulting in lower overhead absorption on a reduced revenue base. During the industry downturn, the Company ~~may~~expects ~~not~~this ~~compete~~trend of reduced gross ~~effectively~~margins ~~with~~to ~~competitors~~continue. ~~These~~Gross ~~reasons~~margins ~~include:~~for 2001 reflect the Company’s adoption of SAB 101, discussed above. Excluding the effect of SAB 101, gross margin for the year ended June 2, 2001 was 27% of net sales.

• Research, ~~Some~~Development ~~competitors~~and ~~may have greater financial resources than the Company~~Engineering. In ~~They also may have more extensive engineering~~2001, ~~manufacturing~~research, ~~marketing~~development and engineering ~~customer~~expense ~~service~~increased ~~and~~to ~~support capabilities~~$64.0 million, •or ~~Some~~24% ~~competitors may supply a broader range~~ of net ~~semiconductor~~sales, ~~capital~~compared ~~equipment~~to ~~than the Company~~$53. ~~As a result~~7 million, ~~these~~or ~~competitors~~20% ~~may~~of ~~have~~net ~~better relationships with semiconductor manufacturers~~sales, in ~~including current and potential customers of the Company~~2000. • The ~~Company~~increase ~~expects~~was ~~competitors~~primarily todue ~~continue~~ to ~~improve~~asset ~~their~~impairment charges ~~existing~~during ~~technology~~2001 ~~and~~of ~~introduce~~approximately ~~new products~~$6.0 million ~~This could cause a decline in the Company’s sales or lead~~ related to ~~intensified price-based competition. • Other~~ capital equipment ~~manufacturers~~that ~~not~~is ~~currently~~no ~~involved~~longer used in ~~the~~ongoing research and development ofprograms. ~~CMP~~The ~~systems~~asset ~~may~~impairment ~~enter~~charges ~~the market or develop technology that reduces the need for the Company’s products~~included $2.4 million •of ~~Once a semiconductor manufacturer commits to purchase a competitor’s~~ equipment, ~~the manufacturer generally relies on~~ that ~~equipment~~was ~~for~~designed anby ~~entire~~the ~~production~~Far ~~line~~East Joint ~~and continues to purchase that equipment exclusively for an extended period of time~~Venture. In

16 ~~Increased competitive pressure could lead to lower prices for the~~ ~~Company’s products, thereby materially adversely affecting~~ ~~the Company’s business, financial condition and results of operations. There can be no assurance that the Company will be able to compete successfully in the future.~~

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

• addition, ~~product~~the ~~selection~~Company •has ~~timely~~incurred incremental hardware, software and ~~efficient~~process ~~completion~~engineering ofcosts ~~product~~related to the design and development •of ~~timely~~the ~~and~~Momentum300 ~~efficient~~system. ~~implementation~~The ofCompany expects ~~manufacturing~~to ~~and~~continue ~~assembly~~investing ~~processes~~substantial •resources ~~product performance~~ in ~~the~~research, development ~~field • effective sales~~ and ~~marketing~~engineering programs.

~~The~~Selling, ~~Company’s~~General ~~business~~and ~~is highly cyclical~~Administrative. ~~The~~ ~~Company’s~~In ~~business~~2001, ~~depends substantially on the capital expenditures of semiconductor manufacturers and~~selling, togeneral ~~a lesser~~and ~~extent,~~administrative ~~thin~~expense ~~film~~remained ~~memory~~unchanged ~~disk~~at ~~and silicon wafer manufacturers~~$52.4 million, ~~These~~or ~~industries~~20% ~~are~~of ~~highly~~net ~~cyclical~~sales ~~and~~from ~~have historically experienced periodic downturns~~$52.4 million, ~~which~~or ~~have~~19% ~~had a material adverse effect on the acquisition~~ of ~~capital equipment and other~~net ~~products~~sales, ~~used~~ in ~~the~~2000. ~~manufacturing~~During ~~process~~2001, ~~including~~significant ~~products~~marketing and ~~offered~~promotional bycosts ~~the~~were ~~Company.~~incurred ~~These downturns have~~ in ~~the~~connection ~~past~~with ~~and are~~product ~~expected~~launch inactivities ~~the~~related ~~future~~ to ~~materially adversely affect~~ the ~~business~~ ~~and~~introduction ~~operating results~~ of the Company.’s ~~The~~new ~~semiconductor device~~products, ~~industry~~the ~~has~~Momentum ~~recently experienced a slowdown~~ and the Auriga ~~memory~~VisionTM. ~~disk~~These ~~and~~incremental ~~silicon~~costs ~~wafer~~were ~~industries~~largely ~~are currently~~offset ~~experiencing~~by acertain ~~slowdown.~~cost ~~These~~cutting ~~events~~measures ~~have~~implemented ~~negatively~~during ~~impacted~~2001 in ~~the~~response ~~Company’s~~to ~~results~~the ofindustry ~~operations~~downturn.

~~There~~Merger, ~~can~~Integration beand noRestructuring. During ~~assurance~~the ~~that~~year ended June 2, 2001, the Company ~~will~~recorded berestructuring ~~successful~~charges inof ~~selecting~~$8.6 million. Approximately $5.1 million related to restructuring associated with the Company’s exit from the manufacturing of silicon wafer and thin film memory disk polishing equipment and $3.5 million of restructuring charges were recorded during the quarter ended March 3, 2001 ~~developing~~related to the industry downturn. In regards to the $5.1 million restructuring charges, ~~manufacturing~~$2.7 million related to fixed asset impairments, $1.2 million related to severance costs for three employees including a former executive of the Far East Joint Venture; and ~~marketing~~$1.2 million ~~new~~related ~~products~~to orother inrestructuring ~~enhancing~~charges ~~its~~associated ~~existing~~with the Company’s plan to exit the manufacturing of wafer and disk polishing products. AsDuring isthe ~~typical~~third quarter ended March 3, 2001, slowing worldwide demand for semiconductors resulted in ~~the~~a rapid ~~semiconductor~~decline ~~capital~~in demand for manufacturing equipment. ~~market~~In response, the Company ~~has~~took actions to substantially reduce overall operating ~~experienced~~expenses. ~~delays~~Cost-cutting ~~from~~measures ~~time~~included toan ~~time~~18-percent reduction in ~~the~~workforce, ~~introduction~~a of10-percent salary cutback for executives, ~~and~~the ~~certain~~deferment ~~technical~~of management raises until business conditions improve and ~~manufacturing~~a ~~difficulties~~decrease ~~with~~in overall discretionary spending. As a result, the ~~certain~~Company recorded approximately $3.5 million in restructuring and other special charges related to lease termination costs of $1.7 million; severance costs of $1.0 million ~~its~~for ~~systems~~247 employees, primarily manufacturing technicians, engineers and ~~enhancements~~field service representatives; and $0.8 million ~~may~~of ~~experience~~other charges. By the end of 2001, the Company completed the majority of its restructuring activities in accordance with its previously established plans.

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

~~delays~~Gain ~~and~~(Loss) ~~technical~~on ~~and~~Disposal ~~manufacturing~~of ~~difficulties~~Investment in ~~future~~ ~~introductions~~Affiliate or volume production of new systems or enhancements. The Company’s inability to complete the development or meet the technical specifications of any of its new systems or enhancements or to manufacture and ~~ship~~Equity ~~these systems or enhancements~~ in ~~volume~~Net inEarnings a(Loss) ~~timely~~of ~~manner would~~Affiliates. ~~materially~~In ~~adversely affect~~ the ~~Company’s~~first ~~business, financial~~quarter ~~condition and results~~ of ~~operations. In addition~~2001, the Company ~~may~~recorded ~~incur~~a ~~substantial~~$10.8 million ~~unanticipated~~loss ~~costs~~on todisposal ~~ensure the functionality and reliability~~ of ~~its future product introductions~~ investment ~~early~~ in ~~the~~affiliate ~~product’s~~in ~~life~~connection ~~cycle.~~with Ifthe ~~new~~dissolution ~~products have~~of ~~reliability~~the orFar ~~quality~~East ~~problems,~~Joint ~~reduced~~Venture ~~orders~~that oroccurred ~~higher manufacturing~~on ~~costs~~August 30, ~~delays in collecting accounts receivable and~~ 2000. ~~additional~~During ~~service~~2000, ~~and~~the ~~warranty~~Company ~~expense~~recorded ~~may~~a ~~result~~$6.1 million ~~Any of these~~gain on ~~events~~the ~~could~~sale ~~materially~~of ~~adversely affect~~ the Company’s ~~business,~~ ~~financial~~50% ~~condition~~interest ~~and~~in ~~results~~its ofjoint venture, ~~operations~~Fujimi Corporation.

~~Competitive~~Equity ~~pressures~~in ~~require~~Net ~~the~~Earnings ~~Company~~(Loss) toof ~~continue~~Affiliates. Equity toin ~~enhance~~net earnings of affiliates ~~performance~~was ~~for~~$0.1 million ~~finer~~in ~~geometrics~~2001 compared to equity in ~~oxide~~net loss of $3.3 million in 2000. During 2001, the Company and ~~tungsten~~Obara ~~applications~~restructured the Far East Joint Venture effectively dissolving the joint venture; therefore, ~~while~~equity ~~developing~~in ~~new~~earnings ~~process~~of ~~capabilities~~affiliates was only recorded for the first quarter of 2001. Included in ~~emerging~~equity ~~STI~~in net loss of affiliates for 2000 are charges recorded by the former Far East Joint Venture for certain asset impairments, ~~copper~~severance costs and ~~300mm~~other ~~applications.~~reorganization ~~The~~costs ~~Company~~to account ~~will~~for the slowdown in the thin film memory disk media ~~also~~market ~~continue~~and tothe ~~enhance~~transition of CMP research and development operations to the ~~plasma~~Company. ~~assisted~~The ~~chemical~~Company’s ~~etch~~share of this ~~processes~~charge was approximately $2.9 million.

~~Product~~Provision orfor ~~process~~Income ~~development~~Taxes. At ~~problems~~the ~~could~~end ~~harm~~of 2001 and 2000, the Company’s ~~results~~established ofa ~~operations.~~valuation ~~The~~allowance ~~Company’s products~~for ~~are~~deferred ~~complex,~~tax assets ~~and~~generated ~~from~~by ~~time~~its tooperating ~~time~~losses ~~have~~and ~~defects~~is orin ~~bugs~~a net ~~that~~operating ~~are~~loss ~~difficult~~carryforward ~~and costly to fix~~position. ~~This~~As ~~can~~a ~~harm~~result, ~~results~~the ofeffective ~~operations~~tax rate for ~~the~~2001 ~~Company,~~and in2000 ~~two~~was ~~ways:~~zero.

• The Company incurs substantial costs to ensure the functionality and reliability of products earlier in their life cycle. This can reduce orders, increase manufacturing costs, adversely impact working capital and increase service and warranty expenses. • The Company requires significant lead-times between product introduction and commercial shipment. As a result, the Company may have to write off inventory and other assets related to products and could lose customers and revenue.17

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

~~The~~Liquidity ~~Company’s quarterly operating results~~ and ~~stock~~Capital ~~price~~Resources ~~may fluctuate for reasons not within its control. The~~ ~~Company’s quarterly operating results may fluctuate due to a variety of factors, including:~~

• As ~~industry~~of ~~demand~~June 1, ~~for capital equipment~~2002, ~~which~~the ~~depends~~Company onhad $33.4 million ~~economic conditions~~ in ~~the semiconductor~~cash, ~~memory~~cash ~~disk~~equivalents and ~~silicon~~short-term investments ~~wafer~~compared ~~markets • timing of new product introductions • ability~~ to ~~develop~~$60.8 million ~~and~~at ~~implement new technologies • timing~~June 2, ~~cancellation or delay of customer orders and shipments~~2001. The Company ~~continues~~used to$25.4 million ~~derive a significant portion~~ of ~~revenue~~cash ~~from~~in ~~the~~operating activities ~~sale~~during of2002 acompared ~~relatively~~to ~~small~~$30.0 million ~~number~~in ~~of machines during a given quarter~~2001. During ~~Order and delivery delays and cancellations~~2002, ~~even~~$4.0 million of ~~one~~cash orwas ~~two~~used ~~systems,~~for ~~may~~working capital ~~cause~~requirements. ~~the~~The ~~Company~~net toloss ~~miss~~of ~~quarterly~~$94.1 million included ~~revenue~~non-cash ~~and~~items ~~profit~~totaling ~~expectations~~$64.4 million: •fixed ~~unexpected~~asset impairments ~~costs~~and ~~associated~~the ~~with~~non-cash ~~sales~~portion ~~and service~~ of ~~the~~restructuring ~~CMP~~charges ~~tools~~of $48.1 million; ~~and~~contribution ~~processes~~of •stock ~~quarterly~~to ~~operating~~employee ~~results~~benefit plan of ~~the~~$0.2 million; ~~Company’s~~cumulative ~~joint~~effect ~~ventures,~~of ~~which~~change ~~are~~in accounting ~~accounted~~principle ~~for~~of on$2.6 million ~~the~~and ~~equity~~depreciation ~~method~~and amortization •expense ~~foreign~~of ~~currency exchange rates~~$13.5 million.

~~Results~~Net ofcash ~~operations~~provided by investing activities totaled $10.0 million in ~~any~~2002 ~~period~~compared ~~are~~with ~~not~~$4.3 million anin 2001. ~~indication~~The Company incurred capital expenditures of ~~future results~~$3.2 million ~~Fluctuations~~and $15.3 million in ~~the~~2002 ~~Company’s~~and ~~operating~~2001, ~~results~~respectively. ~~may~~The ~~also~~majority ~~result~~of inthe ~~fluctuations~~cash inwas ~~the~~used ~~Company’s~~to fund building ~~common~~improvements ~~stock~~and ~~price~~laboratory equipment in 2002. ~~Operating~~During ~~results~~2002, proceeds ~~may~~of ~~fluctuate~~maturing ~~widely~~investments intotaled a$13.5 million, and ~~short~~in ~~period~~2001 proceeds from maturing investments, net of ~~time~~investment purchases, ~~due~~totaled to$15.3 million. ~~factors~~Asset ~~specific~~sales toalso generated ~~the~~proceeds ~~Company~~of ~~such~~$8.1 million in 2001. ~~as:~~

• Financing ~~variation~~activities inprovided ~~quarterly~~$1.3 million and ~~results~~$1.7 million •during ~~changes~~2002 inand ~~analysts’~~2001, ~~earnings~~respectively. ~~estimates~~The sale •of ~~announcements~~stock ~~regarding~~to ~~restructurings,~~employees ~~technological~~and ~~innovations,~~the ~~departures~~exercise of ~~key~~stock ~~officers~~options generated orproceeds ~~employees~~of $1.4 million and 3.4 million in 2002 and 2001, orrespectively. Principal payments on capital lease obligations amounted to $0.1 million in 2002 compared to $1.6 million in 2001. Total long-term debt was $115.0 million at June 1, 2002 compared to $115.1 million at the ~~introduction~~end of ~~new~~the ~~products~~prior year.

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

~~All~~On ofJune 21, 2002, the ~~above~~Company ~~factors~~completed ~~could~~a sale-leaseback ~~decrease~~transaction ~~the~~of ~~trading~~its ~~price~~corporate headquarters and research and development facilities in Chandler, Arizona. As a result of the transaction, the Company’s ~~common~~received ~~stock~~net cash proceeds of approximately $23.7 million. The ~~Company’s~~book ~~stock~~value ~~price~~of buildings ~~may~~and improvements removed from the balance sheet in the ~~also~~first ~~fluctuate~~quarter ~~due~~of to2003 ~~factors~~was ~~specific~~$25.1 million. toThe loss on the sale ~~semiconductor~~of the buildings was immaterial. The Company simultaneously ~~industry,~~entered into a 15-year lease for the buildings which ~~has~~contains provisions ~~experienced~~for ~~significant~~three ~~price~~five-year ~~fluctuations~~extensions inand requires minimum annual ~~recent~~rental ~~years~~payments of $3.0 million. ~~Investors~~Annual inoperating expenses ~~the~~will ~~Company’s~~increase ~~stock~~by ~~should~~approximately be$2.4 million, ~~willing~~reflecting tothe ~~incur~~new rental payments, offset by interest income on the ~~risk~~net ofproceeds ~~such~~and ~~price~~reduced ~~fluctuations~~depreciation expense.

IfDuring ~~the~~2001 ~~market~~and ~~price~~continuing ofin ~~the~~2002, ~~Company’s~~there ~~stock~~was ~~is adversely~~a ~~affected,~~significant ~~the~~decrease ~~Company~~in ~~may~~the ~~experience~~worldwide ~~difficulty~~demand infor ~~raising~~semiconductor capital orequipment. ~~making~~As ~~acquisitions,~~a ~~which~~result ~~could~~of ~~have~~ a ~~material adverse~~rapid ~~effect~~decline onin the ~~Company’s~~demand for ~~business~~semiconductor devices, ~~financial~~inventory buildups in ~~condition~~telecommunications products, slower than expected personal computer sales and ~~stock~~overall ~~price.~~slower Inglobal ~~addition~~economic growth, ifmany semiconductor ~~the~~manufacturers ~~market~~reevaluated ~~price~~their ofcapital spending plans. Accordingly, several of the Company’s ~~common~~customers rescheduled ~~stock~~delivery isor ~~adversely~~canceled ~~affected,~~existing ~~the~~orders. Furthermore, the Company ~~may~~experienced ~~become~~a ~~the~~substantial ~~object~~decline ofin ~~securities~~new ~~class~~orders. ~~action~~In ~~litigation.~~response Ifto ~~the~~industry ~~Company~~conditions isand ~~sued~~the inintroduction aof ~~securities~~new products ~~class~~that ~~action~~are technologically advanced, the Company ~~may~~recorded significant ~~incur~~inventory ~~substantial~~write-downs, ~~costs~~charges ~~and~~related ~~management’s~~to asset ~~attention~~impairments and ~~resources~~severance ~~may~~costs berelated ~~diverted,~~to ~~which could have a~~across-the-board ~~material~~headcount ~~adverse~~reductions. ~~effect~~In onaddition, the ~~business,~~Company ~~financial~~implemented measures ~~condition~~to ~~and stock~~reduce ~~price~~discretionary spending.

InDue ~~addition,~~to ~~stock~~the ~~markets~~continuation ~~have~~and ~~experienced~~severity ~~extreme~~of ~~price~~the ~~volatility~~industry-wide indownturn, ~~recent~~the ~~years.~~Company ~~This~~implemented ~~volatility~~additional cost-cutting ~~has~~measures ~~had~~during a2002, ~~substantial~~which included further decreases ~~effect~~in ondiscretionary spending and reductions in worldwide headcount. Despite the ~~market~~expected ~~price~~continuation of ~~securities~~the industry-wide ~~issued~~downturn byand ~~many~~uncertainty ~~high~~associated with the ~~technology~~introduction ~~companies~~of new products, inand ~~many~~taking ~~cases~~into ~~for~~account ~~reasons~~the Company’s ~~unrelated~~actions to restructure and downsize the Company, ~~operating~~management ~~performance~~believes ofthat the ~~specific~~Company’s ~~companies,~~current cash and investment balances along with net cash generated through operations and the proceeds of the sale-leaseback of its corporate headquarters and research and development facilities will be sufficient to meet the Company’s ~~Common~~anticipated ~~Stock~~cash needs ~~has~~for ~~experienced~~working ~~volatility~~capital ~~not~~and capital expenditures at least ~~necessarily~~through May 31, 2003. However, due to significant uncertainties related to ~~announcements~~the ofduration ~~Company~~and ~~performance.~~severity of the ~~Broad~~semiconductor ~~market~~industry ~~fluctuations~~downturn ~~may~~and ~~adversely~~overall ~~affect~~economic conditions, the ~~market~~Company ~~price~~ may require additional sources of ~~the~~funds ~~Company’s~~in ~~Common~~order ~~Stock.~~to strengthen

18 ~~The Company depends on a small number of major customers.~~ ~~Currently, and for the foreseeable future, the Company expects~~ ~~that it will sell machines to a limited number of major~~ customers. To date, the CMP process has been used primarily to fabricate advanced semiconductors, which accounts for only a portion of the overall semiconductor market. In 2000, two customers accounted for 11.8% and 11.1%, respectively, of its total revenue. In 1999, two customers accounted for 11.4% and 10.5%, respectively, of its total revenue. The Company’s ten largest customers accounted for 64.9%, 60.8% and 53.4% of the Company’s total revenue in 2000, 1999 and 1998, respectively. The loss of a significant customer or a substantial reduction in orders by any significant customer, including reductions due to customer departures from recent buying patterns, market, economic or competitive conditions in the semiconductor industry, could adversely effect the Company’s business, financial condition and results of operations.

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

~~The~~its ~~Company’s~~working ~~success~~capital ~~depends~~position. Based on discussions ~~international~~with ~~sales~~various lenders, the Company believes that the ~~particularly~~sources inof ~~Asia~~funds available include a line of credit facility and term ~~Europe~~debt. ~~International~~If ~~sales accounted~~the ~~for~~Company ~~69.6%~~were to raise additional funds through the issuance of equity securities, the percentage ownership of the Company’s ~~total~~stockholders ~~revenue~~would ~~for~~be ~~2000~~reduced. In addition, these ~~37.4%~~equity ~~for~~securities ~~1999~~may ~~and~~have ~~34.3%~~rights, ~~for~~preferences ~~1998~~or privileges senior to the Company’s common stock. Furthermore, ~~The~~the Company ~~expects~~may ~~that~~need to raise additional funds in ~~international~~future ~~sales~~periods ~~will~~through ~~continue~~public or private financing, or other sources, to ~~account~~fund ~~for~~working acapital ~~significant~~requirements driven by the ~~portion~~expansion of ~~total~~the ~~revenue~~business induring ~~future~~the ~~periods.~~industry’s ~~International sales~~upturn. There are ~~subject~~no assurances that the Company will be able to consummate ~~risks~~any of these transactions. For more detailed information, ~~including:~~see “Certain Factors Affecting the Company’s Business,” set forth below.

• The ~~foreign~~terms ~~exchange~~of ~~issues~~the •Agreement ~~political~~and Plan of Reorganization with Novellus substantially limits our ability to incur indebtedness without the consent of Novellus. In addition, the ~~economic~~merger ~~and~~agreement ~~regulatory~~with ~~environment~~Novellus precludes the issuance of debt or equity securities except under certain limited circumstances with the ~~countries~~prior ~~where~~consent ~~customers~~of ~~are~~Novellus. ~~located~~Further, •we made ~~collectibility~~certain covenants in the merger agreement which prevent us from entering into certain agreements and prevent us from taking certain actions without the consent of ~~accounts~~Novellus ~~receivable~~except agreements •and ~~inadequate~~actions ~~intellectual~~that ~~property~~arise ~~protection~~in •the ~~intense~~ordinary ~~price~~course ~~competition~~of business and are consistent with past practices.

~~The~~Related ~~Company~~Party ~~derives a substantial portion of its revenues from~~Transactions ~~customers in Asian countries particularly Japan and Korea.~~ Economic developments in late 1997 and early 1998 resulted in decreased capital investments by Asian customers. Recent economic developments indicate that the economies of Japan, Korea and other Asian countries have recovered somewhat from 1997 and 1998 levels. Any negative economic developments or delays in the economic recovery of Asian countries could result in the cancellation or delay of orders for the Company’s products from Asian customers, thus materially adversely affecting the Company’s business, financial condition or results of operations.

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

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

~~CMP~~As ~~business. Although the parties have agreed in principle on~~ a ~~division~~ result of the ~~CMP business and the non-CMP business~~transaction, the ~~Company~~ ~~cannot guarantee that the transaction will close. The~~Company ~~transaction~~received ~~involves~~net ~~operations~~cash inproceeds ~~Japan,~~of ~~Korea,~~approximately ~~Taiwan, Malaysia and Singapore~~$23. ~~Each operation must be divided, including the employees~~7 million. The ~~parties~~book ~~must~~value ~~comply~~of ~~with~~buildings ~~various legal~~ and ~~business~~ ~~requirements~~improvements inremoved ~~each~~from ~~of these countries. If~~ the ~~transaction~~balance ~~does~~sheet ~~not~~in ~~close,~~ the ~~Company~~first ~~will~~quarter ~~not~~of ~~realize~~2003 ~~the~~is ~~potential~~$25.1 million. ~~benefits~~The ofloss ~~focusing its energy~~ on the ~~CMP~~sale ~~business. Even if the transaction closes, the reorganization~~ of the ~~Far East~~buildings ~~Joint Venture will subject the Company to the following~~was ~~risks:~~immaterial.

	•	The continued and increased acceptance of CMP among semiconductor manufacturers is still a primary risk factor in the Company’s growth. The reorganization of the Far East Joint Venture makes the Company more dependent on the CMP business. If this market fails to continue to develop, the Company will suffer.
	•	The Company believes that it will incur a one-time non-cash charge to operations in the range of $10 million to $20 million in the first half of 2001 as a result of the reorganization. This could cause the stock price to decline.

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

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

IfIn December 1999, the ~~Company~~Securities isand ~~unable~~Exchange Commission toissued ~~protect~~Staff ~~its~~Accounting ~~intellectual~~Bulletin ~~property~~No. 101 (SAB 101), “Revenue Recognition in Financial Statements,” addressing ~~its~~the ~~business~~timing ~~could~~of ~~suffer~~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’s ~~intellectual~~adopted SAB 101 in ~~property~~the ~~portfolio~~third isquarter ~~very~~of ~~important~~2001, retroactive to the beginning of 2001. As a result of the adoption of SAB 101, the Company changed its ~~success~~revenue recognition policy and recorded the cumulative effect of the change in accounting principle of ($36.5) ~~However~~million, or ($1.22) per share, as of the beginning of 2001 as a charge in the ~~Company~~first ~~may~~quarter ~~not~~of be2001. ~~able~~The previously reported results for the first quarter of 2001 prior to ~~protect~~the ~~its~~adoption ~~technology~~of ~~because:~~SAB 101 were restated to reflect the new revenue recognition method.

• Prior ~~pending and new patent applications may not be approved in a timely manner or approved at all • third parties may try~~ to ~~challenge~~the orimplementation ~~invalidate existing patents and new patents • policing unauthorized use~~ of ~~intellectual~~SAB ~~property~~101, isthe Company ~~difficult~~recognized ~~and~~revenue ~~expensive~~from • the ~~laws~~sale of ~~some~~its ~~foreign~~products generally ~~countries~~upon ~~do not protect intellectual property rights as much as U~~shipment.S. ~~laws~~Effective •June 4, ~~competitors~~2000, ~~may~~the Company ~~independently~~changed ~~develop~~its ~~similar~~method ~~technology~~of orrecognizing ~~design~~revenue ~~around intellectual property owned by the Company~~for

19 ~~The Company’s growth depends on continued and increased~~ ~~acceptance of CMP among semiconductor manufacturers. While~~ ~~CMP is used by a number of advanced logic semiconductor~~ manufacturers, CMP has been used to manufacture advanced memory devices only in the past 3 years. Continued and increased acceptance of CMP systems depends on many factors considered by potential customers, including:

•Table cost of ownership • throughput • process flexibility • performance • reliability • customer supportContents

~~Failure~~sales toof ~~adequately~~CMP ~~meet~~systems ~~potential~~to ~~customers’~~one ~~needs~~in ~~with~~which revenue may ~~respect~~be todeferred ~~one~~in whole or ~~more~~in ofpart ~~these~~based on customer acceptance and other factors ~~may~~(see ~~result~~below infor ~~decreased~~a description of the Company’s ~~acceptance~~revenue recognition policy). Due to the cyclical nature of ~~CMP~~the semiconductor ~~and,~~capital ~~therefore~~equipment industry, and the Company’s dependence ~~CMP~~on ~~systems,~~ a ~~which~~relatively ~~may~~small innumber ~~turn~~of ~~negatively~~large ~~impact~~sales, the change in the Company’s revenue recognition practices could ~~profitability~~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.

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

~~Third~~Critical ~~parties~~Accounting ~~may~~Policies ~~prevent~~and ~~the Company from selling products that~~Accounting ~~allegedly infringe on those third parties’ intellectual~~Estimates ~~property rights. The Company cannot be certain that third parties~~ ~~will not in the future claim that its products infringe their intellectual property rights. Third parties may~~

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

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

The Company ~~may~~generates berevenues ~~subject~~from tothe ~~risks~~sale ~~associated with~~of ~~acquisitions~~systems, spare parts and ~~dispositions~~service contracts. ~~The~~Prior ~~Company~~to ~~continually~~the ~~evaluates~~implementation ~~strategic~~of ~~acquisitions~~SAB of101, ~~other~~the ~~businesses~~Company ~~and dispositions~~recognized ofrevenue ~~portions~~from the sale of ~~its~~our ~~business~~products ~~that~~generally itupon ~~determines~~shipment. ~~are~~Effective ~~not~~June 4, ~~complementary~~2000, towe ~~its~~changed ~~strategy.~~our Ifmethod ~~the~~of ~~Company~~recognizing ~~were to~~revenue ~~consummate~~for ansales ~~acquisition,~~of ~~the~~CMP ~~Company~~systems ~~would be subject~~ to ~~a number~~reflect ~~risks, including~~ the following: approach;

• ~~difficulty~~For inCMP ~~assimilating~~system ~~the~~sales ~~acquired~~to ~~operations~~a ~~and~~new ~~retaining~~customer, ~~acquired~~or ~~personnel~~CMP •system ~~limits~~sales onof ~~the~~existing ~~Company’s~~products ~~ability~~with tonew ~~retain~~specifications ~~acquired~~or ~~distribution~~acceptance ~~channels~~criteria, and ~~customers~~for •all ~~disruption~~new ofCMP ~~the~~products, ~~Company’s~~revenue ~~ongoing~~is ~~business~~deferred •until ~~limits~~customer onacceptance, ~~the~~at ~~Company’s~~which ~~ability~~time tothe ~~successfully~~revenue ~~incorporate~~is ~~acquired~~recognized. ~~technology~~The ~~and~~related ~~rights~~costs ~~into~~for ~~its~~systems ~~service~~for ~~offerings~~which ~~• maintenance of uniform standards, controls, procedures and policies~~this

20 ~~The Company is dependent on key management and technical~~ ~~personnel. The Company’s performance and ability to~~ ~~execute is substantially dependent on the performance of the~~ Company’s executive officers and key technical and engineering employees. The loss of the services of any of these executive officers or key employees could have a material adverse effect on the Company’s business, operating results, financial condition, cash flows, market perceptions or the price of the Company’s stock.

TheTable Company’s future success also depends on its ability to identify, hire, train and retain other highly qualified managerial and technical personnel. Competition for such personnel is intense. If the Company is not successful in identifying, hiring, training and retaining such personnel, it could have a material adverse effect on the Company’s business, operating results, financial condition, cash flows, market perceptions or the price of the Company’s stock. Contents

~~The~~approach ~~Company~~is ~~uses~~used ~~financial~~are ~~instruments~~recorded ~~that~~as ~~potentially subject~~shipped itsystems topending ~~concentrations~~acceptance ofuntil ~~credit~~customer ~~risk. The Company enters into foreign exchange contracts to hedge certain firm commitments denominated in foreign currencies~~acceptance, ~~principally Japanese~~at ~~Yen.~~which ~~The~~time ~~Company~~cost ~~also~~of ~~invests~~goods ~~its~~sold ~~cash~~is ~~in deposits in banks, money market funds, government and corporate debt securities~~recorded. ~~The~~• ~~Company~~For ~~does~~CMP ~~not~~system ~~use~~sales ~~derivative~~to ~~financial instruments~~existing incustomers ~~its~~who ~~investment~~have ~~portfolio.~~previously ~~The~~purchased ~~Company~~the ~~places~~same ~~its investments~~system with ~~high~~the ~~credit~~same ~~quality~~customer-specified ~~issuers~~acceptance ~~and by policy~~provisions, ~~limits~~ ~~the~~revenue ~~amount~~is ofrecognized ~~credit~~under ~~exposure~~a tomultiple-element ~~any one issuer~~arrangement. ~~The Company~~Accordingly, ~~mitigates~~upon ~~default~~shipment, ~~risk~~the bycontractual ~~investing~~amount inpayable ~~only~~by the ~~safest and~~customer ~~highest~~is ~~credit~~recorded ~~quality~~as ~~securities~~revenue and bytitle ~~monitoring~~is ~~the credit rating of investment issuers~~transferred. The ~~portfolio~~remainder ~~includes~~is ~~only marketable~~recorded ~~securities~~as ~~with~~deferred ~~active~~revenue ~~secondary~~and orrecognized ~~resale~~as ~~markets~~revenue ~~to ensure~~upon ~~portfolio~~customer ~~liquidity~~acceptance. To date, the Company has not experienced material losses on these investments. However, there can be no assurance that the Company will not in the future experience losses that could materially adversely affect the Company’s business, financial condition and results of operations.

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

Inventory and Purchase Order Commitments

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

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

Allowance for Doubtful Accounts

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

Valuation Allowance on Deferred Tax Assets

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

Product Warranty Costs

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

Impairment of Long-lived and Intangible Assets

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

Contractual Obligations and Commercial Commitments

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

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


			Operating		Commercial
	Debt		Leases(1)		Commitments

Through May 2003	$	65	$	4,309	$	7,238
June 2003 to May 2006		115,054		10,968		10
June 2006 to May 2008		—		6,599		—
Thereafter		—		33,487		—

Total	$	115,119	$	55,363	$	7,248


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

Impact of Recently Issued Accounting Standards

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

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

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

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

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

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

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

Forward-looking statements involve risks, uncertainties and other factors which may cause actual results, performance or achievements of the Company to be materially different from those expressed or implied by such forward-looking statements. Factors that could affect the Company’s results and cause them to materially differ from those contained in the forward-looking statements include those listed below under the heading “Certain Factors Affecting SpeedFam-IPEC’s Business.” Forward-looking statements speak only as of the date the statement was made. The Company does not undertake and specifically declines any obligation to update any forward-looking statements:

CERTAIN FACTORS AFFECTING SPEEDFAM-IPEC’S BUSINESS

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

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

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

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


	•	we may be required under certain circumstances to pay Novellus a termination fee in cash equal to $5.0 million and reimburse Novellus for its expenses;

	•	the price of our common stock may decline to the extent that the current market price of our common stock reflects a market assumption that the merger will be completed; and

	•	costs related to the merger, such as legal, accounting and financial advisor fees, must be paid even if the merger is not completed.

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

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

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

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

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

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

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


	•	industry downturns;

	•	manufacturing problems;

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

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

	•	competitive factors.

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

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

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


	•	insufficient quantity or quality of parts from suppliers;

	•	our failure to receive shipments from suppliers in a cost-effective and timely manner;

	•	our suppliers’ failure to obtain necessary raw materials or other parts; or

	•	our suppliers’ inability to obtain credit or maintain sufficient cash flows.

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

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

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


	•	industry demand for our products, which depends on economic conditions in the semiconductor and silicon wafer markets;

	•	timing of new product introductions and market acceptance of new or enhanced versions of our or our customers’ products;

	•	ability to develop and implement new technologies in a timely fashion to meet market demand;

	•	the health of other industries on which we are dependant, such as the personal computer, telecommunications and electronics industries;

	•	consolidation in the chip manufacturing industry;

	•	the actions of our competitors;


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

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

	•	foreign currency exchange rates.

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


	•	enhanced credit risk associated with our debt;

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

	•	delays in orders;

	•	announcements by our competitors;

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

	•	government regulation;

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

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

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

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

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


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

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

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

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

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

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

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

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


	•	anticipation of market trends;

	•	product selection;

	•	timely and efficient completion of product design and development;

	•	timely and efficient implementation of manufacturing and assembly processes;

	•	adjustment of production and pricing to meet customer demand;

	•	product performance in the field; and

	•	effective sales and marketing.

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

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


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

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

	•	We require significant lead-times between product introduction and commercial shipment.

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

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


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

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

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

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

	•	collection of accounts receivable;

	•	inadequate intellectual property protection;

	•	potentially adverse tax consequences; and

	•	intense price competition.

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

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


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

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

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

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

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

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

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

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

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

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

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

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

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

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

The Company has no cash flow exposure due to rate changes for cash equivalents and short-term investments, as all of these investments are at fixed interest rates. Long-term debt is at a fixed interest rate. ~~The long-term debt was primarily incurred in~~ ~~connection with the Company’s issuance of convertible~~ ~~debenture bonds.~~

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

																					Fair Value
																					June 3,
		2001			2002			2003			2004			2005		Thereafter		Total			2000
		in thousands
Cash equivalents		$	72,060			—			—			—			—		—	$	72,060		$	72,060
	Average interest rate		5.94	%		—			—			—			—		—		5.94	%
Short-term investments		$	28,723			—			—			—			—		—	$	28,723		$	28,236
	Average interest rate		6.09	%		—			—			—			—		—		6.09	%
Total investment securities		$	100,783			—			—			—			—		—	$	100,783		$	100,296
	Average interest rate		5.98	%		—			—			—			—		—		5.98	%
Long term debt		$	1,077			149			13			115,000			—		—	$	116,239		$	116,239
	Average interest rate		9.13	%		9.02	%		8.79	%		6.25	%		—		—		6.28	%

~~Foreign Currency Risk.~~ The ~~Company~~long-term ~~transacts~~debt ~~business~~was ~~in various~~primarily ~~foreign~~incurred ~~countries. Its primary foreign currency cash flows are~~ in ~~countries in Asia and Europe. During 2000 and 1999,~~ ~~the~~connection ~~Company~~with employed a foreign currency hedging program utilizing foreign currency forward exchange contracts. Under this program, increases or decreases in currency commitments, as translated into U.S. dollars, are primarily offset by realized gains and losses on the ~~hedging instruments. The goal of the hedging program is to economically guarantee or lock in exchange rates on the~~ Company’s ~~foreign~~issuance ~~currency cash outflows and to minimize the impact to the Company~~ of ~~foreign currency~~convertible ~~fluctuations.~~subordinated ~~The Company does not use foreign currency forward exchange contracts for speculative or trading purposes~~notes.

The ~~following~~ table ~~provides~~below ~~information~~presents asprincipal ofamounts ~~June 3, 2000~~and ~~about~~related ~~the~~weighted ~~Company’s~~average ~~derivative~~interest ~~financial~~rates ~~instruments,~~by ~~which are~~year ~~comprised~~ of ~~foreign~~maturity ~~currency forward exchange contracts. The~~for ~~information is provided in U.S. dollar equivalent amounts, as presented in~~ the Company’s ~~financial~~investment ~~statements.~~portfolio ~~The~~and ~~table presents~~debt ~~the~~obligations ~~notional amounts~~ (~~at the contract exchange rates),~~in ~~the weighted average contractual foreign currency exchange rates, and the estimated fair value of those contracts~~thousands).

		Notional			Average			Estimated
																				Fair Value
June 3, 2000		Amount			Contract Rate			Fair Value
																				June 1,
		In thousands, except for average contract rate
		2003			2004			2005			2006		2007		Thereafter		Total			2002
Foreign currency forward exchange contracts:
Cash equivalents		$	33,358			—			—			—		—		—	$	33,358		$	33,358
	Japanese yen, net purchases	$	(784	)		104.51		$	(661	)
	Average interest rate		2.00	%		—			—			—		—		—		2.00	%
Long term debt		$	65			115,040			14			—		—		—	$	115,119		$	73,006
	Average interest rate		2.73	%		6.25	%		—			—		—		—		6.24	%

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

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


							Estimated
		Notional			Average		Fair Value
June 1, 2002		Amount			Contract Rate		Gain/(Loss)


		In thousands, except for
		average contract rate
Foreign currency forward exchange contracts:
	Japanese yen, purchases	$	(65	)		127.20	$	(3	)
	Japanese yen, sales	$	2,193			134.65	$	205
	Euro, sales	$	59			1.03	$	3

Item 8. Financial Statements and Supplementary Data.

~~INDEX~~ The TOinformation ~~CONSOLIDATED~~required ~~FINANCIAL~~by ~~STATEMENTS~~this item is set forth in the Consolidated Financial Statements filed with this report.

	Page
SPEEDFAM-IPEC, INC. AND CONSOLIDATED SUBSIDIARIES
Independent Auditors’ Report		27
Consolidated Balance Sheets — June 3, 2000 and May 31, 1999		28
Consolidated Statements of Operations — Years Ended June 3, 2000 and May 31, 1999 and 1998		29
Consolidated Statements of Stockholders’ Equity — Years Ended June 3, 2000 and May 31, 1999 and 1998		30
Consolidated Statements of Cash Flows — Years Ended June 3, 2000 and May 31, 1999 and 1998		31
Notes to Consolidated Financial Statements		33
SPEEDFAM-IPEC CO., LTD. AND CONSOLIDATED SUBSIDIARIES
Independent Auditors’ Report		57
Consolidated Balance Sheets — April 30, 2000 and 1999		58
Consolidated Statements of Operations — Years ended April 30, 2000, 1999, and 1998		59
Consolidated Statements of Stockholders’ Equity — Years ended April 30, 2000, 1999, and 1998		60
Consolidated Statements of Cash Flows — Years ended April 30, 2000, 1999, and 1998		61
Notes to Consolidated Financial Statements		62

The above consolidated financial statements of SpeedFam-IPEC Co., Ltd. and consolidated subsidiaries are included herein pursuant to Rule 3-09 of Regulation S-X.

Independent Auditors’ Report

The Board of Directors

SpeedFam-IPEC, Inc.:

We have audited the accompanying consolidated balance sheets of SpeedFam-IPEC, Inc. and consolidated subsidiaries as of June 3, 2000 and May 31, 1999, and the related consolidated statements of operations, stockholders’ equity and comprehensive income, and cash flows for each of the three fiscal years in the period from June 1, 1997 through June 3, 2000. These consolidated financial statements are the responsibility of the management of SpeedFam-IPEC, Inc. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of SpeedFam-IPEC, Inc. and consolidated subsidiaries as of June 3, 2000 and May 31, 1999, and the results of their operations and their cash flows for each of the three fiscal years in the period from June 1, 1997 through June 3, 2000 in conformity with accounting principles generally accepted in the United States of America.

KPMG LLP

Chicago, Illinois

June 27, 2000

SPEEDFAM-IPEC, INC.

CONSOLIDATED BALANCE SHEETS

June 3, 2000 and May 31, 1999

			2000			1999
			(in thousands)
Assets
Current assets:
	Cash and cash equivalents		$	72,060			97,003
	Short-term investments			28,236			50,020
	Trade accounts receivable, less allowance for doubtful accounts of $2,549 in 2000 and $5,600 in 1999			129,102			76,808
	Inventories			81,192			80,744
	Prepaid expenses and other current assets			3,301			9,790
		Total current assets		313,891			314,365
Investments in affiliates				19,810			25,360
Property, plant, and equipment, net				87,913			88,997
Other assets				13,466			15,056
		Total assets	$	435,080			443,778
Liabilities and Stockholders’ Equity
Current liabilities:
	Current portion of long-term debt		$	1,077			1,275
	Accounts payable			43,982			20,296
	Due to affiliates			7,372			4,805
	Accrued liabilities			23,264			44,254
		Total current liabilities		75,695			70,630
Long-term liabilities:
	Long-term debt			115,162			116,129
	Other liabilities			7,253			10,269
		Total long-term liabilities		122,415			126,398
Stockholders’ equity:
	Common stock, no par value, 96,000 shares authorized, 29,703 and 29,392 shares issued and outstanding at June 3, 2000 and May 31, 1999, respectively			1			1
	Additional paid-in capital			430,706			427,290
	Retained earnings (deficit)			(194,489	)		(180,311	)
	Accumulated comprehensive income (loss)			752			(230	)
		Total stockholders’ equity		236,970			246,750
		Total liabilities and stockholders’ equity	$	435,080			443,778

See accompanying notes to consolidated financial statements.

SPEEDFAM-IPEC, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

Years Ended June 3, 2000 and May 31, 1999 and 1998

				2000			1999			1998
				(in thousands, except per share data)
Net sales				$	274,048			216,425			374,268
Cost of sales					184,527			194,989			231,332
			Gross margin		89,521			21,436			142,936
Operating expenses:
	Research, development, and engineering				53,714			61,817			67,182
	Selling, general, and administrative				52,356			68,237			72,916
	Merger, integration, and restructuring				—			40,300			—
			Total operating expenses		106,070			170,354			140,098
			Operating income (loss)		(16,549	)		(148,918	)		2,838
Other income (expense)					5,649			4,297			3,510
			Income (loss) before income taxes		(10,900	)		(144,621	)		6,348
Income tax expense (benefit)					—			(3,930	)		29,584
			Loss		(10,900	)		(140,691	)		(23,236	)
Equity in net earnings (loss) of affiliates					(3,278	)		916			4,418
			Loss from continuing operations		(14,178	)		(139,775	)		(18,818	)
Discontinued operations — loss on disposal of IPEC Clean, net of taxes					—			—			(10,578	)
			Net loss		(14,178	)		(139,775	)		(29,396	)
Cumulative dividend on preferred stock					—			(174	)		(244	)
			Net loss attributable to common stockholders	$	(14,178	)		(139,949	)		(29,640	)
Net loss per common share:
	Basic and diluted:
		From continuing operations		$	(0.48	)		(4.84	)		(0.69	)
		From discontinued operations			—			—			(0.39	)
		Net loss attributable to common stockholders			(0.48	)		(4.84	)		(1.08	)
Weighted average shares used in per share calculation:
	Basic and diluted				29,503			28,890			27,469

See accompanying notes to consolidated financial statements.

SPEEDFAM-IPEC, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND

COMPREHENSIVE INCOME

Years ended June 3, 2000 and May 31, 1999 and 1998

											Accumulated
											Other
					Additional			Retained			Comprehensive
		Common			Paid-in			Earnings			Income
		Stock			Capital			(Deficit)			(Loss)			Total
		(in thousands)
Balance at June 1, 1997		$	6			295,113			(8,384	)		1,582			288,317
Comprehensive income (loss):
	Net earnings (loss)		—			—			(29,396	)		—			(29,396	)
	Foreign currency translation adjustments		—			—			—			(2,569	)		(2,569	)
Total comprehensive income (loss)															(31,965	)
Issuance of common stock			—			116,704			—			—			116,704
Conversion of Class A common stock to common stock			(3	)		3			—			—			—
Preferred stock dividends paid			—			—			(246	)		—			(246	)
Unearned compensation, net			—			(896	)		—			—			(896	)
Exercise of stock options, net of tax benefits and employee stock plan purchases			—			12,222			—			—			12,222
Balance at May 31, 1998			3			423,146			(38,026	)		(987	)		384,136
Comprehensive income (loss):
	Net earnings (loss)		—			—			(139,775	)		—			(139,775	)
	Foreign currency translation adjustments		—			—			—			927			927
	Net unrealized change in investment securities		—			—			—			(170	)		(170	)
Total comprehensive income (loss)															(139,018	)
Conversion of Class A common stock to common stock			(2	)		2			—			—			—
June 1999 IPEC net income			—			—			(2,232	)		—			(2,232	)
Preferred stock dividends paid			—			—			(278	)		—			(278	)
Unearned compensation, net			—			742			—			—			742
Exercise of stock options, net of tax benefits and employee stock plan purchases			—			3,400			—			—			3,400
Balance at May 31, 1999			1			427,290			(180,311	)		(230	)		246,750
Comprehensive income (loss):
	Net earnings (loss)		—			—			(14,178	)		—			(14,178	)
	Foreign currency translation adjustments		—			—			—			1,299			1,299
	Net unrealized change in investment securities		—			—			—			(317	)		(317	)
Total comprehensive income (loss)															(13,196	)
Exercise of stock options, net of tax benefits and employee stock plan purchases			—			3,416			—			—			3,416
Balance at June 3, 2000		$	1			430,706			(194,489	)		752			236,970

See accompanying notes to consolidated financial statements.

SPEEDFAM-IPEC, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

Years ended June 3, 2000 and May 31, 1999 and 1998

					2000			1999			1998
					(in thousands)
Cash flows from operating activities:
	Net loss				$	(14,178	)		(139,775	)		(29,396	)
	Adjustments to reconcile net earnings (loss) to net cash used in operating activities:
		June 1999 IPEC net income				—			(2,232	)		—
		Equity in net (earnings) loss of affiliates				3,278			(916	)		(4,418	)
		Depreciation and amortization				17,446			20,421			15,546
		Loss on disposal of IPEC Clean, net of taxes				—			—			10,578
		Gain on the sale of Fujimi Corporation				(6,103	)		—			—
		Merger, integration, and restructuring costs				—			49,800			—
		Deferred income tax expense (benefit)				—			(4,662	)		25,516
		(Gain) loss on sales of assets				—			5,419			(42	)
		Other				54			(151	)		(150	)
		(Increase) decrease in assets:
			Trade accounts receivable			(52,703	)		12,226			(4,445	)
			Inventories			(1,271	)		20,459			(42,088	)
			Prepaid expenses and other current assets			6,526			4,495			(3,602	)
		Increase (decrease) in liabilities:
			Accounts payable and due to affiliates			26,853			(14,554	)		(9,016	)
			Accrued liabilities			(25,261	)		(2,137	)		(8,179	)
			Income taxes payable			130			—			(2,609	)
		Net assets of discontinued operations				—			—			(802	)
				Net cash used in operating activities		(45,229	)		(51,607	)		(53,107	)
Cash flows from investing activities:
	Purchases of short-term investments					(64,340	)		(55,616	)		(609,172	)
	Maturities of short-term investments					85,808			90,369			508,521
	Sales of short-term investments					—			35,871			—
	Capital expenditures					(15,060	)		(31,361	)		(49,065	)
	Proceeds from the sale of Fujimi Corporation					10,000			—			—
	Proceeds from licensing technology and transfer of associated assets					2,335			—			—
	Dividends from affiliates					—			1,521			2,325
	Other investing activities					(371	)		719			(740	)
				Net cash provided by (used in) investing activities		18,372			41,503			(148,131	)
Cash flows from financing activities:
	Repayment of notes payable					—			(395	)		(124	)
	Net proceeds from issuance of common stock and warrants					—			—			122,111
	Proceeds from exercise of stock options and employee stock purchases					3,416			3,400			3,723
	Payment of preferred stock dividend					—			(278	)		(246	)
	Proceeds from long-term debt					—			—			111,181
	Principal payments on long-term debt					(1,165	)		(1,082	)		(27,559	)
				Net cash provided by financing activities		2,251			1,645			209,086
Effect of foreign currency rate changes on cash						(337	)		980			(701	)
				Net increase (decrease) in cash and cash equivalents		(24,943	)		(7,479	)		7,147
Cash and cash equivalents at beginning of year						97,003			104,482			97,335
Cash and cash equivalents at end of year					$	72,060			97,003			104,482

SPEEDFAM-IPEC,Table INC. of Contents

~~CONSOLIDATED~~INDEPENDENT ~~STATEMENTS~~AUDITORS’ ~~OF CASH FLOWS — (Continued)~~REPORT

			2000		1999		1998
			(in thousands)
Supplemental cash flow information
	Cash paid during the year for:
		Interest	$	7,379		7,463		4,771
		Income taxes		435		845		7,261
	Non-cash financing activities — book value of common stock issued in a pooling of interests			—		126,992		—

The Board of Directors

~~See~~SpeedFam-IPEC, ~~accompanying notes to consolidated financial statements~~Inc.:

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

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

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

~~(1) Summary~~ As discussed in Note 5 to the consolidated financial statements, the Company changed its method of accounting ~~Significant~~for ~~Accounting~~goodwill ~~Policies~~in fiscal 2002 and its method of accounting for revenue in fiscal 2001.

~~SpeedFam-IPEC,~~KPMG ~~Inc.~~LLP ~~(SpeedFam-IPEC or the Company)~~Chicago, an Illinois ~~corporation,~~ ~~designs,~~June ~~develops~~28, manufactures, markets, and supports chemical mechanical planarization (CMP) systems used in the fabrication of semiconductor devices and other high-throughput, precision surface processing system. SpeedFam-IPEC’s flat surface processing systems are used in general industrial applications markets. The Company also markets and distributes polishing liquids (slurries), parts, and consumables used in its customers’ manufacturing processes. 2002

~~(a) Principles of Consolidation~~32

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

~~The Company’s investment in the common stock of its 50% owned joint venture, SpeedFam~~SPEEDFAM-IPEC ~~Co.~~, ~~Ltd~~INC.~~, is accounted for by~~ ~~the equity method using a fiscal year ended April 30. The~~ Company’s investment in the common stock of its 50% joint venture, Fujimi Corporation, was accounted for by the equity method prior to the sale of the Company’s interest in the second quarter of 2000.

~~(b) Change~~ CONSOLIDATED inBALANCE ~~Fiscal Year~~SHEETS

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


			2002			2001


			(In thousands)
ASSETS
Current assets:
	Cash and cash equivalents		$	33,358		$	47,344
	Short-term investments			—			13,495
	Trade accounts receivable, less allowance for doubtful accounts of $2,659 in 2002 and $2,907 in 2001.			22,162			60,619
	Inventories			44,545			88,059
	Shipped systems pending acceptance			9,175			13,953
	Prepaid expenses and other current assets			3,896			4,549

		Total current assets		113,136			228,019
Property, plant, and equipment, net				58,007			75,241
Other assets				5,684			11,625

		Total assets	$	176,827		$	314,885

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
	Current portion of long-term debt		$	65		$	229
	Accounts payable			11,061			23,314
	Deferred systems revenue			18,238			46,281
	Accrued liabilities			13,904			18,675

		Total current liabilities		43,268			88,499

Long-term liabilities:
	Long-term debt			115,054			115,124
	Other liabilities			4,620			5,321

		Total long-term liabilities		119,674			120,445

Stockholders’ equity:
	Common stock, no par value, 60,000 shares authorized, 30,672 and 30,116 shares issued and outstanding at June 1, 2002 and June 2, 2001, respectively			1			1
	Additional paid-in capital			435,663			434,090
	Retained deficit			(423,049	)		(328,977	)
	Accumulated comprehensive income			1,270			827

		Total stockholders’ equity		13,885			105,941

		Total liabilities and stockholders’ equity	$	176,827		$	314,885

~~Cash~~See ~~and~~accompanying ~~cash~~notes ~~equivalents~~to ~~include~~consolidated ~~deposits in banks and highly~~financial ~~liquid investments with original maturities of three months or less at the date of purchase~~statements.

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

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

~~(d) Inventories~~ SPEEDFAM-IPEC, INC.

~~Inventories~~CONSOLIDATED ~~are~~STATEMENTS ~~stated at the lower of cost (first-in, first-out~~OF ~~method) or market.~~OPERATIONS

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

SPEEDFAM-IPEC, INC.


				2002			2001			2000


				(In thousands, except per share data)
Net sales				$	119,166		$	267,080		$	274,048
Cost of sales					128,909			228,545			184,527

			Gross margin		(9,743	)		38,535			89,521

Operating expenses:
	Research, development, and engineering				44,665			64,026			53,714
	Selling, general, and administrative				28,131			52,436			52,356
	Litigation settlement cost				1,800			—			—
	Merger, integration, and restructuring				3,000			8,583			—

			Total operating expenses		77,596			125,045			106,070

			Operating loss		(87,339	)		(86,510	)		(16,549	)
Other expense, net					(6,633	)		(783	)		(454	)
Gain (loss) on disposal of investment in affiliate					—			(10,763	)		6,103
Equity in net earnings (loss) of affiliates					—			110			(3,278	)

			Loss before income taxes		(93,972	)		(97,946	)		(14,178	)
Income tax benefit					2,482			—			—

			Loss before cumulative effect of accounting changes		(91,490	)		(97,946	)		(14,178	)
Cumulative effect of accounting changes					(2,582	)		(36,542	)		—

			Net loss	$	(94,072	)	$	(134,488	)	$	(14,178	)

Net loss per common share:
	Basic and diluted:
		Loss before cumulative effect of accounting changes		$	(3.01	)	$	(3.27	)	$	(0.48	)
		From cumulative effect of accounting changes			(0.08	)		(1.22	)		—

		Net loss		$	(3.09	)	$	(4.49	)	$	(0.48	)

Weighted average shares used in per share calculation:
	Basic and diluted				30,414			29,961			29,503

Amounts as if the accounting changes were applied retroactively:
Net loss				$	(91,490	)	$	(97,003	)	$	(35,240	)

Net loss per share:
	Basic and diluted			$	(3.01	)	$	(3.24	)	$	(1.19	)

~~NOTES~~See TOaccompanying ~~CONSOLIDATED~~notes ~~FINANCIAL~~to ~~STATEMENTS —~~consolidated financial ~~(Continued)~~statements.

~~(e) Property, Plant, and Equipment~~34

Property,Table plant, and equipment are stated at cost less accumulated depreciation. Depreciation is provided on the straight-line method over the estimated useful lives of the assets. The estimated useful lives of the assets are as follows: Contents

Buildings and improvements			7 to 40 years
Machinery and equipment			3 to 7 years
Furniture and fixtures			3 to 5 years
Leasehold improvements			2 to 10 years

SPEEDFAM-IPEC, INC.

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

~~(f) Income~~ COMPREHENSIVE ~~Taxes~~INCOME

~~Income~~Years ~~taxes~~Ended ~~are~~June 1, ~~accounted~~2002, ~~for under the asset and liability~~June 2, ~~method.~~2001 ~~Deferred tax assets~~ and ~~liabilities~~June 3, ~~are recognized for~~2000 the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

(g) Revenue Recognition


									Accumulated
									Other
				Additional					Comprehensive
		Common		Paid-in		Retained			Income
		Stock		Capital		Deficit			(Loss)			Total


		(In thousands)
Balance at May 31, 1999		$	1	$	427,290	$	(180,311	)	$	(230	)	$	246,750
Comprehensive income (loss):
	Net loss		—		—		(14,178	)		—			(14,178	)
	Foreign currency translation adjustments		—		—		—			1,299			1,299
	Net unrealized change in investment securities		—		—		—			(317	)		(317	)

Total comprehensive loss													(13,196	)
Exercise of stock options and employee stock plan purchases			—		3,416		—			—			3,416

Balance at June 3, 2000			1		430,706		(194,489	)		752			236,970

Comprehensive income (loss):
Net loss			—		—		(134,488	)		—			(134,488	)
	Foreign currency translation adjustments		—		—		—			(436	)		(436	)
	Net unrealized change in investment securities		—		—		—			511			511

Total comprehensive loss													(134,413	)
Exercise of stock options and employee stock plan purchases			—		3,384		—			—			3,384

Balance at June 2, 2001			1		434,090		(328,977	)		827			105,941

Comprehensive income loss:
Net loss			—		—		(94,072	)		—			(94,072	)
	Foreign currency translation adjustments		—		—		—			467			467
	Net unrealized change in investment securities		—		—		—			(24	)		(24	)

Total comprehensive income (loss)													(93,629	)
Exercise of stock options and employee stock plan purchases			—		1,376		—			—			1,376
Contribution of stock to employee benefit plan			—		197		—			—			197

Balance at June 1, 2002		$	1	$	435,663	$	(423,049	)	$	1,270		$	13,885

~~Net~~See ~~sales~~accompanying ~~consists~~notes of system and service contract revenues as well as commissions from affiliates, which consist primarily of revenue derived from the distribution by the Company in the U.S. and Europe of products manufactured by the Far East Joint Venture. Revenues related to ~~system~~consolidated ~~sales is recognized upon~~financial ~~shipment~~statements. ~~Service contract revenue is recognized upon completion~~ ~~of the service.~~

~~(h) Installation and Warranty Costs~~35

TheTable Company generally warrants its systems for a period of up to 12 months from shipment for material and labor to repair and service the system. A provision for the estimated costs of installation and warranty is recorded upon shipment based on past experience. Contents

~~(i) Foreign~~ SPEEDFAM-IPEC, ~~Currency Translation~~INC.

~~The~~CONSOLIDATED ~~local~~STATEMENTS ~~currency~~OF ~~is the functional currency for all foreign~~CASH ~~operations. Accordingly, translation gains or losses related to~~FLOWS ~~the foreign subsidiaries’ financial statements are included~~ ~~as a component of stockholders’ equity.~~

~~(j) Earnings~~ Years ~~(Loss)~~Ended ~~Per~~June 1, ~~Share~~2002, June 2, 2001 and June 3, 2000

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


					2002			2001			2000


					(In thousands)
Cash flows from operating activities:
	Net loss				$	(94,072	)	$	(134,488	)	$	(14,178	)
	Adjustments to reconcile net loss to net cash used in operating activities:
		Equity in net (earnings) loss of affiliates				—			(110	)		3,278
		Depreciation and amortization				13,453			17,024			17,446
		(Gain) loss on disposal of investments in affiliates				—			10,763			(6,103	)
		Non-cash portion of merger, integration, restructuring and other charges				48,099			45,624			—
		Contribution of stock to employee benefit plan				197			—			—
		Cumulative effect of change in accounting principle				2,582			36,542			—
		(Gain) loss on sales of assets				—			(1,966	)		54
		(Increase) decrease in assets:
			Trade accounts receivable			39,057			69,524			(52,703	)
			Inventories			8,697			(40,442	)		(1,271	)
			Shipped systems pending acceptance			4,779			7,357			—
			Prepaid expenses and other current assets			767			(1,200	)		6,526
		Increase (decrease) in liabilities:
			Accounts payable and due to affiliates			(13,978	)		(20,468	)		26,853
			Accrued liabilities			(6,936	)		(3,665	)		(25,131	)
			Deferred systems revenue			(28,043	)		(14,475	)		—

				Net cash used in operating activities		(25,398	)		(29,980	)		(45,229	)

Cash flows from investing activities:
	Net proceeds from disposal of investment in affiliate					—			661			—
	Purchases of short-term investments					—			(24,674	)		(64,340	)
	Maturities of short-term investments					13,495			39,924			85,808
	Capital expenditures					(3,230	)		(15,282	)		(15,060	)
	Proceeds from sales of assets					—			8,125			—
	Proceeds from the sale of Fujimi Corporation					—			—			10,000
	Proceeds from licensing technology and transfer of associated assets					—			—			2,335
	Other investing activities					(297	)		(4,430	)		(371	)

				Net cash provided by investing activities		9,968			4,324			18,372

Cash flows from financing activities:
	Proceeds from exercise of stock options and employee stock purchases					1,376			3,384			3,416
	Principal payments on long-term debt					(90	)		(1,641	)		(1,165	)

				Net cash provided by financing activities		1,286			1,743			2,251

Effect of foreign currency rate changes on cash						158			(803	)		(337	)

				Net decrease in cash and cash equivalents		(13,986	)		(24,716	)		(24,943	)
Cash and cash equivalents at beginning of year						47,344			72,060			97,003

Cash and cash equivalents at end of year					$	33,358		$	47,344		$	72,060

Supplemental cash flow information
	Cash paid during the year for:
		Interest			$	7,258		$	7,245		$	7,379
		Income taxes			$	1,417		$	902		$	435

InSee ~~calculating~~accompanying ~~diluted~~notes ~~net~~to ~~loss~~consolidated ~~per common share, 860,000,~~financial ~~375,000 and 1,600 common stock equivalent shares (determined~~statements. ~~under the treasury stock method) consisting of stock options,~~ ~~warrants, convertible notes,~~

3436

SPEEDFAM-IPEC,Table INC. of Contents

~~NOTES~~SPEEDFAM-IPEC, ~~TO CONSOLIDATED FINANCIAL STATEMENTS —~~INC. ~~(Continued)~~

~~and~~NOTES ~~convertible~~TO ~~preferred~~CONSOLIDATED ~~stock have been excluded because their~~FINANCIAL ~~inclusion would have been anti-dilutive for 2000, 1999 and 1998,~~STATEMENTS ~~respectively.~~

(k1) ~~Significant~~ Summary ~~Customers and Concentration~~ of ~~Credit~~Significant ~~Risk~~Accounting Policies

~~The~~SpeedFam-IPEC, ~~Company~~Inc. ~~sells~~(the ~~products~~Company), ~~and~~an ~~services primarily to~~Illinois ~~semiconductor manufacturers~~corporation, ~~and~~is ~~extends~~a ~~credit~~leading ~~based~~global onsupplier anof chemical mechanical ~~evaluation~~planarization of(or ~~the~~CMP) ~~customer’s~~systems, ~~financial~~with ~~condition~~more than 1,300 ~~generally~~systems ~~without~~installed ~~requiring collateral~~worldwide. AsThe aCompany ~~result~~designs, ofdevelops, manufactures, ~~the~~markets ~~economic difficulties~~and ~~within~~supports ~~certain~~CMP ~~Asian~~systems ~~countries,~~which ~~the~~are ~~Company~~used ~~has~~in ~~increased~~the ~~sales~~fabrication ~~subject~~of tosemiconductor ~~extended~~devices. ~~payment~~In ~~terms~~addition ~~within~~to ~~this~~CMP ~~region.~~systems, ~~Exposure~~the toCompany ~~losses~~markets onhigh-throughput ~~receivables~~precision ~~is principally~~surface ~~dependent~~processing onequipment, ~~each~~manufactures ~~customer’s~~and ~~financial~~markets ~~condition.~~systems ~~The~~for the ~~Company~~general ~~monitors~~industrial ~~its~~applications ~~exposure~~markets, ~~for~~and ~~credit~~markets ~~losses~~and distributes parts, consumables and ~~maintains allowances~~slurries ~~for~~used ~~anticipated~~in ~~losses~~surface processing.

(la) ~~Patents,~~ Principles of ~~Trademarks, and Goodwill~~Consolidation

~~Patents~~The ~~and~~accompanying ~~trademarks~~consolidated ~~included~~financial statements ininclude ~~other assets, in~~ the ~~net amount~~accounts of ~~$7.6~~the ~~million~~Company and ~~$6.3~~its ~~million~~wholly owned atsubsidiaries ~~the~~after ~~end~~elimination of ~~2000~~all ~~and~~significant ~~1999,~~intercompany ~~respectively,~~accounts ~~are amortized on a straight-line basis over 5 to 17 years for patents~~ and ~~5 years for trademarks~~transactions.

~~Goodwill~~The ~~included~~Company’s investment in ~~other~~the ~~assets,~~common instock of ~~the~~its ~~net~~50% ~~amount~~joint ofventure, $2SpeedFam-IPEC Co.5, Ltd., was accounted ~~million~~for ~~and~~by ~~$3.3~~the ~~million~~equity atmethod prior to the ~~end~~dissolution of ~~2000~~the ~~and 1999,~~joint ~~respectively,~~venture ~~represents~~in the ~~excess~~first ~~cost~~quarter ~~over~~of 2001. The Company’s investment in the ~~fair~~common ~~value~~stock of its 50% joint venture, Fujimi ~~tangible~~Corporation, ~~and~~was ~~intangible~~accounted ~~assets~~for ~~acquired~~by ~~and~~the isequity ~~amortized~~method ~~over~~prior to the ~~10 years~~sale ~~using~~of the ~~straight-line~~Company’s ~~method~~interest in the second quarter of 2000.

(mb) ~~Research, Development, and~~ Fiscal ~~Engineering~~Year

~~Expenditures~~The ~~for~~Company’s ~~research~~fiscal year consists of 52 or 53 weeks ending on the Saturday nearest May 31. Accordingly, ~~development~~the 2002 fiscal year ended on June 1 and contained 52 weeks, the 2001 fiscal year ended on June 2 and ~~engineering~~contained of52 weeks, and the 2000 fiscal ~~products~~year ended on June 3 and ~~processes~~contained ~~are~~53 weeks. ~~expensed~~All references asto ~~incurred~~years relate to fiscal years unless otherwise noted.

(nc) ~~Use~~ Cash and ofCash ~~Estimates~~Equivalents and Short-term Investments

~~The~~Cash ~~preparation~~and ofcash ~~financial~~equivalents ~~statements~~include indeposits ~~conformity with~~in ~~generally~~banks ~~accepted accounting principles requires the Company’s management to make estimates~~ and ~~assumptions~~highly ~~that affect~~liquid ~~the~~investments ~~reported~~with ~~amounts~~original ofmaturities ~~assets and liabilities and~~of ~~disclosures~~three ofmonths ~~contingent~~or ~~assets~~less ~~and liabilities~~ at the date of ~~the~~ ~~financial statements, and the reported amounts of revenues and expenses during the reporting period~~purchase. ~~Actual results could~~ ~~differ from those estimates.~~

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

~~The~~A ~~Company~~decline ~~applies~~in ~~the~~market ~~intrinsic~~ value~~-based~~ ~~method~~ of ~~accounting~~ any available-for-sale ~~its~~security ~~stock~~below ~~options~~cost ~~issued~~that tois ~~employees.~~deemed Asto ~~such,~~be ~~compensation~~other ~~expense~~than temporary is ~~recorded~~considered onan ~~the~~impairment ~~date~~ of ~~grant~~fair ~~only~~value. The ifimpairment ~~the~~ is ~~current~~charged ~~market~~to ~~price~~earnings ofand ~~the~~a ~~underlying~~new ~~stock~~cost ~~exceeds~~basis ~~the~~for ~~exercise~~the ~~price~~security is established. ~~Under~~Premiums ~~Accounting~~and ~~Principles~~discounts ~~Board~~are ~~Opinion 25,~~amortized ~~“Accounting~~or ~~for~~accreted ~~Stock~~over ~~Issued to Employees”, because~~ the ~~exercise~~life ~~price~~ of the ~~Company’s~~related available-for-sale ~~employee~~security ~~stock~~as ~~options~~an ~~equals~~adjustment ~~the~~to ~~market~~yield ~~price~~using of the ~~underlying~~ effective ~~stock~~interest onmethod. ~~the~~Interest ~~date~~income ofis ~~grant,~~recognized ~~no compensation expense is~~when ~~recognized~~earned.

(pd) ~~Fair Value of Financial~~ Inventories ~~Instruments~~

~~The~~Inventories ~~Company’s~~are ~~financial~~stated ~~instruments~~ at ~~June 3, 2000 and May 31, 1999 include cash equivalents, short-term investments, trade receivables, trade payables, foreign exchange contracts, and long-term debt. Information about~~ the ~~fair~~lower ~~value~~ of ~~short~~cost (first-~~term investments is presented~~ in ~~Note 4. The carrying value of cash equivalents~~, ~~trade~~first-out ~~receivables, and trade payables approximates fair value because of the short maturity of these instruments. Fair values relating to foreign currency contracts (used for hedging purposes~~method) ~~reflect the estimated net amounts that the Company would receive~~ or ~~pay to terminate~~ the ~~contracts~~ atcurrent ~~the~~estimated ~~reporting date based on quoted~~ market ~~prices of~~ ~~comparable contracts and are not material at June 3, 2000 and May 31, 1999. The fair~~ value ~~of the Company’s~~. ~~long-term debt is not materially different from its financial~~ ~~statement~~

35 (e) Property, Plant, and Equipment

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

37 ~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —~~ ~~(Continued)~~

carryingTable value at the end of 2000 and 1999. The fair value of the Company’s long-term debt is estimated based on current rates offered to the Company for debt of the same remaining maturities. Contents

~~(q) Impairment of Long-lived Assets~~ ~~and Long~~SPEEDFAM-~~lived~~IPEC, ~~Assets to Be Disposed Of~~INC.

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

Anfurniture ~~asset~~and fixtures, 3 to be5 years; ~~disposed~~and leasehold ofimprovements, isthe ~~reported~~shorter atof the ~~lower~~useful life of ~~its~~the ~~carrying~~asset ~~amount~~ or ~~fair~~the ~~value~~lease ~~less costs to sell~~term.

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

(f) Income ~~The Company uses derivative financial instruments to offset~~Taxes ~~exposure to market risks arising from changes in foreign exchange~~ rates. Derivative financial instruments currently utilized by the Company primarily include foreign currency forward contracts. The Company evaluates and monitors consolidated net exposures by currency and maturity, and external derivative financial instruments correlate with the net exposures in all material respects. Gains and losses on hedges of existing assets and liabilities are included in the carrying amounts of those assets or liabilities and are ultimately recognized in income when those carrying amounts are converted. Gains or losses related to hedges of firm commitments are deferred and included in the bases of the transactions when they are completed. Gains or losses on unhedged foreign currency transactions, if any, are included in income as part of cost of sales. Gains and losses on derivative financial instruments which protect the Company from exposure in a particular currency, but do not currently have a designated underlying transaction, are also included in income as part of cost of sales. If a hedged item matures, or is sold, extinguished, terminated, or is related to an anticipated transaction that is no longer likely to take place, the derivative financial instrument is closed and the related gain or loss is included in income as part of cost of sales.

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

(g) Revenue ~~Certain reclassifications have been made in the 1999 and 1998~~Recognition ~~financial statements to conform to the 2000 presentation.~~

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 (tSAB 101) ~~Recent~~, ~~Accounting~~“Revenue ~~Pronouncements~~Recognition in Financial Statements,” addressing the timing of revenue recognition for sales of products that involve contractual customer acceptance provisions and installation if these events occur following shipment of the product and transfer of title. The Company elected early adoption of SAB 101 in the third quarter of 2001, retroactive to the beginning of 2001 as a charge in the first quarter of 2001. The previously reported results for the first and second quarters of 2001 prior to the adoption of SAB 101 were restated to reflect the new revenue recognition method.

~~Statement~~Prior ofto ~~Financial~~the ~~Accounting~~implementation ~~Standards (SFAS)~~of SAB ~~No. 133~~101, ~~“Accounting~~the Company ~~for~~recognized ~~Derivative Instruments~~revenue ~~and~~from ~~Hedging~~the ~~Activities”~~sales ~~and~~of Noits products generally upon shipment. Effective June ~~138~~4, 2000, the ~~“Accounting~~Company changed its method of recognizing revenue for ~~Certain~~sales ~~Derivative~~of CMP ~~Instruments~~systems ~~and~~to ~~Certain~~reflect the following approach; 1) for CMP ~~Hedging~~system ~~Activities”~~sales to a new customer, ~~establishes~~or ~~accounting~~CMP ~~and~~system ~~reporting~~sales of existing ~~standards~~products ~~for~~with ~~derivative~~new ~~financial~~specifications ~~instruments~~or acceptance criteria, and ~~hedging~~for ~~activities.~~all ~~These~~new ~~statements~~CMP ~~require~~products, ~~that~~revenue is deferred until customer acceptance, at which time the ~~Company~~revenue ~~recognize~~is recognized. The related ~~all~~costs ~~derivatives~~for assystems ~~either~~for ~~assets~~which orthis ~~liabilities~~approach onis ~~the~~used ~~balance~~are recorded ~~sheet~~as ~~and~~shipped ~~measure~~systems ~~those~~pending ~~instruments~~acceptance until customer acceptance, at ~~fair~~which ~~value.~~time ~~Derivatives that~~cost ~~are~~of ~~not~~goods ~~hedges~~sold ~~must~~is berecorded; ~~adjusted~~2) for CMP system sales to ~~fair~~existing ~~value~~customers ~~through~~who have previously purchased ~~income.~~the Ifsame system with the ~~derivative~~same customer-specified acceptance provisions, revenue is recognized under a ~~hedge~~multiple-element arrangement. Accordingly, ~~depending~~upon onshipment, the ~~nature~~contractual ofamount ~~the~~payable ~~hedge,~~by ~~changes~~the incustomer ~~the~~is ~~fair~~recorded ~~value~~as ofrevenue ~~derivatives~~and ~~will~~title ~~either~~is betransferred. ~~offset~~The ~~against~~remainder ~~changes~~is inrecorded ~~the~~as ~~fair~~deferred ~~value~~revenue ofand recognized ~~the~~as ~~hedged~~revenue ~~assets,~~upon customer acceptance. Revenue related to ~~liabilities,~~non-CMP orsystems ~~firm~~and ~~commitments~~spare ~~through~~parts ~~earnings~~for orall ~~recognized~~segments will incontinue ~~other~~to ~~comprehensive~~be ~~income~~recognized ~~until~~upon ~~the~~transfer ~~hedged~~of ~~item~~title, iswhich ~~recognized~~is generally inupon ~~earnings~~shipment. ~~The~~Revenue ~~ineffective~~related ~~portion~~to ofservice acontracts ~~derivative’s~~is ~~change~~recognized inratably ~~fair~~over ~~value~~the ~~will~~duration beof ~~immediately~~the contracts. In all cases, revenue is only recognized inwhen ~~earnings.~~persuasive evidence of an ~~The~~arrangement ~~Company~~exists, ~~will~~delivery ~~adopt~~has ~~SFAS No. 133~~occurred ~~and~~or ~~No. 138~~services inhave been rendered, the ~~first~~price ~~quarter~~is fixed or determinable and collectability is reasonably assured.

36 (h) Warranty Costs

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

38 ~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —~~ ~~(Continued)~~

ofTable 2002, and does not expect the adoption to have a material effect on its financial condition or results of operations. Contents

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

~~Management~~NOTES ~~believes~~TO ~~that~~CONSOLIDATED ~~SAB~~FINANCIAL STATEMENTS ~~101~~— ~~and SAB 101B, to the~~(Continued) ~~extent that they impact the Company, will not affect the~~ ~~underlying strength or weakness of the business operations as measured by the dollar value of the Company’s product shipments and cash flows.~~

(2i) ~~Merger~~ Foreign Currency Translation

InThe ~~April 1999,~~local ~~SpeedFam~~currency ~~International,~~is ~~Inc.~~the ~~(SpeedFam) issued~~functional ~~13.0~~currency ~~million shares of its common stock in exchange~~ for all ~~outstanding~~foreign ~~common~~operations. ~~and~~Accordingly, ~~preferred~~translation ~~stock~~gains ofor ~~Integrated Process~~losses ~~Equipment~~resulting ~~Corp.~~from ~~(IPEC).~~the Intranslation ~~conjunction~~of ~~with~~foreign ~~this~~denominated ~~merger,~~assets ~~SpeedFam~~and liabilities ~~amended~~into ~~its~~U.S. dollars ~~articles~~are ofincluded ~~incorporation~~as toa ~~change the corporate~~component ~~name~~ of ~~SpeedFam~~accumulated toother ~~SpeedFam-IPEC,~~comprehensive ~~Inc~~income.

Effective upon the consummation of the merger, each share of the outstanding common stock of IPEC was converted into .71 shares of common stock of the Company. Outstanding IPEC employee stock options, warrants, and convertible notes were similarly converted into options, warrants, and convertible notes to purchase Company stock. In addition, each share of the Series (j) ~~B-1~~Earnings ~~preferred~~(Loss) ~~stock,~~Per ~~Series B-2 preferred stock, and~~Share ~~Series B-3 preferred stock of IPEC has been converted into~~ ~~8.90, 8.10, and 10.65 shares of common stock of the Company, respectively.~~

~~The~~Basic ~~merger~~earnings ~~constituted~~(loss) aper ~~tax-free~~common ~~reorganization~~share ~~and~~is ~~has been~~based ~~treated~~upon ~~as a pooling-of-interests. Accordingly,~~ the ~~assets~~weighted ~~and liabilities~~average number of ~~IPEC~~common ~~were~~shares ~~carried forward to the Company at~~outstanding. ~~historical~~Diluted ~~values~~earnings ~~and~~(loss) per ~~the~~common ~~consolidated~~share ~~financial~~assumes ~~statements for~~ the exercise ~~periods~~of ~~prior~~all tooptions ~~the~~and ~~combination~~warrants ~~have~~which ~~been~~are ~~restated~~dilutive, towhether ~~include~~exercisable ~~the~~or ~~accounts and results of operations of IPEC~~not.

~~Prior to the combination, IPEC’s fiscal year ended June 30.~~ In ~~recording~~calculating ~~the~~diluted ~~pooling-of-interests~~net ~~combination, IPEC’s~~loss ~~financial~~per ~~statements~~common ~~for the twelve months ended May 31~~share, ~~1999 were combined with SpeedFam’s financial~~ ~~statements~~common ~~for~~stock ~~the~~equivalent ~~same~~shares ~~period~~(determined ~~and~~under ~~IPEC’s financial statements for~~ the ~~years ended June 30, 1998 were combined~~treasury ~~with~~stock ~~SpeedFam’s~~method) ~~financial~~consisting ~~statements for the years ended May 31, 1998. IPEC’s unaudited results~~ of ~~operations for~~stock ~~the one month ended June 30~~options, ~~1998 included revenue of $19.7 million and net earnings of $2.2 million. An adjustment has been made to stockholders’ equity as of May 31~~warrants, ~~1999~~convertible ~~to eliminate the effect of including IPEC’s results of operations for the one month ended June 30~~notes, ~~1998 in the results of operations of the combined enterprise for both 1999~~ and ~~1998.~~convertible ~~There~~preferred ~~were~~stock nohave ~~significant~~been ~~transactions between SpeedFam~~excluded because ~~and~~their ~~IPEC~~inclusion ~~prior~~would tohave ~~the~~been ~~combination or significant differences in accounting policies that required elimination or adjustment in the combined financial statements~~anti-dilutive.

37 (k) Significant Customers and Concentration of Credit Risk

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

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —~~ (~~Continued~~l) Patents and Trademarks

~~(3) Merger,~~ Patents ~~Integration,~~ and ~~Restructuring~~trademarks ~~Costs~~included in other assets are amortized on a straight-line basis over 5 years.

~~In connection with the merger~~ (m) Research, ~~the Company recorded various~~ ~~merger~~Development, ~~integration,~~ and ~~restructuring costs in 1999. Direct~~Engineering ~~merger costs primarily consist of professional fees, such as~~ investment banking, legal, and accounting for services rendered through the date of the merger. The Company recorded integration and restructuring costs for lease terminations, the write-off of duplicative equipment previously used for demonstration purposes, the writedown of inventory and equipment related to product lines that will no longer be supported, and severance costs resulting from workforce reductions.

~~The~~Expenditures ~~merger~~for ofresearch, ~~the two companies resulted in the closing of several facilities~~development, ~~the most significant being the former IPEC corporate office~~ and ~~two manufacturing facilities. The IPEC~~ ~~corporate~~engineering ~~office and one~~ of ~~the~~products manufacturing facilities were vacated as of May 31, 1999. The other manufacturing facility was vacated during 2000. As a result, the Company accrued lease termination costs for the estimated payments required to be made subsequent to vacating the facilities and ~~wrote~~processes ~~off~~are ~~leasehold improvements~~expensed ~~made~~as ~~at these facilities~~incurred.

(n) Use ~~As part~~ of ~~the business strategy developed by the combined~~Estimates ~~entity, certain product lines were no longer supported. These~~ product lines relate to wafer shaping and measuring applications, and the 372 CMP product line formerly produced by IPEC. Certain equipment and inventory associated with these product lines were written down to estimated market value. Market value was determined based on estimated liquidation value. The disposals occurred during 2000.

The ~~severance~~preparation ~~and~~of ~~other~~financial ~~related~~statements ~~employee~~in conformity ~~costs~~with ~~provided~~accounting ~~for~~principles generally accepted in the ~~reduction~~United States of ~~approximately~~America 70requires ~~employment~~the ~~positions~~Company’s ~~resulting from~~management to ~~facility~~make ~~closures,~~estimates and assumptions that affect the ~~elimination~~reported amounts of ~~duplicate~~assets ~~positions~~and or liabilities ~~positions~~and nodisclosures ~~longer~~of ~~necessary~~contingent assets ~~due~~and toliabilities at the ~~streamlining~~date of ~~operations.~~ ~~Notification~~the offinancial statements, and the ~~planned~~reported ~~severance~~amounts of revenues and ~~the~~expenses ~~amount of~~during the reporting ~~related~~period. ~~benefits~~Actual ~~was~~results ~~made~~could todiffer ~~employees~~from ~~prior to~~those ~~May 31, 1999~~estimates.

(o) Employee InStock ~~the fourth quarter of 1999, the Company recorded the following~~Plans ~~merger, integration and restructuring costs totaling $53.9~~ million: $6.9 million direct merger costs; $16.9 million lease termination costs including $2.3 million in lease improvement write-offs; $4.2 million write-down of equipment and $19.4 million write-down of inventory due to certain discontinued product lines; $4.7 million related to severance costs and $1.8 million related to other merger, integration and restructuring write-offs and costs. These charges were incurred primarily to close duplicate facilities, record transaction costs, account for certain employee termination benefits and record adjustments and accruals resulting from strategic decisions to discontinue certain product lines and sales and marketing activities as a merged company.

~~Through~~The ~~June 3,~~Company ~~2000,~~applies the ~~Company~~intrinsic ~~incurred~~value-based method ~~$27.0~~of ~~million~~accounting ~~in asset~~for ~~write-downs~~its ~~and~~stock ~~paid~~options ~~and~~issued ~~charged~~ to ~~the liability $17~~employees.7 ~~million.~~As ~~The remaining restructuring accrual for lease termination~~such, ~~severance~~compensation ~~and~~expense ~~other~~is ~~expenses~~recorded ~~associated~~on ~~with~~ the ~~merger~~ ~~was~~date ~~approximately $9.2 million as~~ of ~~June 3, 2000,~~grant ~~which~~only ~~the~~if ~~Company believes is adequate to cover~~ the ~~remaining liabilities.~~current ~~During~~market ~~2000,~~price ~~lease~~of ~~terminations costs on certain vacated facilities (which was included in~~ the ~~restructuring charge)~~underlying ~~primarily~~stock ~~related to remaining rent, related utilities~~exceeds ~~and common area maintenance on~~ the ~~closed~~exercise ~~Phoenix, Arizona manufacturing and administrative facility~~price. ~~The~~Under ~~Company~~Accounting ~~also estimated~~Principles inBoard ~~May 1999, given the then-current real estate~~Opinion ~~market conditions~~25, ~~that~~“Accounting itfor ~~would~~Stock ~~take~~Issued ~~approximately 9-12 months~~ to ~~sublease the facility. Sublease activity~~Employees”, ~~began~~because ~~in May 2000 (as reflected in~~ the ~~remaining~~exercise ~~accrual) and~~price ~~is projected to be carried out through the end~~ of the ~~Company’s~~ ~~lease term. The~~ Company’s ~~management~~employee ~~has been~~stock options ~~and~~equals ~~is currently in~~ the ~~process~~market price of ~~securing~~the ~~additional~~underlying ~~subleases~~ stock oron ~~other negotiated agreements for~~ the date ~~Phoenix~~of grant, ~~Arizona manufacturing~~no ~~and~~compensation ~~administrative~~expense ~~facility~~is recognized.

38 (p) Fair Value of Financial Instruments

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

39 ~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —~~ ~~(Continued)~~

TheTable following tables summarize the components of and activity related to the merger, integration, and restructuring costs during 2000 and 1999 (in thousands): Contents

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

SPEEDFAM-IPEC, INC.

			1999 Activity				Accrued
	Total						Liability at
	Estimated		Cash		Asset		May 31,
	Costs		Expenditures		Write-downs		1999
Direct merger costs	$	6,900		3,300		—		3,600
Lease termination costs		16,900		—		2,300		14,600
Demonstration equipment		4,200		—		4,200		—
Discontinued product lines		19,400		—		19,300		100
Severance costs		4,700		500		—		4,200
Other costs		1,800		300		1,000		500
	$	53,900		4,100		26,800		23,000

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

~~The~~these ~~1999~~instruments. ~~merger,~~Fair ~~integration,~~values ~~and~~relating ~~restructuring~~to foreign ~~costs~~currency ~~were classified~~contracts in(used for hedging purposes) reflect the ~~statement~~estimated ofnet ~~operations~~amounts ~~for~~that the ~~year~~Company ~~ended~~would receive or pay ~~May 31,~~to ~~1999~~terminate inthe ~~cost~~contracts at the reporting date based on quoted market prices of ~~sales~~comparable contracts and inare ~~selling,~~not ~~general~~material at June 1, 2002 and ~~administrative~~ ~~expenses~~June 2, 2001. The ~~following~~fair ~~table~~value ~~summarizes~~of the ~~classification~~Company’s long-term debt is approximately $73.0 million as of the ~~merger~~end ~~and~~of ~~integration~~2002. ~~charges~~The ~~(in~~fair value of the ~~thousands):~~Company’s long-term debt is estimated based on quoted market prices.

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

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

~~(4) Short~~ The Company continually evaluates whether events and circumstances have occurred that indicate the estimated useful lives of long-~~term~~lived ~~Investments~~assets or intangible assets may warrant revision or that the remaining balance may not be recoverable. When factors indicate that an asset should be evaluated for possible impairment, the Company uses an estimate of the related undiscounted net cash flows generated by the asset over the remaining estimated life of the asset in measuring whether the asset is recoverable. Material factors which may alter the useful life of the asset or determine that the balance may not be recoverable include effects of new technologies, obsolescence, demand, competition, and other economic factors. If an asset is considered to be impaired, the impairment to be recognized is measured as the amount by which the carrying amount of the asset exceeds its fair value. An asset to be disposed of is reported at the lower of its carrying amount or fair value less costs to sell.

The amortized cost, gross unrealized gains, gross unrealized losses, and approximate fair value of short-term investments classified as available-for-sale are summarized as follows at June 3, 2000 and May 31, 1999 (~~in thousands~~r): Derivative Financial Instruments

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

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

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

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

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —~~ (~~Continued~~s) Reclassifications

	1999
			Gross		Gross			Approximate
			Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
Municipal and state governments	$	26,357		1		(70	)		26,288
Corporate debt securities and other		23,833		—		(101	)		23,732
	$	50,190		1		(171	)		50,020

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

~~(5) Inventories~~40

InventoriesTable at the end of 2000 and 1999 are summarized as follows (in thousands): Contents

		2000		1999
Raw materials		$	54,058		48,082
Work-in-process			21,396		23,428
Finished goods			5,738		9,234
	Total inventories	$	81,192		80,744

SPEEDFAM-IPEC, INC.

~~(6) Property,~~ NOTES ~~Plant,~~TO ~~and~~CONSOLIDATED ~~Equipment~~FINANCIAL STATEMENTS — (Continued)

~~Property, plant, and equipment at the end of 2000 and 1999 are summarized as follows~~ (~~in thousands~~t): Recent Accounting Pronouncements

		2000			1999
Land		$	8,547			8,547
Buildings			38,709			40,911
Machinery and equipment			70,539			69,066
Furniture and fixtures			4,324			3,529
Leasehold improvements			1,131			1,607
Construction in progress			7,882			2,906
			131,132			126,566
Less accumulated depreciation			(43,219	)		(37,569	)
	Net property, plant, and equipment	$	87,913			88,997

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

~~Depreciation~~In ~~expense~~October ~~was~~2001, ~~$15.3~~the ~~million~~Financial Accounting Standards Board issued Statement of Financial Accounting Standard (SFAS) No. 144, ~~$19~~“Accounting for the Impairment or Disposal of Long-Lived Assets”.1 ~~million~~SFAS No. 144, ~~and~~which ~~$12~~replaces SFAS No.4 121, “Accounting ~~million~~for inthe ~~2000~~Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,” ~~1999~~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, ~~and~~2001. ~~1998~~The Company has not yet determined the effects SFAS No. 144 will have on its financial position, ~~respectively~~results of operations or cash flows but does not anticipate that the impact will be significant.

~~(7) Accrued~~ In ~~Liabilities~~April 2002, the Financial Accounting Standards Board issued SFAS No. 145, “Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections.” SFAS No. 145 rescinds SFAS No. 4, “Reporting Gains and Losses from Extinguishment of Debt,” and an amendment of that Statement, SFAS No. 64, “Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements”. SFAS No. 145 also rescinds SFAS No. 44, “Accounting for Intangible Assets of Motor Carriers.” SFAS No. 145 amends SFAS No. 13, “Accounting for Leases,” to eliminate an inconsistency between the required accounting for sale-leaseback transactions and the required accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions. SFAS No. 145 also amends other existing authoritative pronouncements to make various technical corrections, clarify meanings, or describe their applicability under changed conditions. The Company is required to adopt SFAS No. 145 on June 2, 2002 and does not expect that it will have a material impact on the financial position or results of operations of the Company.

~~Accrued~~In ~~liabilities~~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 ~~end~~date of ~~2000~~an ~~and~~entity’s commitment ~~1999~~to ~~are~~an ~~summarized~~exit asplan. This Statement also establishes that fair ~~follows~~value ~~(in~~is ~~thousands):~~the objective for initial measurement of the liability. SFAS No. 146 is effective for exit or disposal activities that are initiated after December 31, 2002.

		2000		1999
Accrued warranty and installation costs		$	8,665		13,245
Accrued payroll and benefits			4,588		6,217
Accrued merger, integration, and restructuring costs			1,952		9,429
Other accrued liabilities			8,059		15,363
	Total accrued liabilities	$	23,264		44,254

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

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

41 ~~SPEEDFAM-IPEC, INC.~~

NOTESTable TOof CONSOLIDATED FINANCIAL STATEMENTS — (Continued) Contents

~~(8) Investments~~ SPEEDFAM-IPEC, ~~in Affiliates~~INC.

~~The~~NOTES ~~Company~~TO ~~owns~~CONSOLIDATED ~~a 50% interest in SpeedFam-IPEC Co., Ltd. The~~FINANCIAL ~~Company’s equity investment in SpeedFam-IPEC Co., Ltd. was $19.8 million and $21.8 million at June~~STATEMENTS 3,— ~~2000 and~~(Continued) ~~May 31, 1999, respectively. SpeedFam-IPEC Co., Ltd.’s~~ ~~consolidated financial statements include the accounts of the following subsidiaries:~~

~~Company~~ 30 percent ~~Location~~reduction ~~SpeedFam~~in ~~Clean Systems Co.~~workforce, ~~Ltd.~~a 15 percent ~~Japan~~salary ~~Saku~~cutback ~~Seiki~~for ~~Co.~~executives, ~~Ltd.~~as ~~Japan~~well ~~SpeedFam-IPEC~~as ~~Taiwan~~pay reductions ~~Ltd.~~for ~~Taiwan~~all ~~SpeedFam~~mid-~~IPEC~~to ~~Korea Ltd. South Korea SpeedFam~~upper-~~IPEC~~level ~~India~~employees ~~(Pvt.)~~and ~~Ltd.~~a ~~India~~decrease in ~~SpeedFam-IPEC~~overall ~~(S.E.A.)~~discretionary ~~Pte~~spending. ~~Ltd. Singapore SpeedFam-IPEC (Malaysia) SDN BHD Malaysia~~

~~Significant~~During ~~intercompany~~the ~~balances~~year ~~and~~ended ~~transactions~~June 2, ~~have~~2001, ~~been~~the ~~eliminated~~Company recorded approximately $39.1 million ~~SpeedFam~~in restructuring and other special charges which included inventory write-~~IPEC~~downs ~~Co.,~~of ~~Ltd~~$31.’s2 million; ~~investments~~asset inimpairments ~~three~~of ~~affiliated~~$4.4 million; ~~Japanese~~lease ~~companies,~~termination ~~Met-Coil~~costs ~~Ltd~~of $1.7 million; severance ~~GRT~~costs Coof $1.0 million for 247 employees, primarily ~~Ltd.~~manufacturing technicians, engineers and field service ~~Clean~~representatives; ~~Technology~~and Co$0.,8 million ~~Ltd.~~of ~~are~~other ~~accounted~~charges. ~~for~~As byof June 1, 2002, the ~~equity~~Company had completed all restructuring ~~method~~activities in accordance with its previously established and announced plans which included cash expenditures of $1.5 million and asset write-offs of $37.6 million.

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

SPEEDFAM-IPEC, INC.


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

	$	39,086

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

~~Condensed~~These ~~consolidated~~costs ~~financial~~were ~~statements~~classified in the statement of operations ~~SpeedFam-IPEC~~for ~~Co.~~the year ended June 1, 2002 in cost of sales and ~~Ltd~~operating expenses. ~~are~~The asfollowing ~~follows~~table ~~(in~~summarizes ~~thousands)~~the classification of the restructuring and other charges:

Balance Sheets


Cost of sales	$	37,602
Research and development costs		7,338
Selling, general and administrative costs		159
Restructuring charges		3,000

	$	48,099

			April 30,
			2000		1999
Assets
Current assets:
	Cash and short-term investments		$	14,884		8,963
	Trade accounts receivable, net and due from affiliates			52,085		55,670
	Inventories			8,150		13,445
	Prepaid expenses and other current assets			3,984		3,682
		Total current assets		79,103		81,760
Property, plant, and equipment, net				33,535		36,003
Other assets				14,895		10,759
		Total assets	$	127,533		128,522
Liabilities and Stockholders’ Equity
Current liabilities:
	Short-term borrowings and current portion of long-term debt		$	24,586		26,381
	Accounts payable			25,713		25,546
	Accrued liabilities			8,412		5,862
	Income taxes payable			1,610		—
		Total current liabilities		60,321		57,789
Long-term debt				20,455		19,607
Other long-term liabilities				7,141		7,599
		Total long-term liabilities		27,596		27,206
Stockholders’ equity				39,616		43,527
		Total liabilities and stockholders’ equity	$	127,533		128,522

(3) Restructuring and Other Charges Associated with the Disposal of the Far East Joint Venture

42 On August 30, 2000, the Company and Obara Corporation (Obara) dissolved SpeedFam-IPEC Co., Ltd. (together with its subsidiaries and joint ventures, the Far East Joint Venture). Under the terms of the Master

42 ~~SPEEDFAM-IPEC, INC.~~

NOTESTable TOof CONSOLIDATED FINANCIAL STATEMENTS — (Continued) Contents

~~Statements of Earnings and~~ ~~Retained~~SPEEDFAM-IPEC, ~~Earnings (in thousands)~~INC.

		Years Ended April 30,
		2000			1999			1998
Net sales		$	108,000			136,232			221,738
Costs and operating expenses			118,922			135,378			210,900
	Earnings before income taxes		(10,922	)		854			10,838
Income taxes			(3,346	)		1,332			5,041
	Net earnings before minority interest		(7,576	)		(478	)		5,797
Minority interest			50			684			66
	Net earnings		(7,526	)		206			5,863
Retained earnings at beginning of year			40,326			41,162			37,049
Dividends			—			(1,042	)		(1,750	)
	Retained earnings at end of year	$	32,800			40,326			41,162

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

~~The~~Reorganization ~~following~~Agreement iswith aObara, ~~summary~~ownership of the ~~SpeedFam-IPEC,~~CMP ~~Inc.~~operations of the Far East Joint Venture was transferred to the Company and specific personnel involved in CMP efforts ~~consolidated~~became ~~subsidiaries’~~employees ~~transactions~~of ~~with~~the ~~SpeedFam~~Company. Obara continues the non-~~IPEC~~CMP ~~Co.~~activities of the joint venture, ~~Ltd.~~which ~~and~~include ~~its~~the ~~subsidiaries~~manufacture of ~~(in~~silicon ~~thousands)~~wafer polishing products.

	2000		1999		1998
Sales to SpeedFam-IPEC Co., Ltd.	$	3,636		659		924
Purchases from SpeedFam-IPEC Co., Ltd.	$	13,133		3,030		6,344
Commissions revenue	$	2,875		2,217		9,009
Commission expense	$	8,068		4,727		4,433

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

~~Net~~During ~~amounts~~the ~~due~~first toquarter ~~SpeedFam-IPEC~~of ~~Co.~~2001, ~~Ltd~~the Company recorded charges totaling $10.8 million ~~included~~related to the loss on disposal of the Company’s 50% investment interest in the ~~consolidated~~Far ~~balance~~East ~~sheets~~Joint atVenture and $8.4 million related to the Company’s ~~end~~exit from the manufacturing of ~~2000~~wafer and ~~1999~~disk polishing ~~are~~products as the Company is prohibited from manufacturing these products. The $78.4 million charge includes $3.3 million of inventory write-downs of raw materials and $4spare parts related to silicon wafer and thin film memory disk polishing products classified as a component of cost of sales.8 ~~million~~Impairment of fixed assets of the exited operations, severance ~~respectively~~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.

InDuring ~~November 1999~~2001, the Company ~~sold~~completed ~~its~~all ~~50%~~of ~~interest in the~~its ~~joint~~restructuring ~~venture,~~activities ~~Fujimi~~in ~~Corporation,~~accordance towith its ~~50% partner, Fujimi~~previously ~~Incorporated.~~established ~~Total~~and ~~proceeds~~announced ~~from~~plans; ~~the~~therefore, ~~sale~~no ~~were $10.0 million.~~remaining ~~The~~liability ~~gain~~exists ~~on the sale of $6.1 million is classified~~ as ~~other income in the accompanying consolidated statement~~ of ~~operations for the year ended~~ June 31, ~~2000~~2002. ~~The~~During ~~Company’s~~2001, ~~equity~~the ~~investment~~Company inincurred ~~Fujimi Corporation was~~ $315.6 8 million atin ~~the~~asset ~~end~~write-offs ofand paid ~~1999.~~and ~~Summary~~charged ~~financial information relating~~ to ~~Fujimi Corporation~~the isliability ~~as follows:~~$3.4 million.

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

						Years Ended May 31,
Cost of sales		$	3,351
			June 1, 1999 -
Restructuring charges			5,123
			November 30, 1999			1999			1998
Loss on disposal of investment in affiliate			10,763
Net sales			$	11,629			22,746			36,767
		$	19,237
Costs and operating expenses				(10,629	)		(20,028	)		(31,332	)
	Earnings before income taxes			1,000			2,718			5,435
Income taxes				(400	)		(1,039	)		(2,207	)
	Net earnings		$	600			1,679			3,228

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

~~SPEEDFAM-IPEC~~(4) Merger, ~~INC.~~Integration and Restructuring Costs Associated with the 1999 Merger

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

~~(9) Income~~ The ~~Taxes~~remaining restructuring accrual for lease terminations associated with the merger is approximately $4.6 million which the Company believes is adequate to cover the remaining costs, primarily lease termination payments on certain vacated facilities not offset by sublease income. Sublease activity began in May 2000 and

43 ~~The Company files consolidated U.S. Federal income tax returns~~ ~~with its domestic subsidiary. Operations in the United Kingdom~~ ~~and Germany file local income tax returns. Earnings (loss) from consolidated companies before income taxes are as follows (in thousands):~~

		2000			1999			1998
U.S		$	(12,044	)		(146,437	)		3,942
Non-U.S			1,144			1,816			2,406
	Total	$	(10,900	)		(144,621	)		6,348

~~Income~~SPEEDFAM-IPEC, ~~tax expense (benefit) is included in the statements~~INC. ~~of operations as follows (in thousands):~~

		2000		1999			1998
Continuing operations		$	—		(3,930	)		29,584
Discontinued operations			—		—			—
	Total	$	—		(3,930	)		29,584

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

~~Income~~is ~~tax~~projected ~~expense~~to ~~(benefit)~~continue through the Company’s lease term. For the year ended June ~~related~~1, 2002, $2.0 million in lease termination costs were charged to ~~continuing~~the ~~operations~~accrual, isall asof ~~follows~~which ~~(in~~were ~~thousands):~~cash expenditures.

			2000		1999			1998
Current:
	U.S. Federal		$	—		—			2,348
	State			—		22			1,080
	Non-U.S			—		710			640
				—		732			4,068
Deferred:
	U.S. Federal and state			—		(4,622	)		25,366
	Non-U.S			—		(40	)		150
				—		(4,662	)		25,516
		Income tax expense (benefit)	$	—		(3,930	)		29,584

(5) Changes in Accounting Principle

44 In July 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 142, “Goodwill and Other Intangible Assets”. SFAS No. 142 supersedes prior guidance and requires that goodwill no longer be amortized to earnings, but instead be annually reviewed for impairment. In addition, goodwill should be tested for impairment upon adoption. The Company early adopted SFAS No. 142 in the first quarter of 2002 and recorded a cumulative effect of change in accounting principle for the write-off of goodwill of ($2.6) million, or ($0.08) per share, as of the beginning of 2002 (June 3, 2001). The impact of adoption was to reduce the loss before cumulative effect of accounting change for 2002 by $0.9 million or $0.03 per share. The circumstances leading to the impairment of goodwill primarily relate to current operating losses, the absence of positive cash flows and uncertainties resulting from the duration and severity of the industry downturn. The fair value of the reporting units, which correspond to the Company’s business segments, were estimated using quoted market prices. Net loss for 2001 would have been ($133.5) million or ($4.46) per share, if the accounting change related to goodwill required by SFAS No. 142 had been applied to that period. Net loss for 2000 would have been ($13.2) million or ($0.45) per share if the accounting change related to goodwill required by SFAS No. 142 had been applied to that period.

~~SPEEDFAM-IPEC~~The Company generates revenue from the sale of systems, ~~INC~~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.

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

~~The~~SFAS ~~tax~~No. 133, ~~effects~~“Accounting offor Derivative ~~temporary~~Instruments ~~differences~~and ~~that~~Hedging ~~give~~Activities” ~~rise to the~~and ~~deferred tax assets (liabilities)~~No. at138, ~~the~~“Accounting ~~end~~for ofCertain ~~2000~~Derivative Instruments and ~~1999~~ ~~are~~Certain ~~attributable~~Hedging toActivities”, ~~(in~~established accounting ~~thousands):~~and

			2000			1999
Deferred tax assets:
	Financial valuation accounts		$	13,781			18,655
	Expenses not currently deductible			3,683			2,017
	Merger, integration, and restructuring accruals			3,680			21,421
	Net operating loss carryforwards and tax credits			75,003			55,096
	Other			366			906
				96,513			98,095
	Valuation allowance			(95,856	)		(91,564	)
				657			6,531
Deferred tax liabilities:
	Depreciation and amortization differences			(668	)		(6,542	)
		Net deferred tax liability	$	(11	)		(11	)

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

~~The Company has in excess of $168.0 million of Federal net operating loss carryforwards at June 3~~SPEEDFAM-IPEC, ~~2000 which expire between 2001 and 2019~~INC. ~~The Company also has $5.0 million of~~ ~~Federal research and development tax credit carryforwards available. These carryforwards begin to expire in 2011.~~

~~The~~NOTES ~~valuation~~TO ~~allowance~~CONSOLIDATED ~~for deferred taxes was increased by $4.3~~FINANCIAL ~~million~~STATEMENTS — ~~and $51.5 million during 2000 and 1999, respectively. A~~(Continued) ~~valuation allowance is required to be recorded against deferred~~ tax assets if it is more likely than not that the tax assets will not be realized. This determination is dependent on many factors, including the Company’s ability to generate taxable income within the net operating loss carryforward period. The Company has established a full valuation allowance against all of its deferred tax assets. The Company will recognize future benefits only as reassessment demonstrates that the deferred tax assets are realizable. While the need for this valuation allowance is subject to periodic review, if the allowance is reduced, the tax benefits attributable to the deferred tax assets will be recorded in future operations as a reduction of the Company’s income tax expense.

45 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.

~~SPEEDFAM-IPEC~~In June 2001, ~~INC~~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.

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —~~ (~~Continued~~6) Short-term Investments

AThe ~~reconciliation~~Company ~~between~~held no short-term investments at the end ~~Company’s~~of ~~effective~~2002. ~~tax~~The ~~rate~~amortized cost, gross unrealized gains, gross unrealized losses, and ~~the~~approximate ~~expected~~fair ~~tax~~value ~~rate~~of onshort-term investments ~~earnings~~classified ~~before~~as ~~income~~available-for-sale ~~taxes~~are issummarized as follows at the end of 2001 (in thousands):

			2000				1999				1998
		2001
Expected income tax rate				(34	)%			(34	)%			34	%
						Gross				Gross
State taxes, net of U.S. Federal tax benefit				(6	)			(6	)			12
						Unrealized				Unrealized				Approximate
Foreign sales corporation				—				—				(19	)
		Cost				Gains				Losses				Fair Value
Research and development and other tax credits				(22	)			(2	)			—
Corporate debt securities and other		$	13,471			$	24			$	—			$	13,495
Tax exempt investment securities				—				—				(17	)
Disposition of investments				14				—				—
Non-deductible expenses, including purchased research and development and amortization of goodwill				8				1				42
Change in beginning of year valuation allowance				39				36				391
Stock option compensation				—				—				21
Other				1				2				2
	Effective income tax rate			0	%			(3	)%			466	%

~~No provision is made for income taxes on undistributed earnings~~(7) Inventories ~~of wholly owned non-U.S. subsidiaries and SpeedFam-IPEC Co.,~~ Ltd., because it is the Company’s present intention to reinvest substantially all the earnings of these operations. At the end of 2000, there was approximately $24.5 million of accumulated undistributed earnings of those operations. It is not practical for the Company to compute the amount of unrecognized deferred tax liability on the undistributed earnings.

Inventories at the end of 2002 and 2001 are summarized as follows (~~10) Discontinued~~in ~~Operations~~thousands):

In the second quarter of 1997, the Company announced its decision to focus its resources on manufacturing CMP and CMP related equipment. As a result of this decision, the Company adopted a plan for the disposition by sale or closure of IPEC Clean in calendar 1997.


		2002		2001

Raw materials		$	19,164	$	49,081
Work-in-process			11,490		19,706
Finished goods			13,891		19,272

	Total inventories	$	44,545	$	88,059

45 ~~Following the decision to dispose of IPEC Clean in calendar 1997,~~ ~~the Company entered into negotiations to sell its remaining~~ ~~assets. The deteriorating business climate in the Pacific Rim~~ resulted in customers delaying expected purchases from IPEC Clean and the Company was unable to consummate a sale. The Company closed IPEC Clean in the third quarter of 1998. A charge of $10.6 million to write down accounts receivable, inventory, equipment, and other assets to liquidation value and to record additional liabilities was recorded in 1998.

(11) RevolvingTable Creditof Facilities Contents

~~On October 31, 1996, SpeedFam~~SPEEDFAM-IPEC ~~Limited in the United Kingdom~~, ~~a wholly owned subsidiary of the Company, entered into a £950,000 ($1~~INC.~~4 million) multi-currency revolving line of~~ credit with the London branch of an U.S. bank. The revolving line of credit is secured by property and equipment of the subsidiary and is payable on demand. If the line of credit is utilized, interest will accrue on the outstanding balance at 2.0% above the bank’s base rate (8% and 7.25% at June 3, 2000 and April 30, 1999). As of June 3, 2000 and April 30, 1999, no amounts were outstanding on this credit facility.

46 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

~~SPEEDFAM-IPEC~~(8) Property, ~~INC.~~Plant, and Equipment

~~NOTES~~Property, TOplant, ~~CONSOLIDATED~~and ~~FINANCIAL~~equipment ~~STATEMENTS —~~at the end of 2002 and 2001 are summarized as follows (~~Continued~~in thousands):

(12) Long-term Debt


		2002			2001

Land		$	2,592		$	2,634
Buildings and building improvements			41,620			42,463
Machinery and equipment			58,082			65,897
Furniture and fixtures			4,604			4,785
Leasehold improvements			2,031			2,457
Construction in progress			7			2,946

			108,936			121,182
Less accumulated depreciation			(50,929	)		(45,941	)

	Net property, plant, and equipment	$	58,007		$	75,241

~~Long-term~~Depreciation ~~debt~~expense atwas ~~June~~$10.8 3million, $15.2 million, ~~2000~~ and ~~May~~$15.4 ~~31,~~million ~~1999 consists~~in of2002, ~~the~~2001, ~~following~~and 2000, ~~(in thousands):~~respectively.

		2000		1999
Convertible subordinated notes		$	115,000		115,000
Capital lease obligations, interest rates ranging from 8.7% to 9.88%			1,239		2,404
			116,239		117,404
Less current portion			1,077		1,275
	Long term debt, net of current portion	$	115,162		116,129

(9) Intangible Assets

~~The~~Intangible ~~Company~~assets ~~completed~~included ~~a private placement~~ in ~~the~~other ~~first~~assets ~~quarter of 1998 of $115.0 million Convertible Subordinated Notes (Notes) due in 2004 bearing interest~~ at ~~a rate of 6.25%. The Notes were subsequently registered with~~ the ~~Securities and Exchange~~ ~~Commission~~end in year 1998. Interest is payable semi-annually in March and September. The Notes are subordinated to all existing and future senior indebtedness and are effectively subordinated to all liabilities, including trade payables and lease obligations of ~~the~~2002 ~~Company~~ and ~~its~~2001 ~~subsidiaries. The Notes can be converted into the Company’s common stock at a conversion price of $54.93 per share. The Notes~~ are ~~not~~summarized ~~redeemable~~as byfollows ~~the Company prior to September 20, 2000. Debt issuance costs of $3.8 million incurred~~ (in ~~connection with the issuance have been~~thousands): ~~included in other assets and are being amortized over seven~~ ~~years.~~

The Company entered into lease financing arrangements for certain equipment that expire at various dates through July 2002.


		2002			2001

Patents		$	3,089		$	4,379
Debt issuance costs			3,800			3,800
Goodwill			—			10,138
Trademarks			—			370

			6,889			18,687
Less accumulated amortization — patents			(416	)		(120	)
Less accumulated amortization — debt issuance costs			(2,452	)		(1,961	)
Less accumulated amortization — goodwill			—			(7,556	)
Less accumulated amortization — trademarks			—			(229	)

	Net intangible assets	$	4,021		$	8,821

~~The~~Amortization ~~future~~expense ~~maturities~~was of$2.6 million, $1.8 million, ~~long-term~~and ~~debt~~$2.1 million asin of2002, ~~June~~2001 and 2000, respectively. Estimated amortization expense for the next five years is: $1.1 3million in 2003, ~~2000~~$1.1 million in 2004, ~~are~~$0.7 million asin ~~follows~~2005, ($0.5 million in ~~thousands):~~2006 and $0.5 million in 2007.

Years Ending June 3, 2000		Amount
2001		$	1,077
2002			149
2003			13
2004			115,000
Thereafter			—
	Total	$	116,239

(13) Stockholders’Table Equity of Contents

~~Common~~ SPEEDFAM-IPEC, ~~Stock~~INC.

~~The~~NOTES ~~Company~~TO ~~has~~CONSOLIDATED ~~96.0 million shares of common stock authorized~~FINANCIAL ~~for issuance, at no par value. There were 29.7 million and 29.4 million shares issued and outstanding as of June~~STATEMENTS 3,— ~~2000 and~~(Continued) ~~May 31, 1999, respectively.~~

~~Preferred~~ (10) Accrued ~~Stock~~Liabilities

~~The~~Accrued ~~holders~~liabilities ofat ~~Series B~~the ~~preferred~~end ~~stock were entitled to an annual cumulative dividend amounting to $5.59 per share, payable semiannually on December 31 and June 30, commencing June 30, 1994. Each share~~ of ~~the~~2002 ~~Series B-1 preferred stock, Series B-2 preferred stock,~~ and ~~Series B-3~~2001 ~~preferred stock was converted into 8.90, 8.10, and 10.65 shares of common stock, respectively, in connection with the merger. There~~ are ~~21,478~~summarized ~~shares authorized for each of the series B-1, B-2 and B-3 preferred stocks and no shares were issued and outstanding~~ as offollows ~~June~~(in ~~3, 2000 and May 31, 1999.~~thousands):


		2002		2001

Accrued payroll and benefits		$	2,310	$	3,361
Accrued merger, integration, and restructuring costs			1,288		1,719
Accrued warranty and installation costs			804		6,156
Other accrued liabilities			9,502		7,439

	Total accrued liabilities	$	13,904	$	18,675

~~SPEEDFAM-IPEC,~~(11) Investment ~~INC.~~in Affiliates

~~NOTES~~In TOAugust 2000, ~~CONSOLIDATED~~the ~~FINANCIAL~~Far ~~STATEMENTS —~~East Joint Venture ~~(Continued)~~was dissolved. Under the terms of the Master Reorganization Agreement with Obara, ownership of the CMP operations of the Far East Joint Venture was transferred to the Company and specific personnel involved in CMP efforts became employees of the Company. Obara continues the non-CMP activities of the former Joint Venture, which include the manufacturing of wafer and disk polishing products.

~~Class~~ During the first quarter of 2001, the Company recorded charges totaling $10.8 Amillion ~~Common~~related ~~Stock~~to the loss on disposal of the Company’s 50% investment interest in the Joint Venture. Summary financial information relating to the Joint Venture is as follows:

~~Each~~Statements ~~share~~ of ~~Class A~~Earnings ~~common stock is entitled to four votes~~(in ~~and can be converted into one share of the Company’s common~~thousands) ~~stock. Each share of common stock is entitled to one vote. At~~ the merger date, each share of IPEC Class A common stock was converted into .71 shares of SpeedFam-IPEC, Inc. common stock. There are 2.5 million shares authorized but no shares were issued and outstanding as of June 3, 2000 and May 31, 1999.

(14) Commitments and Contingencies


					Year Ended
		May 1, 2000 -			April 30,
		July 31, 2000			2000

Net sales		$	29,626		$	108,000
Costs and operating expenses			29,267			118,922

	Earnings (loss) before income taxes		359			(10,922	)
Income taxes			(130	)		(3,346	)

	Net earnings (loss) before minority interest		229			(7,576	)
Minority interest			9			50

	Net earnings (loss)	$	220		$	(7,526	)

~~The~~(12) Income ~~Company is subject to lawsuits and other claims arising in~~Taxes ~~the ordinary course of business. In the opinion of management,~~ ~~based on consultation with legal counsel, the effect of such matters will not have a material adverse effect on the Company’s financial position or results of operations.~~

The Company ~~and~~files ~~its~~consolidated ~~subsidiaries~~U.S. ~~occupy certain manufacturing and~~Federal income ~~office~~tax ~~facilities~~returns ~~and~~with ~~use~~its ~~certain~~domestic ~~equipment~~subsidiary. ~~under~~Operations ~~noncancelable~~in ~~operating~~the ~~leases~~United ~~expiring~~Kingdom, atGermany, ~~various~~Japan, ~~dates~~Taiwan, ~~through~~Korea, ~~2004.~~Singapore ~~Rental~~and ~~expense~~Malaysia ~~was~~file ~~approximately~~local ~~$3.0~~income ~~million,~~tax $6returns.2 ~~million,~~Earnings ~~and~~(loss) ~~$5.0~~before ~~million~~income intaxes ~~2000,~~are ~~1999,~~as ~~and~~follows ~~1998,~~(in ~~respectively.~~thousands):

Future minimum lease payments for all noncancelable operating leases having remaining terms in excess of one year at the end of 2000, excluding the lease termination payments relating to the former IPEC Planar facility which are classified as restructuring costs (refer to Note 3), are as follows (in thousands):


		2002			2001			2000

U.S.		$	(97,270	)	$	(102,675	)	$	(15,322	)
Non-U.S.			3,298			4,729			1,144

	Total	$	(93,972	)	$	(97,946	)	$	(14,178	)

Year		Amount
2001		$	1,730
2002			1,264
2003			505
2004			120
2005 and thereafter			—
	Total	$	3,619

(15) ForwardTable Exchangeof Contracts Contents

~~The notional amounts of foreign exchange contracts as of June 3~~SPEEDFAM-IPEC, ~~2000 and May 31, 1999 were as follows (in~~INC. ~~thousands):~~

	2000		1999
Forward exchange contracts to buy foreign currency	$	1,981		1,862
Forward exchange contracts to sell foreign currency	$	1,197		4,390

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

~~All~~Income ~~currency~~tax ~~forward~~expense ~~contracts~~(benefit) ~~outstanding~~is atas ~~June 3,~~follows ~~2000 have maturities of less than one year and are primarily to buy or sell Japanese yen~~ (in ~~exchange for U.S. dollars. Management~~ ~~believes that these contracts should not subject the Company to~~thousands): ~~undue risk from foreign exchange movements, because gains and~~ ~~losses on these contracts generally offset gains and losses on~~ ~~the assets, liabilities, and transactions being hedged.~~

(16) Employee Benefits


			2002			2001		2000

Current:
	U.S. Federal		$	(3,578	)	$	—	$	—
	State			—			—		—
	Non-U.S.			1,096			—		—

				(2,482	)		—		—
Deferred:
	U.S. Federal and state			—			—		—
	Non-U.S.			—			—		—

				—			—		—

		Income tax expense (benefit)	$	(2,482	)	$		$	—

The ~~Company~~tax ~~maintains~~effects ~~defined-contribution~~of ~~savings~~temporary ~~and~~differences that ~~profit-sharing~~give ~~plans~~rise ~~for~~to ~~its~~the ~~employees.~~deferred ~~The~~tax ~~plans~~assets ~~cover~~(liabilities) ~~certain employees~~at ~~who~~the ~~meet~~end ~~length~~ of 2002 ~~service~~and ~~requirements.~~2001 ~~Total~~are ~~Company contributions~~attributable ~~aggregated~~ to ~~$1.1 million, $1.0 million, and $0.8 million~~ (in ~~2000, 1999, and 1998, respectively.~~thousands):

The Company granted to an officer 50,000 shares of common stock which vested monthly from September 1997 through February 2000. At the merger date, all unvested shares became fully vested. The


			2002			2001

Deferred tax assets:
	Deferred revenue, net		$	3,625		$	12,931
	Financial valuation accounts			24,075			18,516
	Expenses not currently deductible			264			3,065
	Merger, integration, and restructuring accruals			2,284			2,804
	Net operating loss and tax credit carryforwards			140,379			105,673
	Other			442			366

				171,069			143,355
	Valuation allowance			(170,401	)		(142,698	)

				668			657
Deferred tax liabilities:
	Depreciation and amortization differences			(668	)		(668	)

		Net deferred tax liability	$	—		$	(11	)

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

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

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

48 ~~Company deferred the related compensation of $1.3 million and~~ ~~amortized the cost over the vesting period. Compensation expense~~ ~~of $0.9 million and $0.4 million was recorded in 1999 and 1998, respectively.~~

TheTable Company’s 1995 Employee Stock Purchase Plan qualifies under Section 423 of the Internal Revenue Code and 500,000 shares of common stock are reserved for issuance under the plan. Payroll deductions for the purchase of stock may not exceed 10% of an employee’s base compensation or $25,000. The employee stock purchase plan provides that eligible employees may purchase stock at 85% of its fair value on specified dates. Under the plan, the Company sold approximately 67,000, 198,000 and 150,000 shares in 2000, 1999, and 1998, respectively. Contents

~~(17) Warrants~~ SPEEDFAM-IPEC, ~~and Stock Option Plans~~INC.

~~Warrants~~ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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

	Common (a)		Common (b)		Total
Exercise price	$	41.20		34.61
Expiration		12/26/00		12/16/02
Outstanding at June 3, 2000 and May 31, 1999		7,100		338,210		345,310

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

(a)	These warrants were issued in connection with services provided during an acquisition and were assigned a value of $100,000.
		2002			2001			2000
(b)	These warrants were issued in connection with preferred stock previously outstanding and were assigned a value of $4.8 million.
Expected income tax rate			(34	)%		(34	)%		(34	)%
State taxes, net of U.S. Federal tax benefit			(6	)		(6	)		(6	)
Research and development and other tax credits			(2	)		(2	)		(22	)
Disposition of investments			—			—			14
Non-deductible expenses, including purchased research and development and amortization of goodwill			13			9			8
Change in beginning of year valuation allowance			27			33			39
Other			—			—			1
Effective income tax rate			(2	)%		0	%		0	%

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

~~The~~(13) Line ~~Company grants options to employees under the 1991 Employee Incentive Stock Option Plan and the 1995 Stock Plan for Employees and Directors~~ of ~~the Company. Under the plans, options may be~~Credit ~~granted to purchase up to 4,800,000 shares of the Company’s~~ authorized but unissued common stock. Stock options are granted at a price not less than the fair market value on the date of grant. Stock option vesting periods range from four to five years with the exception of 164 stock options issued in 1992, which vested immediately. The stock options expire 10 years after the grant date, except for 71 stock options which expire five years after the grant date.

~~The~~SpeedFam-IPEC ~~Company’s~~Limited ~~1992~~in ~~Stock~~the ~~Option~~United ~~Plan~~Kingdom, ~~(the~~a wholly ~~Option~~owned ~~Plan) provides~~subsidiary ~~for~~of the ~~issuance~~Company, has a £950,000 ($1.4 million) revolving line of ~~incentive~~credit ~~stock~~with ~~options~~a ~~and~~major United ~~non-qualified~~Kingdom ~~stock~~bank. ~~options~~The torevolving ~~purchase~~line upof tocredit ~~3,727,500~~is ~~shares~~secured ofby property ~~common~~and ~~stock~~equipment toof ~~employees,~~the ~~directors,~~subsidiary and ~~consultants.~~is ~~The~~payable on ~~grants~~demand. ~~vest~~If ~~over~~the ~~periods~~line ~~ranging~~of upcredit tois ~~five~~utilized, ~~years.~~interest ~~Options~~will ~~may be~~accrue on ~~granted~~the tooutstanding ~~purchase~~balance ~~shares~~at of1.75% above the ~~Company~~bank’s ~~common stock at~~base rate ~~not~~(4.00% ~~less than fair market value~~ at ~~the~~June 1, ~~date~~2002). As of ~~grant~~June 1, ~~and~~2002 ~~are~~and ~~exercisable~~June 2, ~~for~~2001, ano ~~period~~amounts ~~not~~were ~~exceeding~~outstanding ~~ten~~under ~~years~~the ~~from~~line ~~that date~~of credit.

SPEEDFAM-IPEC,Table INC. of Contents

~~NOTES~~SPEEDFAM-IPEC, ~~TO CONSOLIDATED FINANCIAL STATEMENTS —~~INC. ~~(Continued)~~

~~The~~NOTES ~~following~~TO ~~table~~CONSOLIDATED ~~summarizes~~FINANCIAL STATEMENTS — ~~option activity and related~~(Continued) ~~information:~~

							Weighted
							Average
							Exercise
		Options			Price Per Share		Price
Balance at June 1, 1997			3,435,382		$	2.04 – 40.49	$	19.03
	Granted		1,127,550			16.20 – 59.00		29.41
	Exercised		(447,793	)		2.04 – 37.86		12.57
	Canceled or expired		(135,832	)		2.04 – 56.50		23.98
Balance at May 31, 1998			3,979,307		$	2.04 – 59.00	$	22.32
	Granted		758,512			8.70 – 16.38		11.64
	Exercised		(186,790	)		2.04 – 15.32		3.26
	Canceled or expired		(737,190	)		2.04 – 56.25		26.23
Balance at May 31, 1999			3,813,839		$	2.04 – 59.00	$	20.71
	Granted		2,213,750			9.44 – 21.50		11.86
	Exercised		(242,214	)		2.04 – 25.18		12.05
	Canceled or expired		(402,292	)		2.04 – 56.25		19.98
Balance at June 3, 2000			5,383,083		$	2.04 – 59.00	$	17.51

(14) Long-term Debt

~~The~~Long-term ~~following~~debt ~~table~~at ~~summarizes~~June 1, ~~information~~2002 ~~about stock options~~and ~~outstanding at~~ June 32, ~~2000~~2001 consists of the following (in thousands):

						Weighted
		2002			2001
			Options			Average				Options
Convertible subordinated notes		$	115,000		$	115,000
			Outstanding			Remaining		Weighted-		Exercisable		Weighted-
Capital lease obligations, interest rates ranging from 4.08% to 9.8%			119			353
			at			Contractual		Average		at		Average
			115,119			115,353
Range of			June 3,			Life		Exercise		June 3,		Exercise
Less current portion			65			229
Exercise Prices			2000			(Years)		Price		2000		Price
	Long term debt, net of current portion	$	115,054		$	115,124
$	2.04 – 5.90			169,626			4.3	$	3.37		169,626	$	3.37
$	5.91 – 11.80			1,245,430			8.9		9.87		193,320		9.87
$	11.81 – 17.70			1,555,049			9.6		12.90		230,410		13.37
$	17.71 – 23.60			1,600,186			6.7		19.68		1,272,748		19.64
$	23.61 – 29.50			55,265			8.1		24.88		30,736		24.81
$	29.51 – 35.40			8,852			7.6		33.93		8,312		34.00
$	35.41 – 41.30			721,957			7.6		37.09		456,934		37.01
$	41.31 – 47.20			7,008			7.6		46.07		1,480		45.67
$	47.21 – 53.10			800			7.3		51.00		320		51.00
$	53.11 – 59.00			18,910			7.0		55.36		8,140		55.25
$	2.04 – 59.00			5,383,083			8.1	$	17.51		2,372,026	$	20.68

The Company ~~applies~~completed a private placement in the first ~~intrinsic~~quarter ~~value-based~~of ~~method~~1998 of $115.0 million Convertible ~~accounting~~Subordinated ~~for~~Notes ~~its~~(Notes) ~~fixed~~due ~~plan~~in ~~stock~~2004 ~~options.~~bearing ~~Accordingly,~~interest noat a ~~compensation~~rate ~~cost~~of ~~has~~6.25%. ~~been~~The ~~recognized~~Notes ~~for~~were ~~the~~subsequently ~~stock~~registered ~~option~~with the Securities and Exchange Commission in 1998. Interest is payable ~~stock~~semi-annually ~~purchase~~in ~~plans~~March and September. ~~Had~~The ~~compensation~~Notes ~~cost~~are ~~for~~subordinated to all existing and future senior indebtedness and are effectively subordinated to all liabilities, including trade payables and lease obligations of the Company and its subsidiaries. The Notes can be converted into the Company’s common stock ~~option~~at ~~and~~a ~~stock~~conversion ~~purchase~~price ~~plans~~of ~~been~~$54.93 per share. The ~~determined~~Notes ~~based~~are onredeemable by the ~~fair~~Company. Debt issuance costs of $3.8 million incurred in connection with the issuance have been included in other assets and are being amortized over seven years.

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

~~SPEEDFAM~~The future maturities of long-~~IPEC,~~term ~~INC.~~debt are as follows (in thousands):

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


Years		Amount

2003		$	65
2004			115,040
2005			14

	Total	$	115,119

~~value~~(15) Commitments ~~at the grant date for awards in 2000, 1999~~ and ~~1998, the~~ ~~Company’s net loss and loss per share would have been~~Contingencies ~~increased to the pro forma amounts indicated below (in thousands~~ ~~except per share data):~~

	2000			1999			1998
Net loss attributable to common stockholders as reported	$	(14,178	)		(139,949	)		(29,640	)
Pro forma net loss attributable to common stockholders		(23,588	)		(148,630	)		(43,681	)
Basic and diluted loss per share as reported		(0.48	)		(4.84	)		(1.08	)
Basic and diluted pro forma loss per share		(0.80	)		(5.14	)		(1.59	)

MEMC Electronics Materials Litigation

~~The~~On ~~pro~~December 20, ~~forma~~1999, ~~net~~MEMC ~~loss~~Electronics Materials, ~~amounts~~Inc. ~~presented~~(“MEMC”) ~~above~~filed doan ~~not~~action ~~reflect~~against ~~the~~IPEC Precision, ~~full~~Inc. ~~impact~~(“IPI”), ofIntegrated ~~calculating~~Process ~~compensation~~Equipment Corp. ~~cost~~(“IPEC”), predecessor in interest to SpeedFam-IPEC Corporation (“SFC”), and SpeedFam-IPEC, Inc. (“SFI”) in the Circuit Court for ~~options~~St. Charles County, State of Missouri. An amended petition was filed on aor ~~fair~~about ~~value~~May 3, ~~basis~~2001. ~~because~~The ~~compensation~~amended ~~cost~~petition isalleged ~~reflected~~causes ~~over~~of action ~~the~~for breach of contract and quantum meruit/unjust ~~options~~enrichment ~~vesting~~arising ~~period~~out of upa tojoint ~~five~~development ~~years,~~agreement between MEMC and ~~compensation~~IPI. ~~cost~~ Plaintiff ~~for~~alleged ~~options~~that ~~granted~~defendants ~~prior~~failed to fulfill ~~June 1,~~their ~~1995~~obligations isrequired ~~not~~by the parties’ joint

Filing Compare · SPEEDFAM IPEC INC