# UNITED STATESSECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

# FORM 10-K

# [ X ] ANNUAL REPORT
PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934

# For the Fiscal Year
Ended September 30, 2006

# OR

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

# For the Transition
Period From ___ to ___

# Commission File Number
0-25424

SEMITOOL, INC.(Exact Name of
Registrant as Specified in Its Charter)

|Montana                                                        |  | 81-0384392                          
|-------------------------------------------------------------- |  | ------------------------------------
|(State or other jurisdiction of
incorporation or organization) |  | (I.R.S. Employer
Identification No.)

Semitool, Inc.655 West Reserve Drive, Kalispell, Montana 59901
(406) 752-2107(Address, including zip code, and telephone number, including
area code, of registrants principal executive offices)

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

Securities registered pursuant to
Section 12(g) of the Act: Common Stock, no par value

Indicate by check mark if the
registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
   Yes [   ]   No [ X ]

Indicate by check mark if the
registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.
   Yes [   ]   No [ X ]

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

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.  [   ]

Indicate by check mark whether the
registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.
See definition of accelerated filer and large accelerated filer in Rule 12b-2
of the Exchange Act. (Check one):

|                               |                          |                             
|------------------------------ | ------------------------ | ----------------------------
|Large accelerated filer  [   ] | Accelerated filer  [ X ] | Non-accelerated filer  [   ]

Indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   Yes [   ]
   No [ X ]

The approximate aggregate market value
of the voting stock held by non-affiliates of the registrant on March 31, 2006 (based on
the last reported sale price on the Nasdaq Global Market as of such date) was
$250,595,801.

The number of shares of the
registrants Common Stock, no par value, outstanding as of December 1, 2006 was
31,973,917.

# DOCUMENTS INCORPORATED
BY REFERENCE

There is incorporated by reference in
Part III of this Annual Report on Form 10-K the information contained in the
registrants definitive proxy statement for its annual meeting of shareholders to be
held March 9, 2007.

---

# SEMITOOL, INC.

# Index to Annual Report
on Form 10-KYear Ended September 30, 2006

PART I

|                                                                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                     
|---------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------
|ITEM 1. 
        
        
ITEM 1A.
ITEM 1B.
ITEM 2. 
        
ITEM 3. 
        
ITEM 4. | INTRODUCTION  FORWARD-LOOKING STATEMENTS     BUSINESS                                           
                                                   EXECUTIVE OFFICERS OF THE REGISTRANT               RISK FACTORS                                       UNRESOLVED STAFF COMMENTS                          PROPERTIES                                         
                                                   LEGAL PROCEEDINGS                                  
                                                   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS | PAGE 3
 4
  
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PART II

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|ITEM 5. 
        
        
ITEM 6. 
        
ITEM 7. 
        ITEM 7A.
        
ITEM 8. 
        
ITEM 9. 
        ITEM 9A.
        
ITEM 9B. | MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND   ISSUER PURCHASES OF
EQUITY SECURITIES                                                                     
                                                                                          SELECTED FINANCIAL DATA                                                                   
                                                                                          MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF  OPERATIONS     
                                                                                          QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                                
                                                                                          FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA                                               
                                                                                          CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL  DISCLOSURE      
                                                                                          CONTROLS AND PROCEDURES                                                                   
                                                                                          OTHER INFORMATION | 20
  
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  56
  
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PART III

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|------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------
|ITEM 10.
        
ITEM 11.
        
ITEM 12.ITEM 13.
ITEM 14. | DIRECTORS AND EXECUTIVE OFFICERS                                                              
                                                                                              EXECUTIVE COMPENSATION                                                                        
                                                                                              SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED  SHAREHOLDER MATTERSCERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS                                                PRINCIPAL ACCOUNTING FEES AND SERVICES | 57
  
57
  57
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57

PART IV

|         |                                                      |      
|-------- | ---------------------------------------------------- | -----
|ITEM 15. | EXHIBITS AND FINANCIAL STATEMENT SCHEDULESSIGNATURES | 58
60

2

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# PART I

Introduction 
Forward-Looking Statements

Statements
contained in this Annual Report on Form 10-K which are not purely historical facts are
forward-looking statements within the meaning of Section 27A of the Securities Act of
1933, as amended, and Section 21E of the Securities Exchange Act of 1934.  These
forward-looking statements are based on management's estimates, projections and
assumptions that underlie such statements at the time they are made.  Forward-looking
statements in the discussion of our business, properties and legal matters include,
without limitation, statements regarding:

- trends in the semiconductor industry that are driving growth for our products, including the adoption of
     copper as an interconnect material, spray processing supplanting immersion technologies and the continued
     expansion of the wafer level packaging market,
- Semitool's solutions and strategies for electrochemical deposition, wafer surface preparation and wafer level
     packaging, including our intent to continue investing in research and development to maintain and expand our
     position as a technology leader in those markets,
- our plan to develop new technologies, including porous silicon, 3D packaging and wafer thinning, to enable us
     to enter emerging markets and provide innovative solutions,
- our plan to leverage our Raider platform with both our current and potential new customers and in new markets,
- our plan to enhance our relationships with our major customers and identify opportunities to develop similar
     relationships with other semiconductor device manufacturers,
- our intent to expand our sales and support organization to broaden customer reach, particularly in Asia, and
     the potential for growth in those markets,
- our anticipation of continued strong sales in the Asian market in fiscal 2007,
- the performance and acceptance of our products, including the continued technological improvement of our tools
     and the success of our Raider platform,
- manufacturing strategy, including our vertical manufacturing structure and manufacturing strategies for
     increasing performance reliability and yields while reducing the cost of ownership of our tools,
- competition, including our ability to compete favorably with companies significantly larger than we are,
- our efforts to protect our intellectual property portfolio and intent to continue to file patent applications
     to protect that intellectual property,
- the adequacy of our existing manufacturing facilities,
- the ability to maintain our worldwide sales, service and customer support organizations, and
- the impact of litigation on our business, including patent disputes.

Other
forward-looking statements made below under the heading Managements Discussion
and Analysis of Financial Condition and Results of Operations and elsewhere include
statements relating to:

- accounting policies and estimates and the effects of new accounting standards,
- research and development expenses, including expected fluctuations in such expenses in absolute dollar amounts
     and as a percentage of net sales, and our expectation of continued funding of research and development to
     attain technology leadership in our industry,
- the expected geographic sales mix of our products, including our anticipation of strong sales in Asia in
     fiscal 2007,
- the expectation that our transition to a direct sales and service presence in Asia will improve our
     profitability,
- estimates of capital expenditures and the sufficiency of funds and sources of financing to make expected
     capital expenditures through fiscal 2007,
- the impact of various factors on gross margin,
- inventory management,
- the sufficiency of funds and the ability to finance activities, including sources of liquidity,
- our expectation that existing debt financing arrangements and cash flows generated from operating activities
     will be sufficient to fund operations at current and projected levels, and
- our expectation that, if additional financial resources are required, we will have the ability to issue
     securities from our shelf registration statement, issue other financial instruments or borrow money.

Management
cautions that forward-looking statements are subject to risks and uncertainties that could
cause our actual results to differ materially from those projected in such forward-looking
statements. These risks and uncertainties are detailed under the heading Risk
Factors and elsewhere in this Annual Report on Form 10-K. We undertake no obligation
to update forward-looking statements to reflect subsequent events, changed circumstances,
or the occurrence of unanticipated events.

3

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# Item 1.  Business

# Overview

We
design, manufacture, install and service highly-sophisticated equipment for use in the
fabrication of semiconductor devices. Our products are focused on the wet chemical process
steps in integrated circuit, or IC, manufacturing and include systems for wafer surface
preparation and electrochemical deposition, or ECD, applications. Our surface preparation
systems are designed for wet cleaning, stripping and etching processes, including
photoresist and polymer removal and metal etching. Our ECD systems are used to plate
copper and other metals, which are used for the ICs internal wiring, or
interconnects; to plate solder and lead free solder bumps for wafer level packaging
applications; and to plate other metals for various semiconductor and related
applications. Our products address critical applications within the semiconductor
manufacturing process, and help enable our customers to manufacture more advanced
semiconductor devices that feature higher levels of performance. The fabrication of
semiconductor devices typically requires several hundred manufacturing steps, with the
number of steps continuing to increase for advanced devices. Due to the breadth of our
product portfolio and advanced technology capabilities, our solutions address over 150 of
these manufacturing steps.

Semitool,
Inc., a Montana corporation, was founded in 1979 and is headquartered in Kalispell,
Montana. Our mailing address is 655 West Reserve Drive, Kalispell, MT 59901 and our
telephone number is 406-752-2107. Additional information about the Company is available on
our Web site at http://www.semitool.com. On our Investor Relations page on our Web site,
we post the following filings as soon as practicable after they are electronically filed
with or furnished to the Securities and Exchange Commission: our annual report on Form
10-K, our quarterly reports on Form 10-Q, our current reports on Form 8-K and any
amendments to those reports filed or furnished pursuant to Sections 13(a) or 15(d) of the
Securities Exchange Act of 1934. All such filings on our own Investor Relations web page
are available to be viewed free of charge. Information contained on our Web site is not
part of this annual report on Form 10-K or our other filings with the Securities and
Exchange Commission. Our Form 10-K and other filings also are available at the Securities
and Exchange Commissions Web site at http://www.sec.gov.

# Industry Background

Growth
in the semiconductor industry is driven by the global demand for semiconductor devices
that are incorporated in a broad array of electronics devices such as personal computers,
network servers, digital televisions, audio systems including MP3 players, personal
digital assistants, cellular phones, GPS devices and other wireless communications
devices. The market for semiconductor equipment used to fabricate semiconductor devices
has also experienced significant growth, driven by greater demand for, and increasingly
higher performance of, semiconductor devices. Though subject to a high degree of
cyclicality due to periods of excess supply or demand for semiconductor equipment,
semiconductor devices and semiconductor fab capacity utilization, the market for
semiconductor equipment is characterized by rapid technological development and product
innovation. As a result, to meet new technological advancements, semiconductor device
manufacturers may purchase new semiconductor equipment despite the timing of the market
cycle.

Semiconductor
Manufacturing Process Overview

Semiconductor
devices consist of millions of microscopic transistors and other components that
electronically store information and allow the execution of instructions used to operate
electronic devices. Fabrication of ICs involves hundreds of complex and repetitive process
steps, involving an array of sophisticated manufacturing equipment, chemical media, and
materials. The fabrication process includes, among others, the deposition of multiple
layers of dielectric or insulating films and electrically conducting metal films. After
the deposition of each film layer, the fabrication process continues with repeated
cleaning, stripping and etching processes to prepare the surface for the next process.
When completed, the wafer may contain several hundred ICs, which are traditionally then
separated by a dicing process. The ICs are then packaged by connecting them to pins using
metal wires or contacts and encapsulating the ICs in a polymer. In an effort to reduce the
size of packaged ICs, some manufacturers are using newer packaging processes such as wafer
level packaging, which allows for packaging of ICs before they are singularized.
The packaged semiconductor devices can then be placed into an electronic product,
such as a cellular phone or other portable electronic device.

Cleaning,
stripping, etching or otherwise preparing the wafer surface are steps repeated throughout
the semiconductor fabrication process as well as in the wafer level packaging process.
These processes are important, since the integrity of the next process depends on the
effectiveness of prior cleaning, stripping, or etching steps. Immersion and spray are two
fundamental means by which surface preparation wet process steps are performed. Immersion
processes, or wet benches, are a series of liquid-filled tanks in which wafers are
immersed. The wafers are transported from one tank to another tank by robots or human
operators. Spray delivery systems subject wafers to sequential spray applications of
chemicals inside an enclosed process chamber, where the chemical is brought to the wafers
while the wafers rotate on axis. Spray systems can be configured to process wafers in a
batch or single-wafer mode. Single-wafer processor systems can provide a combination of
spray and immersion processes.

4

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An
ICs interconnect wiring establishes the connections between transistors within an
IC to external devices. Interconnects are formed by the deposition of metal film layers,
such as copper, on the surface of a wafer. The deposition step occurs numerous times
throughout the manufacturing process, with advanced ICs possessing seven or more metal
film layers. As device dimensions continue to shrink, the connections between transistors
add noticeably more delay to IC processing speeds, due to the intrinsic resistance and
capacitance of the interconnect material. Copper is the material of choice in such
situations and practically all 300mm fabs use copper plating equipment. However, copper,
unlike aluminum, is difficult to handle due to a negative reaction in direct contact with
silicon, which leads to lower yield and potentially contaminates other manufacturing
processes. As a result, copper-based manufacturing requires more critical surface
preparation steps and special processing techniques to provide complete isolation of the
copper material.

Trends in Semiconductor
Manufacturing

There
are several key trends in the semiconductor manufacturing industry driving growth in
demand for wafer surface preparation, ECD and other advanced semiconductor equipment:

Smaller
Device Features for Lower Cost and Higher Performance. Semiconductor device size has
followed Moores Law which states that on average every 18 months a device doubles in
power and shrinks 50%. The continuing trend towards more advanced electronics applications
has spurred the industrys transition to smaller device features, enabling lower cost
per IC, as more ICs can be fabricated on each wafer. Additionally, smaller device features
operate at higher speeds and require less power. As the industry moves to 65 nanometer
feature sizes and below, the IC fabrication process becomes significantly more complex,
requiring more stringent manufacturing specifications and lower acceptable margins of
error. In particular, the fabrication process becomes more susceptible to ever smaller
particles, requiring the use of more advanced surface preparation equipment. Also,
manufacturing smaller IC interconnects often requires the use of equipment specifically
designed for copper processing.

New
Materials to Fabricate More Advanced Semiconductor Devices. The need to fabricate
increasingly advanced semiconductor devices has led to more complex manufacturing
processes that use new materials, such as low-k dielectrics and copper to form an
ICs interconnect. The use of copper, in particular, presents significant processing
challenges to prevent copper contamination measured in quantities at the atomic level. To
address these challenges, dedicated processes have been developed to provide better
isolation of copper materials on an IC, including dual-damascene, barrier layer formation,
and new cleaning processes to remove unwanted copper. These complex, dedicated processes
require the use of equipment for the precise deposition of copper material. Additionally,
the introduction of new materials requires a higher number of surface preparation steps,
as well as more advanced cleaning processes that are tailored to handle these new
materials.

Increased
Use of 300mm Wafers to Reduce Manufacturing Costs.Leading semiconductor device
manufacturers are investing in 300mm wafer fabs. The 125% more surface area of 300mm
compared to 200mm wafers has led to higher manufacturing efficiency and lower cost per IC
due to the economies of scale that IC manufacturers achieve by processing additional die
per wafer. Processing a larger surface area requires an additional level of control and
precision, which necessitates the purchase of semiconductor equipment that is specifically
targeted for the processing of 300mm wafers.

Move
to Single-Wafer Spray and Immersion Processing Technologies for Enhanced Surface
Preparation.The industry shift towards smaller device dimensions, new materials and
300mm wafer processing has driven the need for more advanced surface preparation
technologies and process equipment. In particular, 300mm is causing a move to single-wafer
processing as the process can be controlled more precisely compared to wet bench
technology. For example, single-wafer spray processing is increasingly being used instead
of wet benches due to its greater process control, reduced footprint and reduced chemical
consumption.

Wafer
Level and Other Advanced Packaging Enable Smaller Portable Products.New packaging
technologies, including wafer level packaging, are being developed by the industry to
enable smaller portable products such as GPSs, MP3 players, mobile phones and radio
frequency identification, or RFID, tags. Advanced packaging is an enabling technology for
the semiconductor industry, as it allows the integration of more computing and information
processing power in a smaller space than conventional packaging technology. Advanced
packaging uses fabrication processes similar to IC fabrication and includes, among others,
ECD for connective solder or gold bumps, photoresist stripping and under-bump metal
etching.

Emerging
Need for Thinner Wafers Driven by the Demand for Smaller Portable Devices. The desire
for smaller, lighter and more power efficient devices has led to the need for thinning the
device prior to packaging. Another emerging trend is 3-D device stacking for more
functionality in a smaller space. This process is also enhanced by first thinning the
device. The main problem with wafer thinning is yield loss due to stress caused by
mechanically grinding the wafer surface. This process is also labor intensive. Chemically
milling the wafer, which can be automated, has emerged as a method to achieve stress-free
thin wafers.

5

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# Semitools Solution

We
are a leading provider of wet chemical processing equipment, targeting wafer surface
preparation and ECD plating applications. As the semiconductor manufacturing process
increases in complexity and production parameters become even more stringent,
semiconductor manufacturers increasingly rely upon manufacturers of semiconductor
equipment to achieve improved process control, provide a smaller equipment footprint and
lower the cost of ownership of their manufacturing processes. Our solutions address
critical applications within the semiconductor manufacturing process, and enable our
customers to manufacture more advanced semiconductor devices that feature higher levels of
performance. Key elements of our solution include:

Technology
Leadership. We are able to leverage our extensive expertise in wet chemical processing
and over 27 years of experience building and supporting production-proven semiconductor
manufacturing equipment. We utilize our advanced modeling techniques in the design of our
reactors to address an increasingly complex manufacturing process. We have a strong
intellectual property portfolio with 322 U.S. patents issued and approximately 193 U.S.
patents pending.

Comprehensive
Product Portfolio.We provide a broad suite of advanced, highly-sophisticated,
innovative processing systems that include surface preparation and ECD equipment. Our
batch and single-wafer processing systems for wet cleaning, stripping and etching feature
our proprietary spray and immersion technologies, as well as our unique, proprietary
process chamber designs. We use advanced computational techniques to design a variety of
applications, including plating chambers, and our proprietary Capsule technology for
back-side and bevel-edge cleaning of copper contamination.

Raider
Platform.Our Raider platform is a high-precision, multi-chamber, single-wafer
platform that supports surface preparation and ECD applications. Our proprietary platform
is configured in a linear design, coupled with our own robotic technology, allowing for up
to 12 interchangeable discrete process chambers. The Raider platform also features
no-teach robot technology which results in reduced installation and maintenance costs.

Vertically-Integrated
Manufacturing and Design Capabilities. Our manufacturing operations are selectively
vertically-integrated to include metals and plastics fabrication and finishing
capabilities, component manufacturing and final product test and assembly and extensive
product development capabilities. Our facilities feature high-volume manufacturing lines
that provide short lead time delivery of our products. In addition, we perform product
development and prototyping internally. This strategy reduces our products time to
market and helps lower our design and manufacturing costs.

# Strategy

Our
objective is to be the leading worldwide provider of wet chemical processing equipment,
targeting wafer surface preparation and ECD applications. To achieve this goal, we are
pursuing the following strategies:

Target
Innovative, High-Margin, High-Growth Opportunities with Differentiated Products. Our
strategy is to be the first to enter new, high-growth markets with differentiated
products. This has provided us with early market and technology leadership and enabled us
to achieve strong gross margins. For example, we were among the first to target the
rapidly-growing wafer level packaging and ECD markets.

Maintain
and Expand Technology Leadership. We intend to continue investing in research and
development to maintain and expand our position as a technology leader in surface
preparation and ECD. Our goal is to deliver leading-edge technical innovation to our
customers by focusing on performance, improved system reliability, yield enhancement and a
low cost of ownership. We plan to develop new technologies, such as porous silicon, to
enable us to enter emerging markets and provide innovative solutions to meet customer
needs.

Leverage
our Raider Platform to Further Penetrate New Customer and Market Opportunities.Our
Raider platform features proprietary surface preparation, ECD, and wafer handling
technologies. We continue to enhance the capabilities of our Raider platform and thus
broaden its customer appeal by expanding its portfolio of wet chemical processing
capabilities. We plan to leverage our Raider platform with both our current and potential
new customers, in our existing markets, as well as in new markets.

Integrate
Design and Manufacturing Expertise. Our strategy is one of close integration of design
and manufacturing, coupled with selective vertical manufacturing to achieve innovative
solutions, cost and quality advantages and to reduce the time to market for new products
and product enhancements. We believe that the close coordination of our engineering and
manufacturing teams provides us with an advantage in developing new products as well as
improving the design of our current products to increase performance reliability and
manufacturing yields while reducing costs. Additionally, our control over selective
critical components reduces our dependence on component suppliers.

6

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Leverage
Strategic Relationships. For over 27 years, we have focused on satisfying the needs of
worldwide semiconductor device manufacturers and establishing long-term relationships with
our customers. We work with select customers at the concept and design stages to identify
and respond to their requests for current and future generations of products. These close
working relationships allow us to understand and address the performance and cost
expectations of our customers. We plan to enhance our relationships with our major
customers and identify opportunities to develop similar relationships with additional
semiconductor device manufacturers.

Expand
Our Asian Market Presence.During the past several years we have expanded our presence
in Asia, and revenue from Asia now comprises a significant percentage of our total net
sales. We currently have sales organizations in Singapore, Japan, Taiwan, Korea, and
China, and we intend to continue to expand our sales and applications support organization
to broaden our customer reach. We believe that the Asia region, in particular Taiwan and
China, has the potential for additional significant long-term growth. Our sales, marketing
and service strategy is to expand our installed base of equipment with existing and
potential new customers in these regions.

# Technology

We
are a leader in the design, development and manufacturing of advanced, wet chemical
processing equipment. We leverage our years of experience in designing and manufacturing
production-proven semiconductor manufacturing equipment to deliver solutions that enable
the fabrication of increasingly higher performance semiconductor devices. We have several
key technological core competencies, including advanced computational modeling, and have
assembled a development team with extensive engineering and modeling expertise to
capitalize on these competencies.

Our
surface preparation systems incorporate our innovative cleaning technology, such as our
new megasonic cleaning chamber and our new precision etch chamber. Through the use of its
enclosed architecture, our processing chambers are able to process a wafer in a more
effective and comprehensive fashion. For example, for cleaning applications, our solutions
are able to more effectively clean all aspects of the wafer, including the top, bottom and
wafer edge using our bevel-edge cleaning capability. In addition, our closed chamber
architecture is able to more efficiently retain evaporable components, thus reducing
chemical consumption leading to significant cost savings.

For
electroplating applications, we leverage our advanced techniques in the design of our
proprietary copper pellet anode assemblies and membrane technology to provide low cost
copper to the flash and memory markets. Our multiple anode assemblies enable radially
controlled current density during the electroplating process, leading to a more
controllable process for depositing copper film on the surface of a wafer allowing the
optimal match of the copper film to the planning characteristics of the downstream CMP
process step.

# Products

Our
broad product suite of highly-sophisticated, innovative processing systems leverages our
core wet chemical processing expertise and our years of experience in manufacturing and
supporting production-proven semiconductor manufacturing equipment. Our primary wet
chemical processing solutions are single-wafer and batch cleaning, stripping and etching
equipment and single-wafer plating equipment, primarily for the deposition of copper, lead
or lead-free solder.

# Surface Preparation
Products

Our
multi-chamber, single-wafer processing systems for wet cleaning, stripping and etching are
designed with a linear arrangement of the processing chambers for high volume production
and, like our ECD chambers, utilize the Raider platform. The platform modularity reduces
downtime and increases wafer throughput providing the customer with an overall lower cost
of ownership. These systems are available to accommodate 200mm and 300mm wafer sizes.
During the year, we shipped Raider SP units with our Nano-Megs technology, which allows
the use of a megasonic device to clean the wafer surface without damage to the nano-sized
features of the ICs. We also shipped single-wafer tools capable of providing our HydrOzone
process for more cost effective cleans of the wafer surface. Selling prices for these
systems range from $700,000 to $3.0 million.

Our
batch systems for wet cleaning, stripping and etching applications include semi- and
fully-automated systems and use our proprietary spray technology to deliver the chemicals,
deionized water and gases to the wafer surface in an enclosed chamber. The wafers are
rotated, on axis, and showered by a sequenced spray of chemicals and heated nitrogen gas
to process and dry the wafers. This technology enables precise and uniform application of
process chemicals and enhances process reliability and cost effectiveness through reduced
particle contamination and process cycle time. Our cost-effective ozone and deionized
water-based cleaning process, called HydrOzone, is available on selected systems. This
environmentally friendly process can replace traditional processes using sulfuric acid and
other hazardous chemicals resulting in lower costs, reduced process cycle time, reduced
water consumption, and minimize chemical waste costs. These systems are available to
accommodate 150mm, 200mm and 300mm wafer sizes in up to 50 wafer batches. Selling prices
for these systems range from under $15,000 to $2.7 million.

7

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# RAIDER SP

Our
Raider platform is a high-precision, multi-chamber, single-wafer platform that supports
surface preparation applications. Our proprietary platform is configured in a linear
design, coupled with our robotic technology, allowing for up to 12 interchangeable
discrete process chambers. The Raider platform also features Nano-Megs cleaning
capability, combined with the ability to use the single-wafer version of our HydrOzone or
FluorOzone processes. The flexibility of its linear design makes it one of the most
versatile wet cleaning, stripping and etching platforms in the industry. The tool can be
equipped with our proprietary Capsule II chamber, which allows side-selectable processing.
In addition, the system can also be equipped with spray, immersion, megasonic, or vapor
process chambers. Applications include wafer backside, bevel-edge clean for removal of
unwanted copper and other contamination, post-etch polymer removal, critical
pre-deposition cleans, metal etching and Front End Of Line (FEOL) cleans. The Raider SP is
available to accommodate 200mm and 300mm wafer sizes.

# SPECTRUM

The
Spectrum is an advanced automated batch processing system for cleaning, stripping and
etching applications. Its compact modular design features high throughput, flexible
process formats and precise control for low cost of ownership. In addition to our
proprietary spray processing modules, the Spectrum can be equipped with immersion and
surface tension gradient dry capabilities. It can be configured to use either corrosives,
solvents or our proprietary HydrOzone-based processes for polymer removal, photoresist
strip and critical cleaning applications. The Spectrum is available to accommodate both
200mm and 300mm wafer sizes.

# Spray Acid Tool (SAT),
Spray Solvent Tool (SST), Spin Rinser/Dryer (SRD), SCEPTER

The
SAT and SST are manually loaded semi-automated systems for performing sequential
processing of 25 wafers per spray process chamber. They are designed for wafer
processing using high purity acidic, alkaline and solvent based chemistries to achieve a
wide array of cleaning, stripping and etching applications. These systems can be equipped
with up to three 200mm process chambers and are ideal for medium to low production volumes
and research and development activity. The SRD is a high efficiency cleaning system
utilizing deionized water to remove water-soluble contaminants, chemical residue and
particulate matter. It is available to accommodate wafer sizes up to 300mm in diameter.
The Scepter series is an advancement of these semi-automated products that offers double
the productivity of the 25 wafer capacity tools by processing 50 wafers at a time in
nearly the same system footprint. The Scepter can process wafer sizes up to 200mm in
diameter.

# Electrochemical
Deposition Systems

Our
single-wafer ECD systems incorporate proprietary electroplating technology on a
multi-chamber platform that processes one wafer per chamber. ECD applications include
copper interconnect for logic and memory ICs, gold bumps for high speed communication ICs,
lead and lead-free solder bumps for advanced wafer level packaging and deep via plating
for 3-D chip stacking applications. Our leading single-wafer design is modular, with
process chambers arranged in a linear orientation, providing flexibility in system
configuration. These systems generally include a combination of ECD and surface
preparation process chambers to address a customers specific application. These
systems are available to accommodate wafer diameters from 100mm to 300mm and can be scaled
for customers capacity requirements. Selling prices of these systems typically range
from approximately $700,000 to $4.7 million.

# RAIDER ECD

The
Raider ECD is an automated multi-chamber, single-wafer processor for high volume ECD. The
specific configuration of its multiple processing chambers determines which semiconductor
IC and advanced packaging markets the Raider ECD serves. For copper interconnect, several
process steps can be integrated onto a single system such as ECD seed layer enhancement,
ECD plating fill, wafer backside clean, bevel-edge clean, film thickness metrology and
rapid thermal anneal. Our proprietary concentric anode chamber design, coupled with our
model-based plating controller, allows the user to optimize plating profiles for
downstream operations such as better matching of film characteristics to planarization
(CMP) equipment, resulting in CMP improvements and reduced CMP rework loads. Our
proprietary Capsule cleaning chamber, which is also used in our Raider SP, is integrated
into the tool for bevel-edge and backside copper cleaning to eliminate copper
contamination. The modularity of the platform provides our customers with the flexibility
to configure the chamber mix to meet their specific needs. Additionally, our Advanced
Chemical Management System, or ACMS, an automated electroplating bath control unit, can be
fully integrated with the Raider ECD systems. The ACMS maintains the desired chemical
balance in the plating baths by automatically analyzing and replenishing the chemical
constituents using our proprietary technology and typically services two ECD systems. The
primary applications for the Raider ECD are copper, gold, nickel, platinum and solder
depositions. It is available to accommodate 200mm and 300mm wafer sizes.

8

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# Customers, Sales and
Marketing

Our
customers include leading global semiconductor manufacturers. The following is a
representative list of our largest customers in fiscal 2006:

|                                                                                                                                                                |                                                                                                                                                                   |                                                                                                                              
|--------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------- | -----------------------------------------------------------------------------------------------------------------------------
|Advanced Micro Devices
Amkor                 
Anadigics             
Atmel                 
Casio                 
Cree                  
Cypress Semiconductor | Freescale Semiconductor
Hitachi               
Infineon              
Intel                 
Magic Technologies    
Micron/IM Flash/Tech  
National Semiconductor | Nepes
Qimonda
Semiconductor Mfg. Intl. Corp
Spansion
STMicroelectronics
Texas Instruments
United Microelectronics Corporation

Our
top ten customers accounted for 54.0%, 58.2% and 56.9% of net sales in fiscal 2006, 2005
and 2004, respectively. Advanced Micro Devices accounted for 13.8% and 16.7% of net sales
in fiscal 2006 and fiscal 2005, respectively. No customer accounted for over 10% of net
sales in fiscal 2004.

International
sales, primarily in Europe, Asia and Japan, accounted for approximately 62.5%, 72.7 % and
51.8% of net sales for fiscal 2006, 2005 and 2004, respectively. The relative proportion
of international sales to total net sales increased in fiscal 2005 primarily due to
increasing shipments of our Raider systems to Asia after declining in fiscal 2004 because
initial shipments of the Raider systems, and our licensing fees, were in North America. We
have direct sales and customer support organizations located in the United States, Europe,
Japan, Singapore, Korea, Taiwan and China, and for some products, we utilize on a
selective basis both independent representatives and distributors. We are currently
expanding our direct sales and service organizations in Taiwan and China.

Field
service personnel and process engineers located in the United States, Europe, Japan and
Asia provide warranty service, post-warranty service and equipment installation. We also
provide service and maintenance training, as well as process application training for our
customers personnel, on a fee basis. Spare parts inventories are maintained in
outsourced locations throughout the world, which allows us to offer same day or overnight
delivery in many instances.

# Backlog and Deferred
Revenue

Consolidated
orders backlog was $85.3 million as of September 30, 2006. We include in backlog those
customer orders for which we have written customer authorization and for which shipment is
scheduled within the next 12 months. Orders are subject to cancellation or rescheduling by
customers with limited or no cancellation fees. During periods of downturns in the
semiconductor industry, we have experienced significant cancellations and delays.

Our
deferred revenue primarily relates to equipment shipped to customers that has not been
accepted by the customer. Revenue on those shipments is recognized as sales when
acceptance is received. As of September 30, 2006, deferred revenue was $14.4 million.

As
a result of systems ordered and shipped in the same quarter, possible changes in customer
delivery dates, cancellations and shipment delays, and acceptances of shipped equipment
carried in deferred revenue, the backlog at any particular date and the orders bookings
for any particular period are not necessarily indicative of actual revenue for any
succeeding period.

# Manufacturing

Most
of our manufacturing is conducted at our facilities located near Kalispell, Montana. Our
manufacturing operations are selectively vertically integrated to include metals and
plastics fabrication and finishing capabilities, component parts and final product
assembly, and extensive product development capabilities. Manufacturing personnel work
closely with product development engineers to enhance manufacturability and facilitate the
transition from prototype to full-scale production. Our high-volume manufacturing lines
provide responsive lead time delivery of our products. Component and product prototyping
typically is performed internally, reducing the time to market for new products and
product enhancements. During the year we increased our manufacturing ability with the
purchase of a 72,000 square foot facility near Kalispell. This building contains our
fabrication departments and provides more space for the assembly area in our main
facility. We also completed our facility in Salzburg, Austria which has space for light
manufacturing and a repair facility.

# Research and Development

We
believe that timely development of products is necessary to remain competitive in an
equipment market characterized by rapid technological change and product innovation. We
devote significant resources to programs directed at developing new and enhanced products,
as well as new applications for existing products. We maintain extensive demonstration and
process development laboratories at our facilities in Montana, including three lab areas
for demonstrating, testing and developing products. Research and development personnel
work directly with customers, vendors, and research institutes to develop new processes
and to design and evaluate new equipment.

9

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Research
and development, which is expensed as incurred, was approximately $24.5 million, $19.7
million and $15.1 million in fiscal 2006, 2005 and 2004, respectively. As a percentage of
our net sales, these expenses represented approximately 10.1%, 10.4% and 10.8% in each of
these fiscal years, respectively. Our research and development efforts were focused on the
following projects which include FEOL cleaning applications, edge cleaning processes and
equipment and integrated megasonic cleans. ECD R&D focused on the development of
proprietary processes and power supply hardware to provide arbitrary wave form and dynamic
current control for damascene plating, direct-on-barrier and thin seed layer processes,
porous silicon processes and equipment and deep via applications. R&D projects also
included mini-batch vacuum furnace/anneal and Thru Silicon Via (TSV) plating required for
three dimensional chip stacking. During fiscal 2006, we and other semiconductor equipment
companies and research institutes formed a consortium called EMC 3D, whose mission is to
develop the processes and equipment needed for TSV technology.

# Competition

The
semiconductor equipment industry is an intensively competitive market place marked by
constant technological change. Significant competitive factors in the semiconductor
equipment and related markets in which we compete include: system performance, quality and
reliability, cost of using our equipment, ability to ship products to meet customer
schedules, timeliness and quality of technical support service, our success in developing
new and enhanced products, pricing and payment terms. We face substantial competition from
established companies, some of which have greater financial, marketing, technical and
other resources, broader and integrated product lines, more extensive customer support
capabilities, larger sales organizations and greater installed customer bases. Our primary
competitors in ECD include Applied Materials, Inc. and Novellus Systems, Inc.

In
wet surface preparation applications, our competition includes Dainippon Screen
Manufacturing Co., FSI International, Inc., SEZ Holding, AG and Tokyo Electron, Ltd.

We
believe that we compete favorably with these manufacturers. We may also face competition
from new market entrants.

# Patents and Other
Intellectual Property

The
semiconductor industry in general is very active in pursuing patent applications for both
equipment and processes used in the manufacture of semiconductor devices. Patents are
considered important to the protection of intellectual property resulting from a
companys research and development programs and are viewed as a means of gaining
market advantages over competitors because the industry often differentiates competitors
on the basis of technological criteria.

We
place a strong emphasis on the innovative features of our products and, where available,
we generally seek patent protection for those features. We currently hold 322 U.S.
patents, some with pending foreign counterparts, have approximately 193 U.S. patent
applications pending and intend to file additional patent applications, as we deem
appropriate. We have had an active patent program since the Companys inception;
consequently, the duration of our patent portfolio is staggered due to various initial
filing dates for individual patents. Our patent portfolio is not dominated by any
particular patents. We consider the strength of the overall portfolio to be more important
than the strength of any particular patent. In fact, many patents are part of our
patent families and it is difficult, if not impossible, to make any assessment
regarding the materiality of one patent in that family over another. Even if a
patent is not used offensively to prevent a competitor from practicing the same art, it
may still provide a deterrent against a competitors potential patent infringement
claim against us.

# Employees

As
of September 30, 2006, we had 1,312 full-time and temporary employees worldwide. Our
employees are not represented by a labor union, and we have never experienced a work
stoppage or strike. We consider our employee relations to be good.

# Environmental Matters

We
are subject to a variety of governmental regulations related to the discharge or disposal
of toxic, volatile or otherwise hazardous waste. Our compliance with federal, state and
local provisions regulating the discharge of materials into the environment, and the
remedial actions we have taken with respect to environmental regulations, have not had,
and are not expected to have, a material effect on our business, financial condition,
results of operations and cash flows.

10

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# Executive Officers of the
Registrant

The
following table sets forth certain information with respect to the executive officers of
the Company:

|Name                                                                                                            | Age                | Position                                                                                                                                                                              
|--------------------------------------------------------------------------------------------------------------- | ------------------ | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Raymon F. Thompson (1)
Larry E. Murphy (2)   
Timothy C. Dodkin (3) 
Larry A. Viano (4)    
James L. Wright (5) | 65
 47
 57
 52
 43 | Chairman of the Board and Chief Executive Officer
President and Chief Operating Officer
Executive Vice President
Vice President, Chief Financial Officer
Vice President, Manufacturing

---

(1)Raymon F. Thompson founded Semitool in 1979 and serves as our Chairman and
          Chief Executive Officer. In 1979, Mr. Thompson designed, patented and introduced
          the first on-axis spin rinser/dryer for the semiconductor industry.

(2)    
          Larry E. Murphyjoined us in May 2004 as our Chief Operating Officer and
          has served as our President since April 2005. Prior to joining us, Mr. Murphy
          worked for 15 years at Tosoh SMD, Inc., a U.S. subsidiary of Tosoh Corporation
          headquartered in Tokyo, Japan. Mr. Murphy was Tosoh SMDs President and
          Chief Executive Officer, as well as Chairman of their Taiwanese, Korean and
          Singapore subsidiaries. Previously at Tosoh SMD, he held several executive
          positions, including Chief Operating Officer, Vice President of Sales and
          Marketing and Global Sales Manager.

(3)Timothy C. Dodkinhas been employed by us since 1985 and has served on our
          Board of Directors since 1998. Mr. Dodkin has held a number of sales-related
          positions including Senior Vice President, Global Sales and Marketing and, since
          June 2003, has served as Executive Vice President. Prior to joining us, Mr.
          Dodkin worked at Cambridge Instruments, a semiconductor equipment manufacturer,
          for ten years in national and international sales.

(4)Larry A. Viano joined us in 1985 and has held various positions with the
          Company since then. Mr. Viano has served as our Vice President, Chief Financial
          Officer since May 2003. He also serves as our Principal Accounting Officer. He
          is a Certified Public Accountant.

(5)    
          James L. Wright joined us in 2003 as our Director of Operations and has
          served as our Vice President of Manufacturing since March 2006. Prior to joining
          us, Mr. Wright worked for eight years at Applied Materials as a Senior
          Operations Manager for the Copper, PVD and Systems Division.

The executive officers are elected
each year by the Board of Directors to serve for a one-year term of office.

# Item 1A.  Risk Factors

Set forth below are risks and
uncertainties that could negatively impact our business, financial condition, results of
operations and cash flows, and could cause actual results to differ materially from the
results contemplated by the forward-looking statements contained in this Annual Report on
Form 10-K. These risks and uncertainties could also cause our stock price to decline.

We have incurred significant net
losses in the past, our future revenues are inherently unpredictable, and we may be unable
to maintain profitability.

We have incurred significant net
losses in the past. Our operating results for future periods are subject to numerous
uncertainties, and we cannot assure that we will be able to maintain the profitability
that we achieved in the past three fiscal years. It is possible that in future quarters
our operating results will decrease from the previous quarter or fall below the
expectations of securities analysts and investors. In this event, the trading price of our
common stock could significantly decline.

11

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Our quarterly operating results
have varied in the past and will continue to vary significantly in the future, causing
volatility in our stock price.

Our quarterly operating results have
varied significantly in the past and will continue to do so in the future, which will
continue to cause our common stock price to fluctuate in the future. Some of the factors
that may influence our operating results and subject our common stock to price and volume
fluctuations include:

- changes in customer demand for our systems, which is influenced by economic conditions, technological
  developments in the semiconductor industry, and the announcement or release of enhancements to existing products
  or new product offerings by our competitors;
- demand for products that use semiconductors;
- market acceptance of our systems and changes in our product offerings;
- size and timing of orders from customers;
- customer cancellations or delays in orders, shipments, and installations;
- customer delays or rejections of final acceptance of our shipments;
- changes in average selling price and product mix;
- failure to ship an anticipated number of systems in the quarter;
- product development costs, including research, development, engineering and marketing expenses associated with
  our introduction of new products and product enhancements;
- sudden changes in component prices or availability;
- manufacturing inefficiencies caused by uneven or unpredictable order patterns, reducing our gross margins;
- costs associated with protecting our intellectual property;
- level of our fixed expenses relative to our net sales; and
- fluctuating costs associated with our international organization and international sales; including currency
  exchange rate fluctuations.

During any quarter, a significant
portion of our net sales may be derived from the sale of a relatively small number of high
priced systems. The selling prices of our systems range from under $700,000 to in excess
of $4.7 million. Accordingly, a small change in the number and/or mix of tools we sell may
cause significant changes in our operating results.

Variations in the amount of time it
takes for our customers to accept our systems may cause our operating results to
fluctuate. Securities and Exchange Commission Staff Accounting Bulletin 104
(SAB 104) Revenue Recognition provides guidance on the recognition of
revenue for sales that involve contractual customer acceptance provisions and product
installation commitments. Timing of revenue recognition from the sale of new systems,
sales to new customers and installation services is subject to the length of time required
to achieve customer acceptance after shipment, which could cause our operating results to
vary from period to period.

In light of these factors and the
cyclical nature of the semiconductor industry, we expect to continue to experience
significant fluctuations in quarterly and annual operating results. Moreover, many of our
expenses are fixed in the short-term which, together with the need for continued
investment in research and development, marketing and customer support, limits our ability
to reduce expenses quickly in response to declines in sales. As a result, net sales could
decline and harm our business, financial condition, results of operations and cash flows,
which could cause our operating results to be below the public market analysts or
investors expectations and the market price of our stock could decline.

Cyclicality in the semiconductor
industry and the semiconductor equipment industry has historically led to substantial
variations in demand for our products and consequently our operating results, and will
continue to do so.

Our operating results are subject to
significant variation due to the cyclical nature of the semiconductor industrys
business cycles, the timing, length and volatility of which are difficult to predict. Our
business depends upon the capital spending of semiconductor manufacturers, which, in turn,
depends upon the current and anticipated market demand for semiconductors and products
using semiconductors. The semiconductor industry has historically been cyclical because of
sudden changes in demand for semiconductors and manufacturing capacity, including capacity
utilizing the latest technology. The rate of changes in demand, including end-user demand,
is accelerating, and the effect of these changes on us is occurring sooner, exacerbating
the volatility of these cycles. These changes have affected the timing and amounts of
customers capital equipment purchases and investments in new technology, and
continue to affect our net sales, gross margin and results of operations.

During downturns, the semiconductor
equipment industry typically experiences a more pronounced percentage decrease in revenues
than the semiconductor industry. A prolonged downturn can seriously affect our net sales,
gross margin and results of operations. In addition, during downturns, it is critical to
appropriately align our cost structure with prevailing market conditions, to minimize the
effect of such downturns on our operations, and in particular, to continue to maintain our
core research and development programs. If we are unable to align our cost structure in
response to such downturns on a timely basis, or if such implementation has an adverse
impact on our business, then our financial condition, results of operations and cash flows
may be negatively affected to an even larger extent during industry downturns.

12

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Conversely, during an upturn or
periods of increasing demand for semiconductor manufacturing equipment, we may not have
sufficient manufacturing capacity and inventory to meet customer demand. During an upturn
we would be unable to predict the sustainability of a recovery, if any, and/or the
industrys rate of growth in such a recovery, both of which will be affected by many
factors. If we are unable to effectively manage our resources and production capacity
during an industry upturn, there could be a material adverse effect on our business,
financial condition, results of operations and cash flows.

We have experienced periods of
rapid growth and decline in operating levels, and if we are not able to successfully
manage these significant fluctuations, our business, financial condition and results of
operations could be significantly harmed.

We have experienced periods of
significant growth and decline in net sales. Our net sales increased 27.7% from
approximately $190.4 million in fiscal 2005 to approximately $243.2 million in fiscal
2006. However, there have been periods of significant declines in net sales; for example,
our net sales decreased 51.8% from approximately $256.5 million for fiscal 2001 to
approximately $123.7 million for fiscal 2002. In addition, our consolidated orders
backlog increased 39.2% from approximately $61.3 million at September 30, 2005
to $85.3 million at September 30, 2006. If we are unable to effectively manage
periods of rapid decline or sales growth, our business, financial condition, results of
operations and cash flows could be significantly harmed.

Our deferred revenue and orders
backlog may not result in future net sales.

Revenue recognition guidance requires
that revenue and the associated profit from the sale of newly introduced systems, systems
sales into new customer environments and substantive installation obligations that are
subject to contractual customer acceptance provisions are deferred until the customer has
acknowledged their acceptance of the system. If the system does not meet the agreed
specifications and the customer refuses to accept the system, the deferred revenue and
associated deferred profit will not be realized and we may be required to refund any cash
payments previously received from the customer, which may harm our business, financial
condition, results of operations and cash flows.

Order backlog does not necessarily
include all sales needed to achieve net revenue expectations for a subsequent period. We
schedule the production of our systems based in part upon order backlog. Due to possible
customer changes in delivery schedules and cancellations of orders, our backlog at any
particular date is not necessarily indicative of actual sales for any succeeding period.
In addition, while we evaluate each customer order to determine qualification for
inclusion in backlog, there can be no assurance that amounts included in backlog will
ultimately result in future sales. A reduction in backlog during any particular period, or
the failure of our backlog to result in future sales, could harm our business, financial
condition, results of operations and cash flows.

Our continued high spending levels
on research and development and the need to maintain a high level of customer service and
support may, under certain circumstances, harm our results of operations.

In order to remain competitive, we
must maintain a high level of investment in research and development, marketing and
customer service while controlling operating expenses.

Our industry is characterized by the
need for continued investment in research and development as well as a high level of
worldwide customer service and support. As a result of our need to maintain spending
levels in these areas, our operating results could be materially harmed if our net sales
fall below expectations. In addition, because of our emphasis on research and development
and technological innovation, our operating costs may increase further in the future,
which could have a negative impact on our results of operations and cash flow in any given
period.

There can be no assurance that we will
have sufficient resources to continue to make a high level of investment in research and
development, marketing and customer service while controlling operating expenses or that
our products will continue to be viewed as competitive as a result of technological
advances by competitors or changes in semiconductor processing technology. Such
competitive pressures may necessitate significant price reductions by us or result in lost
orders, which could harm our business, financial condition, results of operations and cash
flows.

We depend on our key customers with
which we do not have long-term contracts. Any loss, cancellation, reduction or delay in
purchases by, or failure to collect receivables from these customers could harm our
business.

Typically, we do not have long-term
contracts with our customers. As a result, our agreements with our customers do not
provide any assurance of future sales. Sales are made pursuant to purchase orders, which
can be cancelled or delayed by our customers at any time. Our customers are not required
to make minimum purchases from us, or make purchases at any particular time; our customers
are free to purchase products from our competitors; and our customers can stop purchasing
our products at any time without penalty.

13

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Our ten largest customers accounted
for approximately 54.0%, 58.2% and 56.9% of net sales in fiscal 2006, 2005 and 2004,
respectively. There is a limited number of mostly large companies operating in the highly
concentrated, capital intensive semiconductor industry. Accordingly, we expect that we
will continue to depend on a relatively small number of large companies for a significant
portion of our net sales. Although the composition of the group of largest customers may
change from year to year, the loss of, or a significant curtailment of purchases by, one
or more of our key customers or the delay or cancellation of a large order could cause our
net sales to decline significantly, which would harm our business, financial condition,
results of operations and cash flows. Similarly, delays in payments by large customers
could have a significant impact on our cash flows.

Intense competition in the markets
in which we operate may adversely affect our market share and reduce demand for our
products.

We face substantial competition from
established competitors, some of which have:

- greater financial, marketing, technical and other resources;
- broader and integrated product lines;
- more extensive customer support capabilities; and
- larger sales organizations and customer bases.

We may also face competition from new
market entrants. Our ability to compete successfully in the future depends on a number of
factors, including:

- system performance, quality and reliability;
- upfront price and maintenance costs of using our products;
- ability to ship products on time to meet customers' demands;
- timeliness and quality of technical support service; and
- our success in developing new and enhanced products.

Due to intense competitive conditions
in the semiconductor equipment industry, we have from time to time selectively reduced
prices on our systems in order to protect our market share, and competitive pressures may
necessitate further price reductions. Periodically, our competitors announce the
introduction of new products or lower prices which can affect our customers
decisions to purchase our systems, the prices we can charge for our systems and the level
of discounts we grant our customers.

Moreover, there has been significant
merger and acquisition activity among our competitors and potential competitors. These
combinations may provide our competitors and potential competitors with a competitive
advantage over us by enabling them to more rapidly expand their product offerings and
service capabilities to meet a broader range of customer needs. Many of our customers and
potential customers are relatively large companies that require global support and service
for their semiconductor manufacturing equipment. Our larger competitors have more
extensive infrastructures, which could place us at a disadvantage when competing for the
business of global semiconductor device manufacturers.

We expect our competitors to continue
to improve the design and performance of their products. We cannot assure you that our
competitors will not develop enhancements to, or future generations of, competitive
products that will offer superior price, performance and/or cost of ownership features, or
that new processes or technologies will not emerge that render our products less
competitive or obsolete.

As a result of the substantial
investment required to evaluate and select capital equipment and integrate it into a
production line, we believe that once a manufacturer has selected certain capital
equipment from a particular vendor, there is a tendency for the manufacturer to rely upon
that vendor to provide equipment for the specific production line application and may seek
to rely upon that vendor to meet other capital equipment requirements. Accordingly, we may
be at a competitive disadvantage for a protracted period of time with respect to a
particular customer if that customer utilizes a competitors manufacturing equipment.

Our Raider platform accounts for a
substantial portion of current and anticipated sales.

We have leveraged our Raider platform
to address both surface preparation and ECD applications. In fiscal year 2006, the Raider
platform accounted for approximately 70% of our tool revenues. We expect that revenue from
our Raider platform will continue to account for a significant portion of our revenue.
Accordingly, if the Raider platform was adversely affected by its own performance, price
or total cost of ownership, or the availability, functionality and price of competing
products and technologies, that could have a material adverse impact on our business,
financial condition, results of operations and cash flows.

14

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Rapid technological change could
make our products and inventories obsolete or unmarketable for specific applications.

We operate in an industry that is
subject to evolving industry standards, rapid technological changes, rapid changes in
customer demands and the rapid introduction of new, higher performance systems with
shorter product life cycles. For example, recent trends in semiconductor manufacturing
include the move towards smaller device features to lower cost and improve performance,
the use of new materials, such as copper, to achieve higher speed and performance of an
integrated circuit, and the migration to 300mm diameter wafers from 200mm diameter wafers
to increase productivity and reduce costs. As a result of these and other trends in our
industry, we expect to continue to make significant investments in research and
development. Although, historically, we have had adequate funds from operations to devote
to research and development, there can be no assurance that we will have funds available,
and in sufficient quantities, in the future for such research and development activities.

Introductions of new products by us or
our competitors could adversely affect sales of our existing products and may cause these
existing products and related inventories to become obsolete or unmarketable, or otherwise
cause our customers to defer or cancel orders for existing products. We may be unable to
develop and introduce new products or enhancements to our existing products on a timely
basis or in a manner which satisfies customer needs or achieves widespread market
acceptance. Any significant delay in releasing new systems could adversely affect our
reputation, give a competitor a first-to-market advantage or allow a competitor to achieve
greater market share. These effects of rapid technological change could harm our business,
financial condition, results of operations and cash flows.

Our results of operations may
suffer if we do not effectively manage our inventories or are required to write down our
inventories due to changing market demands for our products.

To achieve commercial success with our
products, we need to manage our inventory of component parts and finished goods
effectively to meet changing customer product and volume requirements. Some of our
products and supplies, have in the past and may in the future, become obsolete, while in
inventory, due to rapidly changing customer specifications or slowdowns in demand for
existing products ahead of new product introductions by us or our competitors. If we are
not successfully able to manage our inventory, including our spare parts inventory, we may
need to write off unsaleable or obsolete inventory, which would adversely affect our
results of operations. For example, in the fourth quarter of fiscal 2003, we wrote down
inventory by $19.1 million primarily due to a change in forecasted demand for certain
of our products due to the introduction of our new Raider platform.

Our dependence on key suppliers
could delay shipments and increase our costs.

Some components and subassemblies
included in our products are obtained from a single source or a limited group of
suppliers. The loss of, or disruption in, shipments from these sole or limited source
suppliers could, in the short-term, adversely affect our business and results of
operations. Further, a significant increase in the price of one or more of these
components could harm our business, financial condition, results of operations and cash
flows.

# Our future success
depends on international sales.

Our net sales attributable to
customers outside the United States as a percentage of our total net sales were
approximately 62.5%, 72.7% and 51.8% in fiscal 2006, 2005 and 2004, respectively. We
expect net sales outside the United States to continue to represent a significant portion
of our future net sales. Sales to customers outside the United States are subject to
various risks, including:

- exposure to currency fluctuations and related derivatives used to hedge such fluctuations;
- exposure of foreign accounts to foreign exchange translations;
- political and economic instability, including terrorism;
- unexpected changes in regulatory requirements;
- tariffs and other market barriers;
- potentially adverse tax consequences;
- outbreaks of hostilities, particularly in Israel, Korea, Taiwan or China;
- difficulties in managing foreign sales representatives and distributors; and
- difficulties in staffing and managing foreign branch operations.

A substantial portion of our
international sales are denominated in U.S. dollars. Therefore, if the
U.S. dollar rises in value in relation to foreign currencies, our systems will become
more expensive to customers outside the United States and less competitive with systems
produced by competitors outside the United States. Such conditions could negatively impact
our international sales.

Although we endeavor to meet technical
standards established by foreign standards setting organizations, there can be no
assurance that we will be able to comply with changes in foreign standards in the future.

15

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Variations in the amount of time it
takes for us to sell our systems may cause fluctuations in our operating results, which
could cause our stock price to decline.

Variations in the length of our sales
cycles could cause our net sales, and thus our business, financial condition, results of
operations and cash flows, to fluctuate widely from period to period. This variation could
cause our stock price to decline. Our customers generally take a long time to evaluate
many of our products before committing to a purchase. We expend significant resources
educating and providing information to our prospective customers regarding the uses and
benefits of our systems. The length of time it takes us to make a sale depends upon many
factors, including:

- the efforts of our sales force and our independent sales representatives and distributors;
- the complexity of our customers' fabrication processes;
- the internal technical capabilities and sophistication of the customer; and
- capital spending by our customers.

Because of the number of factors
influencing the sales cycle, the period between our initial contact with a potential
customer and the time when we recognize revenue from our customer, if ever, varies widely
in length. Our sales cycle typically ranges from one month to two years. Occasionally our
sales cycle can be even longer, particularly with our international customers and new
technologies. The subsequent build cycle, or the time it takes us to build a product to
customer specifications after receiving an order, typically ranges from one to six months.
During these cycles, we commit substantial resources to our sales efforts in advance of
receiving any revenue, and we may never receive any revenue from a customer despite our
sales efforts.

When a customer purchases one of our
systems, that customer often evaluates the performance of the system for a lengthy period
before considering the purchase of more systems. The number of additional products a
customer may purchase from us, if any, depends on many factors, including the
customers capacity requirements. The period between a customers initial
purchase and subsequent purchases, if any, often varies from two to twelve months or
longer, and variations in length of this period could cause further fluctuations in our
business, financial condition, results of operations, cash flows, and possibly our stock
price.

If we deliver systems with defects,
our credibility may be harmed, sales and market acceptance of our systems may decrease and
we may incur liabilities associated with those defects.

Our systems are complex and sometimes
have contained errors, defects and software bugs when introduced. If we deliver systems
with errors, defects or software bugs, our credibility and the market acceptance and sales
of our systems could be harmed. Further, if our systems contain errors, defects or
software bugs, we may be required to expend significant capital and resources to alleviate
such problems. Defects could also lead to commercial and/or product liability as a result
of lawsuits against us or against our customers. We have agreed to product liability
indemnities. Our product and commercial liability insurance policies currently provide
only limited coverage per claim. In the event of a successful product liability and/or
commercial claim, we could be obligated to pay damages that may not be covered by
insurance or that are significantly in excess of our insurance limits.

Failure of our products to gain
market acceptance would adversely affect our financial condition and our ability to
provide customer service and support.

We believe that our growth prospects
depend upon our ability to gain customer acceptance of our products and technology. Market
acceptance of products depends upon numerous factors, including compatibility with
existing manufacturing processes and products, perceived advantages over competing
products and the level of customer service available to support such products. Moreover,
manufacturers often rely on a limited number of equipment vendors to meet their
manufacturing equipment needs. As a result, market acceptance of our products may be
adversely affected to the extent potential customers utilize a competitors
manufacturing equipment. There can be no assurance that growth in sales of new products
will continue or that we will be successful in obtaining broad market acceptance of our
systems and technology.

We expect to spend a significant
amount of time and resources to develop new products and refine existing products. In
light of the long product development cycles inherent in our industry, these expenditures
will be made well in advance of the prospect of deriving revenue from the sale of any new
systems. Our ability to commercially introduce and successfully market any new products is
subject to a wide variety of challenges during this development cycle, including start up
delays, design defects and other matters that could delay the introduction of these
systems to the marketplace. As a result, if we do not achieve market acceptance of new
products, we may not be able to realize sufficient sales of our systems in order to recoup
research and development expenditures. The failure of any of our new products to achieve
market acceptance would harm our business, financial condition, results of operations and
cash flows.

16

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We manufacture substantially all of
our equipment at two facilities and any prolonged disruption in the operations of either
facility could have a material adverse effect on our net sales.

We manufacture substantially all of
our equipment in our manufacturing facilities located near Kalispell, Montana. Our
manufacturing processes are highly complex and require sophisticated and costly equipment
and a specially designed facility. As a result, any prolonged disruption in the operations
of either of our manufacturing facilities, whether due to technical or labor difficulties,
destruction or damage as a result of a fire or any other reason, could seriously harm our
ability to satisfy our customer order deadlines. If we cannot provide timely delivery of
our systems, our business, financial condition, results of operations and cash flows would
be adversely affected to a significant extent.

If we require additional capital in
the future, it may not be available, or if available, may not be on terms acceptable to
us.

We believe that our existing balances
of cash, cash equivalents and marketable securities, our cash flow from operations, and a
revolving credit facility we finalized in November 2004 and amended in the first quarter
of fiscal 2006 will be sufficient to meet our cash needs for working capital and capital
expenditures for at least the next 12 months. We may, however, require additional
financing to fund our operations in the future. Although we expect existing debt financing
arrangements and cash flows generated from operating activities to be sufficient to fund
operations at the current and projected levels in the future, there is no assurance that
our operating plan will be achieved. We may need to take actions to reduce costs, seek
alternative financing arrangements or pursue additional placement of our common stock.

A significant contraction in the
capital markets, particularly in the technology sector, may make it difficult for us to
raise additional capital in the future, if and when it is required, especially if we are
unable to maintain profitability. If adequate capital is not available to us as required,
or is not available on favorable terms, our shareholders may be subject to significant
dilution in their ownership if we raise additional funds through the issuance of equity
securities, or we could be required to significantly reduce or restructure our business
operations.

The above mentioned revolving credit
facility provides for up to $30 million in borrowings. There is no assurance that this
facility will be sufficient to meet our cash needs.

Compliance with environmental
regulations may be very costly, and the failure to comply could result in liabilities,
fines and cessation of our business.

We are subject to a variety of
governmental regulations related to the discharge or disposal of toxic, volatile or
otherwise hazardous chemicals. Current or future regulations could require us to purchase
expensive equipment or to incur other substantial expenses to comply with environmental
regulations. Any failure by us to control the use of, or adequately restrict the discharge
or disposal of, hazardous substances could subject us to future liabilities, result in
fines being imposed on us, or result in the suspension of production or cessation of our
manufacturing operations.

If the protection of our
proprietary rights is inadequate, our business could be harmed.

We place a strong emphasis on the
technically innovative features of our products and, where available, we generally seek
patent protection for those features. We currently hold 322 U.S. patents, some with
pending foreign counterparts, have approximately 193 U.S. patent applications pending
and intend to file additional patent applications, as we deem appropriate. There can be no
assurance that patents will issue from any of our pending applications or that existing or
future patents will be sufficiently broad to protect our technology. While we attempt to
protect our intellectual property rights through patents, copyrights and non-disclosure
agreements, there can be no assurance that we will be able to protect our technology, or
that competitors will not be able to develop similar technology independently. In
addition, the laws of certain foreign countries do not protect our intellectual property
to the same extent as the laws of the United States. Furthermore, certain types of
intellectual property are country-specific; for example, U.S. patents provide protection
in the U.S. but generally do not provide protection outside the U.S. Moreover, there can
be no assurance that our existing or future patents will not be challenged, invalidated or
circumvented, or that the rights granted thereunder will provide meaningful competitive
advantages to us. In any of such events, our business, financial condition, results of
operations and cash flows could be harmed.

There has been substantial litigation
regarding patent and other intellectual property rights in semiconductor-related
industries. Although we are not aware of any potential infringement by our products of any
patents or proprietary rights of others, further commercialization of our technology could
provoke claims of infringement from third parties.

In addition, we rely on trade secret
protection for our technology, in part through confidentiality agreements with our
employees, consultants and third parties. These agreements could be breached and we may
not have adequate remedies for any such breach. In any case, others may come to know about
or determine our trade secrets through a variety of methods.

17

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Now and in the future, litigation may
be necessary to enforce patents issued to us, to protect trade secrets or know-how owned
by us or to defend us against claimed infringement of the rights of others and to
determine the scope and validity of the proprietary rights of others. Any such litigation
could cause us to accrue substantial cost or divert our management or resources, which by
itself could have a material adverse effect on our financial condition, results of
operations and cash flows. Further, adverse determinations in such litigation could result
in our loss of proprietary rights, subject us to significant liabilities and damages to
third parties, require us to seek licenses from third parties or prevent us from
manufacturing or selling our products, any of which could harm our business, financial
condition, results of operations and cash flows.

Our efforts to protect our
intellectual property may be less effective in some foreign countries where intellectual
property rights are not as well protected as in the United States.

In fiscal 2006, approximately 62.5% of
our net sales were derived from sales in foreign countries, including certain countries in
Asia such as Singapore, Taiwan, Japan, China and Korea. The laws of some foreign countries
do not protect our proprietary rights to as great an extent as do the laws of the United
States, and many U.S. companies have encountered substantial problems in protecting
their proprietary rights against infringement in such countries, some of which are
countries in which we have sold and continue to sell systems. For example, in many
countries other than the U.S., the public disclosure of an invention prior to the filing
of a patent application for the invention would invalidate the ability of a company to
obtain a patent. Similarly, in contrast to the United States where the contents of patent
applications may remain confidential during the patent prosecution process in certain
cases, the contents of a patent application may be published before a patent is granted,
which provides competitors an advanced view of the contents of applications prior to the
establishment of patent rights. For these and other reasons, we also have not filed patent
applications in these countries to the same extent that we file in the U.S. There is a
risk that our means of protecting our proprietary rights may not be adequate in these
countries. Our competitors in these countries may independently develop similar technology
or duplicate our systems. If we fail to adequately protect our intellectual property in
these countries, it would be easier for our competitors to sell competing products in
those countries.

Anti-takeover provisions in our
charter documents could adversely affect the rights of the holders of our common stock.

Our Articles of Incorporation
authorize our Board of Directors to issue preferred stock in one or more series and to fix
the rights, preferences, privileges and restrictions granted to or imposed upon any
unissued shares of preferred stock and to fix the number of shares constituting any series
and the designations of such series, without further vote or action by the shareholders.
We have no present plans to issue any preferred stock in order to deter a takeover and/or
adopt additional anti-takeover measures. If such actions are taken in the future, they may
make a change of control difficult, even if a change of control would be beneficial to our
shareholders.

Any anti-takeover provisions,
including any issuance of preferred stock, could have the effect of discouraging a third
party from making a tender offer or otherwise attempting to gain control of us. In
addition, these provisions could limit the price that investors might be willing to pay in
the future for shares of our common stock.

We must attract and retain key
personnel to help direct and support our future growth. Competition for such personnel in
our industry can be high.

Our success depends to a significant
degree upon the continued contributions of our key management, engineering, sales and
marketing, customer support, finance and manufacturing personnel. The loss of any of these
key personnel, particularly our Chairman and Chief Executive Officer, Raymon F. Thompson,
or our President and Chief Operating Officer, Larry E. Murphy, could harm our business and
operating results. We do not have key person life insurance on any of our executives.
Further, to support future growth, we will need to attract and retain additional qualified
employees. The pool of qualified applicants is limited and it can be difficult to hire and
relocate personnel from other areas. Competition for such personnel can be intense, and we
may not be successful in attracting and retaining qualified senior executives and other
employees.

# Item 1B.  Unresolved Staff
Comments

Not applicable.

18

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# Item 2.  Properties

We
own two manufacturing facilities located on sites near Kalispell, Montana with
approximately 251,000 square feet in the aggregate. Additionally, we own two manufacturing
facilities located in Libby, Montana housing approximately 20,000 square feet in the
aggregate. We also own a facility located in Coopersburg, Pennsylvania, which serves as a
manufacturing facility for our Rhetech, Inc. subsidiary, which we are currently expanding
by 10,000 square feet for a total of 32,000 square feet. We constructed a 29,000
square-foot production and office building in Salzburg, Austria, which we occupied in
December 2005. We believe that our existing manufacturing facilities along with our
anticipated expansion will be adequate to meet our requirements for the foreseeable future
and that suitable additional or substitute space will be available as needed. We own an
office building in Cambridge, UK, which serves as our European headquarters for sales and
customer support. We also lease 12 other smaller facilities worldwide, which are used as
sales and customer service centers.

We
are subject to a variety of governmental regulations related to the discharge or disposal
of toxic, volatile, or otherwise hazardous chemicals used on Semitools premises. We
believe that we are in material compliance with these regulations and that we have
obtained all necessary environmental permits to conduct our business. Nevertheless,
current or future regulations could require us to purchase expensive equipment or to incur
other substantial expenses to comply with environmental regulations. Any failure by us to
control the use of, or adequately restrict the discharge or disposal of, hazardous
substances could subject us to future liabilities, result in fines being imposed on us, or
result in the suspension of production or cessation of our manufacturing operations.

# Item 3.  Legal Proceedings

We
are involved in legal proceedings that arise in the ordinary course of our business.
Although there can be no assurance as to the ultimate disposition of these matters, it is
the opinion of management, based upon the information available at this time, that the
currently expected outcome of these matters, individually or in the aggregate, will not
have a material adverse effect on our business, financial condition, results of operations
or cash flows.

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

No
matters were submitted to the shareholders for a vote during the fourth quarter of the
fiscal year.

19

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# PART II

# Item 5.  Market for
Registrants Common Equity, Related Shareholder Matters and Issuer Purchases of
Equity Securities

Our Common Stock is traded under the
symbol SMTL on the Nasdaq Global Market. The approximate number of
shareholders of record at December 1, 2006 was 125 and the reported last sale price on
that date of our common stock on the Nasdaq Global Market was $13.59. The high and low
sales prices for our common stock reported by the Nasdaq Global Market are shown below.

|               | Common Stock Price Range
               Fiscal Year
              Ended September 30, | 
|-------------- | ------------------------------------------------------------------------------------- | 
|
|
|First Quarter  |                                                                                       | 
|Second Quarter |                                                                                       | 
|Third Quarter  |                                                                                       | 
|Fourth Quarter |                                                                                       | 

Since our initial public offering of
common stock in February of 1995, we have never declared or paid any cash dividend and we
have no intent to do so in the near future.

# Item 6.  Selected
Financial Data

This summary should be read in
conjunction with the consolidated financial statements and related notes included
elsewhere in this Annual Report on Form 10-K.

# Summary Consolidated
Financial Information(in thousands, except
per share data)

|                                                 | Year Ended September 30, | 
|------------------------------------------------ | ------------------------ | 
|
|Statement of Operations Data:                    |                          | 
|Net sales                                        |                          | 
|Gross profit (1)                                 |                          | 
|Income (loss) from operations                    |                          | 
|Net income (loss)                                |                          | 
|Diluted earnings (loss) per share                |                          | 
|Balance Sheet Data:                              |                          | 
|Cash, cash equivalents and marketable securities |                          | 
|Working capital (1)                              |                          | 
|Total assets                                     |                          | 
|Short-term debt                                  |                          | 
|Long-term debt and capital leases                |                          | 
|Shareholders' equity                             |                          | 

|(1) | In
the fourth quarter of fiscal 2003, we wrote down inventory by $19.1 million
               primarily due to a change in forecasted demand for certain of our products
due                to the successful introduction of our new Raider platform.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

20

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

# Overview

We design, manufacture, install and
service highly-sophisticated equipment for use in the fabrication of semiconductor
devices. Our products are focused on the wet chemical process steps in integrated circuit,
or IC, manufacturing and include systems for wafer surface preparation and electrochemical
deposition, or ECD, applications. Our surface preparation systems are designed for wet
cleaning, stripping and etching processes, including photoresist and polymer removal and
metal etching. Our ECD systems are used to plate copper and other metals, which are used
for the ICs internal wiring, or interconnects; to plate solder and lead free solder
bumps for wafer level packaging applications; and to plate other metals for various
semiconductor and related applications. Our products address critical applications within
the semiconductor manufacturing process, and help enable our customers to manufacture more
advanced semiconductor devices that feature higher levels of performance. The fabrication
of semiconductor devices typically requires several hundred manufacturing steps, with the
number of steps continuing to increase for advanced devices. Due to the breadth of our
product portfolio and advanced technology capabilities, our solutions address over 150 of
these manufacturing steps.

There are several key trends in the
semiconductor manufacturing industry driving growth in demand for wafer surface
preparation, ECD and other advanced semiconductor equipment:

- smaller device features for lower cost and higher performance;
- new materials to fabricate more advanced semiconductor devices;
- increased use of 300mm wafers to reduce manufacturing costs;
- move to single-wafer spray and immersion processing technologies for enhanced surface preparation;
- wafer level and other advanced packaging to enable smaller portable products; and
- emerging need for thinner wafers driven by the demand for smaller portable devices.

As the semiconductor manufacturing
process increases in complexity and production parameters become even more stringent,
semiconductor manufacturers increasingly rely upon manufacturers of semiconductor
equipment to achieve improved process control, provide a smaller equipment footprint and
lower the cost of ownership of their manufacturing processes.  Key elements of our
solution include technological leadership, a comprehensive product portfolio, including
our Raider platform and vertically-integrated manufacturing and design capabilities.

# Key Performance Indicators

Our management focuses on revenues,
gross margin, operating expenses and profitability in managing our business.  In addition
to these financial measures found in our consolidated financial statements, we also use
bookings, backlog, shipments and deferred revenue as key performance indicators.
 Bookings are firm orders for which we have received written customer authorization in
the fiscal period.  Backlog is the balance of undelivered orders at the end of a fiscal
period.  In order to be included in bookings or backlog, an order must be scheduled to
ship within the next 12 months.  Backlog and forecasted orders drive our production
schedule.  Shipments measure how well we have met our production plan and are viewed as a
primary measure of factory output. Deferred revenue primarily represents tool shipments
for which we are awaiting final customer acceptance.

A summary of key factors that
impacted our financial performance during fiscal year 2006 includes:

- Our fiscal 2006 bookings were $259.3 million and include $158.0 million in bookings for our Raider platform.
     Fourth quarter fiscal 2006 bookings were $65.6 million.  Our consolidated orders backlog of $85.3 million and
     deferred revenue of $14.4 million resulted in a revenue backlog of $99.7 million.
- Shipments in fiscal 2006 were $235.3 million including $131.2 million from Raider shipments.
- Net income was $9.8 million, or 4.0%, on net sales of $243.2 million in fiscal 2006 compared with net income
     of $10.1 million, or 5.3%, on net sales of $190.4 million in fiscal 2005.
- Our gross margin declined to 46.4% of net sales, down from 50.9% in fiscal 2005.
- Cash, cash equivalents and marketable securities were $17.3 million at September 30, 2006, an increase of
     $10.3 million from $7.0 million at September 30, 2005.

21

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# Results of Operations

The following table sets forth our
consolidated results of operations for the periods indicated as a percentage of net sales:

|                                    | Year Ended September 30, | 
|----------------------------------- | ------------------------ | 
|
|Net sales                           |                          | 
|Cost of sales                       |                          | 
|                                    |                          | 
|Gross profit                        |                          | 
|                                    |                          | 
|Operating expenses:                 |                          | 
|Selling, general and administrative |                          | 
|Research and development            |                          | 
|                                    |                          | 
|Total operating expenses            |                          | 
|                                    |                          | 
|Income from operations              |                          | 
|Other income (expense)              |                          | 
|                                    |                          | 
|Income before income taxes          |                          | 
|Income tax provision                |                          | 
|                                    |                          | 
|Net income                          |                          | 
|                                    |                          | 

# Fiscal 2006 Compared with
Fiscal 2005 and Fiscal 2004

# Net Sales

|                                                            | Year Ended September 30, | 
|----------------------------------------------------------- | ------------------------ | 
|
|
|Net Sales                                                   |                          | 
|By Product Line:                                            |                          | 
|Semiconductor equipment                                     |                          | 
|License fees                                                |                          | 
|By Geographical Distribution, percentage of net tool sales: |                          | 
|North America                                               |                          | 
|Europe                                                      |                          | 
|Asia, including Japan                                       |                          | 

Net sales consist of revenues from
sales of semiconductor equipment, spare parts and service and royalties. Our revenue
recognition policy provides that revenue from sales of semiconductor equipment may be
recognizable upon shipment if the product is an existing tool to a customer environment in
which we have already successfully installed and gained acceptance of our products and the
revenue recognition criteria in SAB 104, Revenue Recognition have been met.
Alternatively, revenue will be deferred and only recognized upon final customer acceptance
for tools that are new products or where an existing tool is sold into a new customer
environment. Revenue for elements other than equipment, such as installation revenue, is
included in tool acceptance revenue. License fee revenue represents license initiation
fees for our seed layer enhancement patents and other technologies that we licensed.

Net sales increased 27.7% or $52.8
million to $243.2 million for fiscal 2006 as compared to $190.4 million in fiscal 2005. In
general, business activity levels have increased in fiscal 2006 as compared to fiscal 2005
as all product lines showed improvement over fiscal 2005 levels. Revenue from both
shipments and acceptances of single-wafer surface preparation Raiders for Front End of
Line (FEOL) and Back End of Line (BEOL) cleans applications and ECD Raiders for
interconnect applications accounted for almost 60% of fiscal 2006 sales and for more than
70% of the increase in sales over fiscal 2005 levels. Our Raider tool base continues to
expand, allowing us to recognize more revenue upon tool shipment as is evidenced by the
69% increase in revenue from shipments in fiscal 2006 as compared to fiscal 2005 and the
26% decrease in revenue from tool acceptances from fiscal 2005. Spare Parts sales
contributed more than 11% to the increase in fiscal 2006 revenues while sales at our
Rhetech subsidiary added almost 10% to the increase in revenues over fiscal 2005 levels.

22

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Net sales increased $50.8 million to
$190.4 million in fiscal 2005 as compared with $139.6 million in fiscal 2004. Most product
lines showed improvement over fiscal 2004 levels. The primary driver of the increase in
fiscal 2005 net sales was increasing sales of both single-wafer surface preparation
Raiders and ECD Raiders for copper interconnect and advanced packaging applications, which
accounted for approximately 95% of the $50.8 million increase in net sales. Improved
automated batch tool sales partially offset non-recurring license initiation fees of $10.8
million received in fiscal 2004 as a result of our seed layer enhancement patent
litigation.

Geographically, the Asian markets
continue to be our leading market area, although we see additional opportunity in Asia
when we compare ourselves to the rest of the industry. In fiscal 2006, 41.5% of our tool
sales were in Asia as compared to 53.4% in fiscal 2005 and 25.9% in fiscal 2004. We
continue to place a strong focus on our sales and marketing efforts in this region and
anticipate strong sales in the Asian market in fiscal 2007.

Tool sales rose sharply in North
America, climbing to almost one-third of fiscal 2006 tool sales. In fiscal 2005 more than
half of our tool sales were derived from Asia while North America accounted for only 18.8%
of tool sales. In fiscal 2004, North American tool sales accounted for approximately half
of our tool sales.

European tool sales dipped slightly
from fiscal 2005 and fiscal 2004 levels, but still accounted for more than 25% of tool
sales in fiscal 2006.

# Gross Profit

|                        | Year Ended September 30, | 
|----------------------- | ------------------------ | 
|
|
|Gross profit            |                          | 
|Percentage of net sales |                          | 

Gross profit increased $16.0 million
or 16.4% in fiscal 2006 compared to fiscal 2005. Fiscal 2005 gross profit increased $19.5
million or 25.2% compared to fiscal 2004 gross profit of $77.4 million.

Gross profit increased in absolute
dollars in fiscal 2006 because of higher sales volumes but declined by 4.5 percentage
points from fiscal 2005. The gross margin percentage was negatively impacted by selected
tool installations of new applications for first-time customers. One-time pricing
incentives coupled, in certain instances, with increased manufacturing costs, impacted the
gross margin by approximately four percentage points in fiscal 2006. The gross margin
benefited slightly by a one-time order cancellation fee in the second quarter while
increased warranty and installation costs also reduced the gross margin by approximately
one percentage point in fiscal 2006.

Gross profit increased in absolute
dollars in fiscal 2005 and declined by 4.5 percentage points from fiscal 2004. The fiscal
2004 gross margin was favorably impacted by the license initiation fees discussed above.
Exclusive of the license initiation fees, gross margin would have been essentially flat
year over year, declining less than one percentage point. The variability in gross margin
year over year is primarily related to product mix as spare parts and service sales
contributed a higher percentage to overall sales revenues in fiscal 2004 than in fiscal
2005. Spare parts and service sales typically provide for a higher gross margin than do
tool sales.

Fiscal 2004 gross margin was favorably
impacted by approximately 1.0 percentage point due to the sale of tools that contained
certain parts that had been previously written-down. Revenues on those sales totaled $9.0
million.

# Selling, General and
Administrative

|                                    | Year Ended September 30, | 
|----------------------------------- | ------------------------ | 
|
|
|Selling, general and administrative |                          | 
|Percentage of net sales             |                          | 

Selling, general and administrative
(SG&A) expenses include employment costs for sales, marketing, customer support and
administrative personnel as well as travel, communications, professional fees and expenses
related to sales and service offices at our global locations. SG&A expenses increased
$7.1 million in fiscal 2006 as compared with fiscal 2005 and increased $15.1 million in
fiscal 2005 as compared with fiscal 2004. As a percentage of net sales, SG&A expenses
declined to 30.3% in fiscal 2006 down from 34.9% in fiscal 2005 and from 36.8% in fiscal
2004.

23

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Employment costs increased $7.1
million in fiscal 2006 as compared with fiscal 2005 as we increased staff to support
expanded business activity and recorded stock-based compensation expense. In fiscal 2006,
we completed our plan to transition from using an outsourced sales representative in
Taiwan and China to maintaining a direct sales and customer service presence in those
locations. As a result, we saved an estimated $1.2 million in sales representative
commission expense in Taiwan and China in fiscal 2006. The combination of commission
expense and direct expenses associated with our transition to a direct sales and service
presence in Taiwan and China has resulted in some duplication of expenses but we expect
this change from a variable cost structure to a fixed cost structure will improve our
profitability in the future. Professional Fees decreased 29% in fiscal 2006 reflecting
reduced audit and compliance fees related to the Sarbanes-Oxley Act of 2002. Travel and
other expenses related to expanded business activity and customer support increased. These
increases were partially offset by decreased legal costs.

Employment costs increased
approximately $6.0 million in fiscal 2005 as compared to fiscal 2004 as we restored wages
from previously imposed pay reductions, increased staff to support expanded business
activity and accrued for profit sharing bonuses. Commission expense, primarily related to
increased sales activity in Asia, increased more than $4.0 million in the year over year
comparison. Legal expenses declined approximately $3.0 million as plaintiff litigation
related to our seed layer enhancement patents concluded in early fiscal 2005. Increased
professional fees primarily related to increased audit and Sarbanes-Oxley Section 404
compliance offset the reduction in legal costs. Sarbanes-Oxley and audit compliance fees
were in excess of $2.6 million, more than triple our fiscal 2004 costs. Travel and other
expenses increased related to the overall increase in business opportunity and activity.

# Research and Development

|                         | Year Ended September 30, | 
|------------------------ | ------------------------ | 
|
|
|Research and development |                          | 
|Percentage of net sales  |                          | 

Research and Development (R&D)
expense consists of salaries, project materials, laboratory costs, consulting fees and
other costs associated with our product development efforts. R&D expense increased
$4.8 million in fiscal 2006 as compared to fiscal 2005 and increased $4.6 million in
fiscal 2005 as compared to fiscal 2004.

Prototype expenses increased
approximately $1.3 million in fiscal 2006 as we expanded our research and development
efforts. Our research and development efforts were focused on the following projects which
include FEOL cleaning applications, edge cleaning processes and equipment and integrated
megasonic cleans. ECD R&D focused on the development of proprietary processes and
power supply hardware to provide arbitrary wave form and dynamic current control for
damascene plating, direct-on-barrier and thin seed layer processes, porous silicon
processes and equipment and deep via applications. R&D projects also included
mini-batch vacuum furnace/anneal and Thru Silicon Via (TSV) plating required for three
dimensional chip stacking. During fiscal 2006, we and other semiconductor equipment
companies and research institutes formed a consortium called EMC 3D, whose mission is to
develop the processes and equipment needed for TSV technology. Depreciation expense
increased approximately $1.6 million as we replaced older technology tools in our
demonstration laboratories with new generation Raider platform tools. Employment costs
increased approximately $1.4 million in the year to date comparison reflecting increased
staff levels and stock-based compensation expense. General operating expenses increased
reflecting expanded business activity.

Prototype expense increased almost
$1.8 million in fiscal 2005 as we worked on a number of projects. Surface preparation
R&D projects included FEOL cleaning applications, immersion processes, single-wafer
megasonic cleans, single-wafer ozone cleans and hydrofluoric vapor cleans. ECD R&D
focused on the development of a lead-free solder application and hardware, membrane
technology to control the cost of chemicals used in plating, work on deep via plating to
be used in 3-D chipstacking applications and seed layer enhancement. Batch process R&D
projects included wafer thinning processes and automated FOUP (Front Opening Unified Pod)
cleaning processes and hardware. Labor expense increased approximately $1.4 million as a
result of the reversal of a wage reduction in effect in fiscal 2004, staffing level
increases and profit sharing accruals. R&D depreciation expense increased almost $1.3
million as we replaced older technology tools in our demonstration laboratories with
Raider platform tools.

Our research and development expense
has fluctuated from period to period in the past. We expect such fluctuations to continue
in the future, both in absolute dollars and as a percentage of net sales, primarily due to
the timing of expenditures and fluctuations in the level of net sales in a given period.
We expect to continue to fund research and development expenditures with a multi-year
perspective and are committed to technology leadership in our sector of the semiconductor
equipment industry.

24

---

# Other Income (Expense)

|                             | Year Ended September 30, | 
|---------------------------- | ------------------------ | 
|
|
|Interest income              |                          | 
|Interest expense             |                          | 
|Foreign exchange gain (loss) |                          | 
|Other                        |                          | 
|                             |                          | 
|Total other income (expense) |                          | 
|                             |                          | 

Net other income (expense) decreased
to a net expense of $117,000 in fiscal 2006 from a net income of $3.8 million in fiscal
2005. In October 2004, we received a seed layer enhancement litigation settlement payment
of $2.9 million from Novellus Systems, Inc. which accounts for most of the year over year
change. Interest expense increased in fiscal 2006 to $479,000 from $122,000 in fiscal 2005
and $148,000 in fiscal 2004 because we periodically used our $30 million line of credit in
fiscal 2006 to support expanding business activity. We reported a minimal foreign exchange
loss in fiscal 2006 and fiscal 2005. In fiscal 2004, we reported foreign exchange losses
because of fluctuations in the Yen, Euro and the British pound.

# Income Taxes

|                     | Year Ended September 30, | 
|-------------------- | ------------------------ | 
|
|
|Income tax provision |                          | 
|Effective tax rate   |                          | 

Our estimated effective tax rate
increased to 33% in fiscal 2006 as compared to 32% in fiscal 2005 and 31.5% in fiscal
2004. The effective tax rate in fiscal 2006 is higher compared to the rate used for fiscal
2005 because the Federal Research Credit expired in December 2005. As of September 30,
2006, no extension of the Research Credit had been enacted by Congress.

The expensing of stock-based awards in
accordance with SFAS No. 123(R) Share-Based Payment, and the limited
deductibility of those awards in some jurisdictions, also contributed to the increase in
our effective tax rate for fiscal year 2006.

We recognized a Research and
Experimentation Credit of approximately $186,000 in the first quarter of fiscal 2005.
Legislation to extend the Credit was signed into law after September 30, 2004; therefore
we were unable to recognize the Credit in fiscal 2004 when it was generated. This resulted
in a recorded tax rate of 30.7% for fiscal 2005.

The effective tax rate reflects our
underlying profitability, the regions where income and expenses are recorded and the
respective tax rates imposed. Our effective tax rate is based on current business outlook,
including our continued and substantial investments in research and development programs
qualifying for the Research Credit (through the expiration in December 2005), and our
expectations of earnings from operations in lower-tax jurisdictions throughout the world.

# Backlog and Deferred
Revenue

|                                      | September 30, | 
|------------------------------------- | ------------- | 
|
|
|Backlog                               |               | 
|Percentage change in backlog          |               | 
|year over year                        |               | 
|Deferred revenue                      |               | 
|Percentage change in deferred revenue |               | 
|year over year                        |               | 

25

---

Approximately 74% of our current
backlog is for Raider tools. Deferred revenue decreased $9.1 million at September 30, 2006
as compared with September 30, 2005 primarily because of increased shipments of Raiders
into existing customer environments where Raiders have been previously accepted, which
allows for a large percentage of revenue to be recognized upon shipment. Current deferrals
include all or a part of 23 Raiders at September 30, 2006 as compared with 27 Raiders at
September 30, 2005; however, the fiscal year 2005 figures include a higher percentage of
Raiders that represented new tools shipped into new customer environments, requiring full
deferral of revenue on those tools.

We include in backlog those customer
orders for which we have written customer authorization and for which shipment is
scheduled within the next 12 months. Orders are subject to cancellation or rescheduling by
customers with limited or no cancellation fees. As the result of systems ordered and
shipped in the same quarter, possible changes in customer delivery dates, cancellations
and shipment delays and acceptances of shipped equipment carried in deferred revenue, the
backlog at any particular date and the bookings for any particular period are not
necessarily indicative of actual revenue for any succeeding period. In particular, during
periods of downturns in the semiconductor industry we have experienced cancellations and
significant shipment delays.

Deferred profit included in current
liabilities is derived from deferred revenue, which primarily relates to equipment shipped
to customers that has not been accepted by the customer, less the deferred cost of sales,
including warranty and installation, and commission expenses. Deferred revenue is not
included in orders backlog.

# Stock-Based Compensation

Through fiscal 2005, we accounted for
our stock option plans using the intrinsic value method under Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to Employees (APB No. 25).
Effective the beginning of fiscal 2006, we adopted SFAS No. 123(R) and elected to adopt
the modified prospective application method. SFAS No. 123(R) requires us to use a
fair-value based method to account for stock-based compensation. Accordingly, stock-based
compensation cost is estimated at the grant date, based on the fair-value of the award and
is recognized as expense ratably over the requisite service period of the award. Total
compensation cost for our stock plans in fiscal 2006 was approximately $1.4 million.

# Liquidity and Capital
Resources

Operating Activities.In fiscal 2006,
cash used by operations was $8.4 million. The primary uses of cash were increased trade
receivables of $15.6 million as a result of higher sales levels and increased inventory of
$21.8 million to support increased sales volume. Work-in Process inventory grew $7.8
million and Raw Materials inventory grew $10.6 million to support current and expected
shipment volumes and to ensure adequate inventory is available near our customers
locations to support their operations. Offsetting these uses of cash were a $4.0 million
increase in accounts payable, a $3.6 million increase in customer advances, net income of
$9.8 million and changes in non-cash components of net income including $9.7 million in
depreciation and amortization expense and $1.4 million in stock-based compensation expense
offset by a $2.0 million decrease in deferred income taxes.

In fiscal 2005, cash used by
operations was $9.6 million. The primary use of cash was to support inventory growth of
$23.8 million. Work-in-Process and Finished Goods inventories contained more than $8.0
million in tools that were substantially complete either awaiting shipment or shipped
during the fourth quarter under evaluation agreements. Net of the $8.0 million,
inventories, primarily Work-in-Process and Raw Materials, have grown to support the
shipment volumes in fiscal 2005 and expected fiscal 2006 shipments. Deferred profit
decreased by $13.3 million from year-end fiscal 2004 levels because acceptances of Raider
and other high value tools have exceeded deferrals of revenue, and associated cost
deferrals in fiscal 2005. The primary source of cash during the period was the collection
of trade receivables in the normal course of business. Trade receivables declined by $10.0
million from September 30, 2004. We received a $2.9 million litigation settlement and a
$1.3 million income tax refund in fiscal 2005. Other sources of cash in fiscal 2005
included net income of $10.1 million and changes in non-cash components of net income,
primarily depreciation, amortization and deferred income taxes.

Investing Activities.Investing
activities in fiscal 2006 primarily consisted of $14.3 million in purchases of property,
plant and equipment including the acquisition, remodeling and equipping of our new
fabrication facility, the completion of the manufacturing and office facility in Salzburg,
Austria, the remodeling and expansion of the Raider production floor and the initial
phases of a remodeling and expansion project at our Rhetech subsidiary in Coopersburg,
Pennsylvania. We invested $3.7 million in our development and demonstration laboratories
primarily for tools on our Raider platform by transferring finished goods inventory to
property, plant and equipment. We continued to invest in intellectual property rights
which used cash of $1.3 million. In November 2006, we sold a 21,000 square foot
fabrication facility located near Kalispell, Montana for $1.9 million.

Investing activities in fiscal 2005
included $6.4 million in purchases of factory equipment and other property and net cash
proceeds of $5.5 million from the sale of marketable securities. We invested an additional
$6.9 million in our development and demonstration laboratories primarily for tools on our
Raider platform in fiscal 2005 by transferring finished goods inventory to property, plant
and equipment. We also continued to invest in intellectual property rights which used cash
of $1.2 million.

26

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Financing Activities.Financing
activities in fiscal 2006 consisted primarily of approximately $27.8 million in cash
proceeds from an equity offering of three million shares of common stock in December 2005,
net borrowings under our revolving credit facility of approximately $3.1 million,
borrowings under long-term debt of $2.1 million, primarily for the new facility being
constructed in Austria and $1.3 million from the exercise of stock options.

Financing activities in fiscal 2005
consisted primarily of cash received from stock option exercises of $349,000 and
borrowings under long-term debt of $1.3 million for a new facility being constructed in
Austria. Long-term debt for the facility increased to approximately $3.0 million in fiscal
2006 with a fixed interest rate of 3.5% for five years. Cash proceeds were offset by
long-term debt repayments of $225,000 during fiscal 2005.

Off-Balance Sheet Arrangements. We do not have any relationships with unconsolidated entities or financial
partnerships, such as entities often referred to as structured finance or special purpose
entities, which would have been established for the purpose of facilitating off-balance
sheet arrangements or other contractually narrow or limited purposes. As such, we are not
exposed to the types of financing, liquidity, market or credit risks that could arise if
we had engaged in such relationships.

The following commitments as of
September 30, 2006, incurred in the normal course of business, have been included in the
consolidated financial statements with the exception of purchase order commitments and
operating lease obligations, which are properly excluded under accounting principles
generally accepted in the United States of America. They are disclosed in the following
table in order to provide a consolidated picture of our financial position and liquidity.

|                           | Payments Due by Period | 
|-------------------------- | ---------------------- | 
|
|
|Long-term debt             |                        | 
|Capital lease obligations  |                        | 
|Operating leases           |                        | 
|Purchase order commitments |                        | 
|                           |                        | 
|Total commitments          |                        | 
|                           |                        | 

We have agreements with limited
liability companies wholly-owned by Mr. Raymon F. Thompson, our Chairman and Chief
Executive Officer, to lease aircraft and an aircraft hangar. Under these agreements, rent
expense was approximately $3,289,200 for the years ended September 30, 2006 and 2005, and
$2,933,600 for the year ended September 30, 2004. The current rental rate is approximately
$274,000 per month for both the aircraft and the hangar; the lease terms are
month-to-month and therefore are not included in the above table. In fiscal 2004, we
incurred $802,000 of leasehold improvements to leased aircraft. The improvements are being
amortized over a three-year period, which represents the estimated useful life.

In December 2004, we sold a
condominium located in Kalispell, Montana to Larry E. Murphy, our President and Chief
Operating Officer, for $250,000 in cash. The condominium had previously been used to
provide short-term housing to employees who were not located in the Kalispell area. The
terms were negotiated with Mr. Murphy based on the estimated current market value of the
condominium.

As of September 30, 2006, our
principal sources of liquidity consisted of approximately $17.3 million of cash and cash
equivalents and $26.9 million available under our $30.0 million revolving line of credit.
The credit facility is with Wells Fargo and bears interest at the banks prime
lending rate, 8.25% as of September 30, 2006, or at our option, LIBOR plus 2.25%, or 7.57%
as of that date. The revolving credit line expires on March 1, 2008. The Credit Agreement
has various restrictive covenants including a prohibition against pledging real, fixed or
intangible assets during the term of the agreement and the maintenance of various
financial ratios. If we were to default on the Credit Agreement or if there were a
materially adverse change in our financial condition, the bank reserves the right to
accelerate payment of any advances outstanding under the Credit Agreement. We are in
compliance with our debt covenants.

We believe that we have sufficient
cash and cash equivalents, along with funds expected to be generated from operations and
amounts available under our credit facility to meet operating expenses and planned capital
expenditures through fiscal 2007 and into the foreseeable future. However, continued
growth in shipments of product may require additional funding. We estimate capital
expenditures will be between $10.0 million and $12.0 million during the next twelve
months. We currently have an effective shelf registration statement, which registers the
offer and sale of up to an aggregate $47 million of our securities. If additional
financial resources are required in the future, we expect either to issue securities from
the shelf registration statement or to issue other financial instruments, whichever
management deems advisable. Of course, there can be no assurance that in the future we
will be able to issue additional common stock or other financial instruments on acceptable
terms.

27

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# Critical Accounting
Policies and Estimates

The preparation of consolidated
financial statements in conformity with accounting principles generally accepted in the
United States of America requires us to make estimates and judgments that affect the
reported amounts of assets, liabilities, revenues and expenses, and related disclosure of
contingent liabilities. On an on-going basis, we evaluate our estimates, including those
related to revenue recognition, inventories, warranty obligations, bad debts, investments,
intangible assets, income taxes, financing operations, employee benefits, contingencies and litigation. We
base our estimates on historical experience and on various other assumptions that are
believed to be reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are not readily
apparent from other sources. Actual results may differ from these estimates under
different assumptions or conditions.

We believe the following critical
accounting policies and estimates affect our more significant judgments and estimates used
in the preparation of our consolidated financial statements.

Revenue Recognition.Revenue
recognition is significant because revenue is a key component of our results of
operations. We recognize revenue under the guidance for Staff Accounting Bulletin No. 104
(SAB 104), Revenue Recognition. Under this method, revenue is recognized only
when persuasive evidence of an arrangement exists, delivery has occurred or services have
been rendered, the sellers price is fixed or determinable and collectibility is
reasonably assured. Our product sales generally contain substantive customer acceptance
provisions. Sales of new products to new or existing customers are not recognized until
customer acceptance. Likewise, sales of existing products to new customer environments are
not recognized until customer acceptance. If multiple elements exist, sales of existing
products into existing customer environments are treated as such in accordance with
Emerging Issues Task Force Issue No. 00-21, Accounting for Revenue Arrangements with
Multiple Deliverables. The amount of revenue recognized in multiple element
arrangements is the lesser of the fair value of the equipment or the contracted amount
that was due or payable upon title transfer. The revenue for elements other than equipment
is recorded in deferred profit and is recognized when the remaining goods and/or services
are delivered or performed. Revenue related to service is recognized upon completion of
performance of the service or ratably over the life of the related service contract. Spare
parts sales are recognized upon shipment when title and risk of loss pass to the customer.
Unearned revenue from service contract agreements is included in Customer Advances in the
current liabilities section of the Consolidated Balance Sheets.

In addition, the timing of certain
expenses, such as cost of sales, including installation and warranty, and commission
expenses coincides with the recognition of the related revenues. We follow specific
guidelines in measuring revenue; however, certain judgments such as the definition of a
new customer environment and new acceptance criteria or if installation is perfunctory may
be required in the application of our revenue recognition policy.

Inventories.Inventories
are valued at the lower of cost or market on a first-in, first-out basis.
Accordingly, we write down the carrying value of inventories for estimated
obsolescence and future marketability. On a quarterly basis, we compare
historical and projected sales and usage of raw materials and parts and our
assumptions about future use of raw materials, parts and finished goods with
our forecast, market demand and industry conditions to determine potential
obsolescence or whether the inventory on hand represents excess quantities. As
a result of our analysis, we record reserves impacting Cost of Sales, if
appropriate. These reserves are subject to management judgment and if actual
future use, demand or market conditions are less favorable than those projected
by us, additional inventory valuation write-downs may be required.

Warranty Obligations.We
provide for the estimated cost of equipment warranties when the related revenue is
recognized. We track individual warranties on a tool-by-tool basis and develop estimated
rates by equipment class based on this history. The rates are used to estimate the
warranty accrual for a given specific piece of equipment. These rates are revised
periodically to reflect current cost trends due to the current life cycle of that product
class. The warranty accrual is reduced by actual costs of providing the warranty or if a
balance is remaining at the end of the warranty period, then that amount is also written
off. Warranty accrual expense impacts primarily Cost of Sales. While we engage in
extensive product quality programs and processes, including actively monitoring and
evaluating the quality of our component suppliers, our warranty obligation is affected by
product failure rates, material usage and service delivery costs incurred in correcting a
product failure. Should actual product failure rates, material usage or service delivery
costs differ from our estimates, revisions to the estimated warranty liability would 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. We record expense as a component of
selling, general and administrative within the Consolidated Statements of Income. If the
financial condition of our customers were to deteriorate, due to the cyclicality of the
industries we serve or for other reasons, resulting in an impairment of their ability to
make payments, additional allowances and expense may be required. Likewise, if we are
successfully able to collect on an amount presumed to be uncollectible, the allowance for
doubtful accounts and the related expense may be reduced. In general, it takes longer to
collect payment in the capital equipment industry than in certain other industries. Days
Sales Outstanding (DSO) of peer companies in our industry ranges between approximately 40
and 145 days.

28

---

Deferred Tax Assets.We make
estimates to determine the amount of our deferred tax assets that we believe is more
likely than not to be realized. We consider future taxable income and ongoing prudent tax
planning strategies in assessing the need for a valuation allowance; however, should we
determine that we will not be able to realize all or part of our net deferred tax asset in
the future, a decrease in the deferred tax asset would negatively impact our results of
operations, particularly the income tax provision, in the period such determination was
made.

Stock-Based Compensation. In
fiscal 2006, we adopted SFAS No. 123(R) using the modified prospective application method
and began accounting for stock-based compensation using a fair-value based recognition
method. Under the provisions of SFAS No. 123(R), stock-based compensation cost is
estimated at the grant date based on the fair-value of the award and is recognized as
expense ratably over the requisite service period of the award. Determining the
appropriate fair-value model and calculating the fair value of stock-based awards requires
considerable judgment, including estimating stock price volatility, expected option life
and forfeiture rates. We develop our estimates based on historical data and market
information which can change significantly over time. A small change in the estimates used
can have a relatively large change in the estimated valuation.

We use the Black-Scholes option
valuation model to value employee stock options, consistent with the provisions of SFAS
No. 123(R), SEC SAB No. 107 and our prior period pro forma disclosures of net earnings,
including stock-based compensation (determined under a fair value method as prescribed by
SFAS No. 123). We estimate stock price volatility based on a blended rate of historical
volatility and the implied volatility derived from traded options on our stock. Estimated
option life and forfeiture rate assumptions are derived from historical data. For
stock-based compensation awards with graded vesting that were granted after fiscal 2005,
we recognize compensation expense using the straight-line amortization method. As of
September 30, 2006, $3.1 million of total unrecognized compensation cost related to
non-vested awards is expected to be recognized over a weighted average period of 1.9
years.

Prior to the adoption of SFAS No.
123(R), the Company accounted for stock-based employee compensation using the intrinsic
value method under APB No. 25 and had adopted the disclosure-only provisions of Statement
of Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation (SFAS No. 123) as amended by SFAS No. 148, Accounting for
Stock-Based Compensation Transition and Disclosure (SFAS No. 148).

# Litigation

We are involved in legal proceedings
that arise in the ordinary course of our business. Although there can be no assurance as
to the ultimate disposition of these matters, it is the opinion of management, based upon
the information available at this time, that the currently expected outcome of these
matters, individually or in the aggregate, will not have a material adverse effect on our
business, financial condition, results of operations or cash flows.

# New Accounting
Pronouncements

In May 2005, the Financial Accounting
Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 154,
Accounting Changes and Error Corrections, a replacement of APB Opinion No. 20 and
FASB Statement No. 3. SFAS No. 154 requires retrospective application to prior
period financial statements for changes in accounting principle, unless it is
impracticable to determine either the period-specific effects or the cumulative effect of
the change. SFAS No. 154 also requires that retrospective application of a change in
accounting principle be limited to the direct effects of the change. Indirect effects of a
change in accounting principle should be recognized in the period of the accounting
change. SFAS No. 154 further requires a change in depreciation, amortization or depletion
method for long-lived, non-financial assets to be accounted for as a change in accounting
estimate effected by a change in accounting principle. SFAS No. 154 is effective for
accounting changes and corrections of errors made in fiscal years beginning after December
15, 2005. Accordingly, we will adopt SFAS No. 154 in the first quarter of fiscal 2007. We
will only be impacted by the adoption of SFAS No. 154 if we implement changes in
accounting principles that are addressed by the standard or correct accounting errors in
future periods.

In July 2006, the FASB issued
Interpretation No. 48, Accounting for Uncertainty in Income Taxes-an
Interpretation of FASB Statement 109,(FIN 48) which clarifies the accounting
for uncertain tax positions. FIN 48 provides that the tax effects from an uncertain tax
position be recognized in our financial statements, only if the position is more likely
than not of being sustained on audit, based on the technical merits of the position. The
provisions of FIN 48 are effective for fiscal years beginning after December 15, 2006.
Accordingly, we will adopt FIN 48 in fiscal 2008. We are currently evaluating the impact
of adopting FIN 48 on our results of operations and financial condition.

In June 2006, the FASB ratified
Emerging Issues Task Force (EITF) Issue No. 06-3, How Taxes Collected from Customers
and Remitted to Governmental Authorities Should Be Presented in the Income Statement (That
Is, Gross Versus Net Presentation) (EITF 06-3). This standard allows companies to
present in their statements of income any taxes assessed by a governmental authority that
are directly imposed on revenue-producing transactions between a seller and a customer,
such as sales, use, value-added, and some excise taxes, on either a gross (included in
revenue and costs) or a net (excluded from revenue) basis. The provisions of this EITF
Issue are effective for interim and annual reporting periods after December 15, 2006.
Accordingly, we will adopt EITF 06-3 in fiscal 2007. We are currently evaluating the
impact of adopting EITF 06-3 but do not expect its adoption to have a significant impact
on our results of operations and financial condition.

29

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In September 2006, the SEC staff
issued Staff Accounting Bulletin (SAB) No. 108, Considering the Effects of Prior
Year Misstatements when Quantifying Misstatements in Current Year Financial
Statements.  In SAB No. 108, the SEC staff established an approach that
requires quantification of financial statement misstatements based on the effects of the
misstatements on each of the companys financial statements and the related financial
statement disclosures.  SAB No. 108 permits existing public companies to initially
apply its provisions either by (i) restating prior financial statements or (ii) recording
the cumulative effect as adjustments to the carrying values of assets and liabilities with
an offsetting adjustment recorded to the opening balance of retained earnings.  SAB
No. 108 is effective for the first fiscal year ending after November 15, 2006. We are
required to adopt SAB No. 108 by the end of fiscal 2007 and do not expect adoption to have
a significant impact on our results of operations or financial condition.

In September 2006, the FASB issued
SFAS No. 157, Fair Value Measurements.  SFAS No. 157 clarifies the
definition of fair value, establishes a framework for measuring fair value in generally
accepted accounting principles and expands disclosures about fair value
measurements.  SFAS No. 157 applies under other accounting pronouncements that
require or permit fair value measurements.  SFAS No. 157 is effective for fiscal
years beginning after November 17, 2007 and interim periods within those fiscal years.
Accordingly, we will adopt SFAS No. 157 in the first quarter of fiscal 2009. We currently
are evaluating the impact this statement will have on our consolidated financial
statements.

# Item 7A.  Quantitative and
Qualitative Disclosures About Market Risk

# Market Risks

Market risks relating to our
operations result primarily from changes in interest rate and changes in foreign currency
exchange rates.

As of September 30, 2006, we had
approximately $5.3 million in long-term debt and approximately $3.1 million in short-term
debt. Our long-term debt bears interest at a fixed rate. As a result, changes in the fixed
rate interest market would change the estimated fair value of the fixed rate long-term
debt. Our short-term debt bears interest at the banks prime lending rate, 8.25% as of September 30, 2006, or at
our option, LIBOR plus 2.25%, or 7.57% as of that date. However, we believe
that a 10% change in the long-term or the short-term interest rates would not have a
material effect on our business, financial condition, results of operations or cash flows.
See Note 7  Long-Term Debt and Capital Leases.

All of our international operations
are subject to inherent risks in conducting business abroad, including fluctuation in the
relative value of currencies. We manage this risk and attempt to reduce such exposure
through an economic hedge using short-term forward exchange contracts. At September 30,
2006, we held forward contracts to sell Japanese Yen with a total face value of $6.2
million and a total market value of $5.9 million and a total unrealized gain of
approximately $300,000. The impact of movements in currency exchange rates on forward
contracts is offset to the extent of receivables denominated in Japanese Yen. The effect
of a 10% change in foreign exchange rates on hedged transactions involving Japanese Yen
forward exchange contracts and the underlying transactions would not be material to our
financial condition, results of operations or cash flows. We do not hold or issue
derivative financial instruments for trading or speculative purposes.

30

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# Item 8.  Financial
Statements and Supplementary Data

SEMITOOL, INC.CONSOLIDATED BALANCE SHEETSSeptember 30, 2006 and 2005
(Amounts in Thousands, Except Share Amounts)

|                                                                                 | 2006 |  | 2005 |        
|-------------------------------------------------------------------------------- | ---- |  | ---- | -------
|
|Current assets:                                                                  |      |  |      |        
|Cash and cash equivalents                                                        |      |  | $    | 17,347 
|Marketable securities                                                            |      |  |      | --     
|Trade receivables, less allowance for doubtful accounts of $269 and $270         |      | 
|in 2006 and 2005                                                                 |      |  |      | 56,593 
|Inventories                                                                      |      |  |      | 90,159 
|Income tax refund receivable                                                     |      |  |      | 211    
|Prepaid expenses and other current assets                                        |      |  |      | 2,835  
|Deferred income taxes                                                            |      |  |      | 11,268 
|                                                                                 |      |  |      |        
|Total current assets                                                             |      |  |      | 178,413
|Property, plant and equipment, net                                               |      |  |      | 44,610 
|Intangibles, less accumulated amortization of $2,390 and $1,579 in 2006 and 2005 |      |  |      | 8,470  
|Other assets                                                                     |      |  |      | 903    
|                                                                                 |      |  |      |        
|Total assets                                                                     |      |  | $    | 232,396
|                                                                                 |      |  |      |        

|LIABILITIES AND SHAREHOLDERS' EQUITY                                     |  | 
|------------------------------------------------------------------------ |  | 
|Current liabilities:                                                     |  | 
|Accounts payable                                                         |  | 
|Note payable to bank                                                     |  | 
|Accrued commissions                                                      |  | 
|Accrued warranty                                                         |  | 
|Accrued payroll and related benefits                                     |  | 
|Income taxes payable                                                     |  | 
|Other accrued liabilities                                                |  | 
|Customer advances                                                        |  | 
|Deferred profit                                                          |  | 
|Long-term debt and capital leases, due within one year                   |  | 
|                                                                         |  | 
|Total current liabilities                                                |  | 
|Long-term debt and capital leases, due after one year                    |  | 
|Deferred income taxes                                                    |  | 
|                                                                         |  | 
|Total liabilities                                                        |  | 
|                                                                         |  | 
|Commitments and contingencies                                            |  | 
|Shareholders' equity:                                                    |  | 
|Preferred stock, no par value, 5,000,000 shares authorized,              |  | 
|no shares issued and outstanding                                         |  | 
|Common stock, no par value, 75,000,000 shares authorized,                |  | 
|31,924,781 and 28,732,777 shares issued and outstanding in 2006 and 2005 |  | 
|Retained earnings                                                        |  | 
|Accumulated other comprehensive loss                                     |  | 
|                                                                         |  | 
|Total shareholders' equity                                               |  | 
|                                                                         |  | 
|Total liabilities and shareholders' equity                               |  | 
|                                                                         |  | 

The accompanying notes are an
integral part of the consolidated financial statements.

31

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SEMITOOL, INC.CONSOLIDATED STATEMENTS OF INCOME
For the years ended September 30, 2006, 2005 and 2004(Amounts in Thousands, Except Per Share
Amounts)

|                                            | 2006 |  | 2005 |         | 2004 |  
|------------------------------------------- | ---- |  | ---- | ------- | ---- | -
|Net sales                                   |      |  | $    | 243,218 |      | $
|Cost of sales                               |      |  |      | 130,299 |      |  
|                                            |      |  |      |         |      |  
|Gross profit                                |      |  |      | 112,919 |      |  
|                                            |      |  |      |         |      |  
|Operating expenses:                         |      | 
|Selling, general and administrative         |      |  |      | 73,624  |      |  
|Research and development                    |      |  |      | 24,525  |      |  
|                                            |      |  |      |         |      |  
|Total operating expenses                    |      |  |      | 98,149  |      |  
|                                            |      |  |      |         |      |  
|Income from operations                      |      |  |      | 14,770  |      |  
|                                            |      |  |      |         |      |  
|Other income (expense):                     |      | 
|Interest income                             |      |  |      | 493     |      |  
|Interest expense                            |      |  |      | (479    | )    |  
|Other, net                                  |      |  |      | (131    | )    |  
|                                            |      |  |      |         |      |  
|Total other income (expense)                |      |  |      | (117    | )    |  
|                                            |      |  |      |         |      |  
|Income before income taxes                  |      |  |      | 14,653  |      |  
|Income tax provision                        |      |  |      | 4,817   |      |  
|                                            |      |  |      |         |      |  
|Net income                                  |      |  | $    | 9,836   |      | $
|                                            |      |  |      |         |      |  
|Earnings per share:                         |      | 
|Basic                                       |      |  | $    | 0.32    |      | $
|                                            |      |  |      |         |      |  
|Diluted                                     |      |  | $    | 0.31    |      | $
|                                            |      |  |      |         |      |  
|Weighted average common shares outstanding: |      | 
|Basic                                       |      |  |      | 31,174  |      |  
|Diluted                                     |      |  |      | 31,518  |      |  

The accompanying notes are an
integral part of the consolidated financial statements.

32

---

SEMITOOL, INC.CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY
For the years ended September 30, 2006, 2005 and 2004(Amounts in Thousands)

|                                      | Common Stock |  |   |        | 
|------------------------------------- | ------------ |  | - | ------ | 
|
|Balance September 30, 2003            |              |  |   | 28,456 | 
|Net income                            |              |  |   | --     | 
|Exercise of stock options             |              |  |   | 212    | 
|Income tax effect of stock option     |              | 
|transactions                          |              |  |   | --     | 
|Compensation expense recognized under |              | 
|employee stock option plans           |              |  |   | --     | 
|Other comprehensive income            |              |  |   | --     | 
|                                      |              |  |   |        | 
|Balance September 30, 2004            |              |  |   | 28,668 | 
|Net income                            |              |  |   | --     | 
|Exercise of stock options             |              |  |   | 65     | 
|Income tax effect of stock option     |              | 
|transactions                          |              |  |   | --     | 
|Compensation expense recognized under |              | 
|employee stock option plans           |              |  |   | --     | 
|Other comprehensive loss              |              |  |   | --     | 
|                                      |              |  |   |        | 
|                                      |              |  |   |        | 
|Balance September 30, 2005            |              |  |   | 28,733 | 
|Net income                            |              |  |   | --     | 
|Exercise of stock options             |              |  |   | 192    | 
|Proceeds from stock offering          |              |  |   | 3,000  | 
|Income tax effect of stock option     |              | 
|transactions                          |              |  |   | --     | 
|Compensation expense recognized under |              | 
|employee stock option plans           |              |  |   | --     | 
|Other comprehensive loss              |              |  |   | --     | 
|                                      |              |  |   |        | 
|Balance September 30, 2006            |              |  | $ | 31,925 | 
|                                      |              |  |   |        | 

The accompanying notes are an
integral part of the consolidated financial statements.

33

---

SEMITOOL, INC.CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended September 30, 2006, 2005 and 2004(Amounts in Thousands)

|                                                                   | 2006 |  | 2005 |         | 2004 |  
|------------------------------------------------------------------ | ---- |  | ---- | ------- | ---- | -
|Operating activities:                                              |      |  |      |         |      |  
|Net income                                                         |      |  | $    | 9,836   |      | $
|Adjustments to reconcile net income  to net                        |      | 
|cash provided by (used in) operating activities:                   |      | 
|Loss on disposition of assets                                      |      |  |      | 125     |      |  
|Depreciation and amortization                                      |      |  |      | 9,743   |      |  
|Deferred income taxes                                              |      |  |      | (2,014  | )    |  
|Income tax benefit received on the exercise of stock-based awards  |      |  |      | 99      |      |  
|Compensation expense recognized under employee stock options plans |      |  |      | 1,396   |      |  
|Change in:                                                         |      | 
|Trade receivables                                                  |      |  |      | (15,613 | )    |  
|Inventories                                                        |      |  |      | (21,804 | )    |  
|Income tax refund receivable                                       |      |  |      | (207    | )    |  
|Prepaid expenses and other current assets                          |      |  |      | 1,261   |      |  
|Other assets                                                       |      |  |      | (191    | )    |  
|Accounts payable                                                   |      |  |      | 4,009   |      |  
|Accrued commissions                                                |      |  |      | (482    | )    |  
|Accrued warranty                                                   |      |  |      | 1,854   |      |  
|Accrued payroll and related benefits                               |      |  |      | 1,348   |      |  
|Income taxes payable                                               |      |  |      | 2,533   |      |  
|Other accrued liabilities                                          |      |  |      | (1,580  | )    |  
|Customer advances                                                  |      |  |      | 3,568   |      |  
|Deferred profit                                                    |      |  |      | (2,262  | )    |  
|                                                                   |      |  |      |         |      |  
|Net cash provided by (used in) operating activities                |      |  |      | (8,381  | )    |  
|                                                                   |      |  |      |         |      |  
|Investing activities:                                              |      | 
|Purchases of marketable securities                                 |      |  |      | --      |      |  
|Proceeds from sale and maturities of marketable securities         |      |  |      | 475     |      |  
|Purchases of property, plant and equipment                         |      |  |      | (14,270 | )    |  
|Increases in intangible assets                                     |      |  |      | (1,300  | )    |  
|Proceeds from sale of property, plant and equipment                |      |  |      | 152     |      |  
|                                                                   |      |  |      |         |      |  
|Net cash used in investing activities                              |      |  |      | (14,943 | )    |  
|                                                                   |      |  |      |         |      |  
|Financing activities:                                              |      | 
|Net proceeds from stock offering                                   |      |  |      | 27,788  |      |  
|Proceeds from exercise of stock options                            |      |  |      | 1,274   |      |  
|Excess tax benefits received on the exercise of stock-based awards |      |  |      | 328     |      |  
|Borrowings under line of credit and short-term debt                |      |  |      | 82,779  |      |  
|Repayments of line of credit and short-term debt                   |      |  |      | (79,671 | )    |  
|Borrowings under long-term debt                                    |      |  |      | 2,075   |      |  
|Repayments of long-term debt and capital leases                    |      |  |      | (375    | )    |  
|                                                                   |      |  |      |         |      |  
|Net cash provided by financing activities                          |      |  |      | 34,198  |      |  
|                                                                   |      |  |      |         |      |  
|Effect of exchange rate changes on cash and cash equivalents       |      |  |      | (84     | )    |  
|                                                                   |      |  |      |         |      |  
|Net increase (decrease) in cash and cash equivalents               |      |  |      | 10,790  |      |  
|Cash and cash equivalents at beginning of year                     |      |  |      | 6,557   |      |  
|                                                                   |      |  |      |         |      |  
|Cash and cash equivalents at end of year                           |      |  | $    | 17,347  |      | $
|                                                                   |      |  |      |         |      |  

34

---

SEMITOOL,
INC.CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUEDFor the years ended
September 30, 2006, 2005 and 2004(Amounts in Thousands)

|                                                                       | 2006 |  | 2005 |       | 2004 |  
|---------------------------------------------------------------------- | ---- |  | ---- | ----- | ---- | -
|Supplemental disclosures of cash flow information:                     |      |  |      |       |      |  
|Cash paid (received) during the year for:                              |      | 
|Interest, net of amounts capitalized                                   |      |  | $    | 457   |      | $
|Income taxes                                                           |      |  |      | 2,274 |      |  
|Supplemental disclosures of non-cash financing and investing activity: |      | 
|Inventory transferred to equipment                                     |      |  | $    | 3,747 |      | $
|Assets acquired by incurring debt and capital leases                   |      |  |      | 98    |      |  
|Intangible assets acquired with the sale of products                   |      |  |      | 914   |      |  

The accompanying notes are an
integral part of the consolidated financial statements.

35

---

SEMITOOL,
INC.CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOMEFor the years ended
September 30, 2006, 2005 and 2004(Amounts in Thousands)

|                                                        | 2006 |  | 2005 |       | 2004 |  
|------------------------------------------------------- | ---- |  | ---- | ----- | ---- | -
|Net income                                              |      |  | $    | 9,836 |      | $
|Net gain (loss) on cash flow hedges                     |      |  |      | 61    |      |  
|Unrealized gain (loss) on available-for-sale securities |      |  |      | --    |      |  
|Foreign currency translation adjustments                |      |  |      | (179  | )    |  
|                                                        |      |  |      |       |      |  
|Total comprehensive income                              |      |  | $    | 9,718 |      | $
|                                                        |      |  |      |       |      |  

The accompanying notes are an
integral part of the consolidated financial statements.

36

---

# SEMITOOL, INC.NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS

1.     Company
Organization and Summary of Significant Accounting Policies:

| | Semitool,
Inc. (Semitool or the Company) designs, manufactures, installs and services
highly-sophisticated equipment for use in the fabrication of semiconductor devices. The
Companys products are focused on the wet chemical process steps in integrated
circuit, or IC, manufacturing and include systems for wafer surface preparation and
electrochemical deposition, or ECD, applications. Semitools surface preparation
systems are designed for wet cleaning, stripping and etching processes, including
photoresist and polymer removal and metal etching. The Companys ECD systems are
used to plate copper and other metals which are used for the ICs internal wiring,
or interconnects; to plate solder and lead free solder bumps for wafer level packaging
applications; and to plate other metals for various semiconductor and related
applications. The Companys products address critical applications within the
semiconductor manufacturing process, and help enable its customers to manufacture more
advanced semiconductor devices that feature higher levels of performance. The fabrication
of semiconductor devices typically requires several hundred manufacturing steps, with the
number of steps continuing to increase for advanced devices. Due to the breadth of the Companys
product portfolio and advanced technology capabilities, its solutions address over 150 of
these manufacturing steps.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Significant
accounting policies followed by the Company are:
| | ------------------------------------------------------------

| | Principles
of Consolidation
| | ---------------------------

| | The
consolidated financial statements include the accounts of Semitool and its wholly-owned
subsidiaries: Semitool Austria GmbH, Semitool Europe Ltd., (United Kingdom); Semitool
Halbleitertechnik Vertriebs GmbH, (Germany); Semitool France SARL; Semitool Israel Ltd.;
Semitool Italia SRL; Semitool Japan Inc.; Semitool Korea, Inc.; Semitool (Asia) Pte Ltd.,
(Singapore); Semitool Semiconductor Equipment Technology (Shanghai) Co., LTD.; Semitool
(Taiwan) Inc.; and Rhetech, Inc.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | All
significant intercompany accounts and transactions are eliminated in consolidation.
| | ---------------------------------------------------------------------------------------

| | Estimates
| | ---------

| | The
preparation of consolidated financial statements in conformity with accounting principles
generally accepted in the United States of America requires the Company to make estimates
and judgments that affect the reported amounts of assets, liabilities, revenues and
expenses, and related disclosure of contingent liabilities. On an on-going basis, the
Company evaluates its estimates, including those related to revenue recognition, bad
debts, inventories, investments, intangible assets, income taxes, financing operations,
warranty obligations, employee benefits, contingencies and litigation. The Company bases
its estimates on historical experience and on various other assumptions that are believed
to be reasonable under the circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities that are not readily
apparent from other sources. Actual results may differ from these estimates under
different assumptions or conditions.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Cash
Equivalents
| | ----------------

| | The
Company considers all highly liquid investments with purchased maturities of three months
or less to be cash equivalents. The Company invests its cash and cash equivalents in
deposits with major financial institutions, which, at times, exceed federally insured
limits. The Company has not experienced any losses on its cash and cash equivalents.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Marketable
Securities
| | ---------------------

| | The
Company classifies its marketable securities as available-for-sale in accordance with the
provision of the Statement of Financial Accounting Standards (SFAS) No. 115,
Accounting for Certain Investments in Debt and Equity Securities. Securities
classified as available-for-sale are reported at fair market value with the related
unrealized gains and losses reported as a separate component of accumulated other
comprehensive loss (OCI). Realized gains and losses and declines in value of
securities judged to be other than temporary are included in earnings.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Trade
Receivables and Allowance for Doubtful Accounts
| | -----------------------------------------------------

| | Trade
receivables are recorded at the invoice amount and do not bear interest. Past due
accounts are determined based on contractual terms. The Company maintains allowances for
doubtful accounts for estimated losses resulting from the inability of its customers to
make required payments based on its experience and knowledge of the current financial
condition of its customers.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

37

---

| | Derivatives
| | -----------

| | The
Company uses derivative instruments to manage some of its exposures to foreign currency
risks. The objective for holding derivatives is to minimize these risks using the most
effective methods to eliminate or reduce the impact of these exposures. The Company uses
cash flow hedge accounting in accordance with SFAS No. 133, Accounting For
Derivative Instruments and Hedging Activities to account for hedges. At the
inception of the hedge, the hedging relationship to a forecasted transaction, the risk
management objective and the strategy for undertaking the hedge is documented. Quarterly,
forward rates are used to evaluate hedging effectiveness. For effective hedges,
unrealized gains and losses are included in OCI. If the derivative no longer meets hedge
accounting criteria, or the terms of the hedged item change so the derivative no longer
qualifies for hedge accounting, the derivative is marked-to-market. Any amounts in OCI
relating to a derivative that no longer qualifies for hedge accounting are transferred
out of OCI and reported in earnings during the period in which hedge accounting no longer
applies. At maturity or termination the gain or loss on the derivative is calculated and
reported in earnings.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Certain
forecasted transactions and assets are exposed to foreign currency risk. The Company
monitors foreign currency exposures regularly to maximize the overall effectiveness of
the foreign currency hedge positions. The only currency hedged is the Japanese Yen.
Forward contracts used to hedge forecasted international sales on credit for up to 18
months in the future are designated as cash flow hedging instruments. Derivative gains
and losses included in OCI are reclassified when forecasted transactions become
receivables. During the fiscal year ended September 30, 2006, the amount transferred from
OCI to Other income (expense) was not material. The Company estimates that all $181,000
of net derivative gains, currently reported as a separate component of accumulated other
comprehensive loss, will be reclassified into earnings within the next 12 months.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | All
derivatives, whether designated in hedging relationships or not, are recorded on the
balance sheet at fair value. If the derivative is designated a fair value hedge, the
changes in the fair value of the derivative and of the hedged item attributable to the
hedged risk are recognized in earnings. If the derivative is designated as a cash flow
hedge, the effective portions of changes in the fair value of the derivative are recorded
in OCI and are recognized in earnings when the cash flow hedge ceases.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Ineffective
portions of changes in the fair value of cash flow hedges are recognized in earnings.
Hedge ineffectiveness, determined in accordance with SFAS No. 133, had no impact on
earnings for the fiscal years ended September 30, 2006, 2005 and 2004.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Inventories
| | -----------

| | Inventories
are carried at the lower of first-in, first-out (FIFO) cost or market. The Company
periodically reviews its inventories to identify excess and obsolete inventories and to
record such inventories at net realizable values. It is reasonably possible that the
Companys estimates of net realizable values could be revised in the near term due
to technological and other changes.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Property,
Plant and Equipment
| | -----------------------------

| | Property,
plant and equipment is stated at cost. Depreciation and amortization is provided using
the straight-line method with estimated useful lives as follows:
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                                                                                                   |                                                                                                                                                        
|---------------------------------------------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------
|Buildings and improvements
Machinery and equipment   
Furniture and fixtures    
Vehicles and aircraft     
Leasehold improvements | 10-40 years
                         2-5 years
                         3-7 years
                        5-10 years
The useful life of the improvement

| | Major
additions and betterments are capitalized. Costs of maintenance and repairs which do not
improve or extend the lives of the respective assets are expensed when incurred. When
items are disposed, the related costs and accumulated depreciation are removed from the
accounts and any gain or loss is recognized.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Long-Lived
Assets
| | -----------------

| | The
Company evaluates the carrying value of its long-lived assets whenever events or changes
in circumstances indicate that the carrying value of the asset may be impaired in
accordance with the provisions of SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets. An impairment loss is recognized when estimated
future cash flows expected to result from the use of the asset including disposition, are
less than the carrying value of the asset.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Intangible
Assets
| | -----------------

| | Intangible
assets primarily include legal costs associated with obtaining patents. The cost of granted patents is
amortized on a straight-line basis over seven years.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------

38

---

| | Revenue
Recognition
| | -------------------

| | In
December 1999, the staff of the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin No. 101 (SAB 101), Revenue Recognition in Financial Statements, which
has been subsequently updated by Staff Accounting Bulletin No. 104 (SAB 104), Revenue
Recognition. Under this method, revenue is recognized only when persuasive evidence
of an arrangement exists, delivery has occurred or services have been rendered, the sellers
price is fixed or determinable and collectibility is reasonably assured. The Companys
product sales generally contain substantive customer acceptance provisions. Sales of new
products to new or existing customers are not recognized until customer acceptance.
Likewise, sales of existing products to new customer environments are not recognized
until customer acceptance. If multiple elements exist, sales of existing products into
existing customer environments are treated as such in accordance with Emerging Issues
Task Force Issue No. 00-21, Accounting for Revenue Arrangements with Multiple
Deliverables. The amount of revenue recognized in multiple element arrangements is
the lesser of the fair value of the equipment or the contracted amount that was due or
payable upon title transfer. The revenue for elements other than equipment is recorded in
deferred profit and is recognized when the remaining goods and/or services are delivered
or performed. Revenue related to service is recognized upon completion of performance of
the service or ratably over the life of the related service contract. Spare parts sales
are recognized upon shipment when title and risk of loss pass to the customer.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Deferred
profit included in current liabilities is derived from deferred revenue, which primarily
relates to equipment shipped to customers that has not been accepted by the customer,
less the deferred cost of sales, including warranty and installation, and commission
expenses.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Warranty
Obligations
| | --------------------

| | The
Companys obligations for warranty are accrued concurrently with the revenue
recognized on the related equipment. The Company makes provisions for its warranty
obligations based upon historical costs incurred for such obligations adjusted, as
necessary, for current conditions and factors. Due to the significant uncertainties and
judgments involved in estimating the Companys warranty obligations, including
changing product designs and specifications, the ultimate amount incurred for warranty
costs could change in the near term from the Companys current estimate.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Foreign
Currency
| | ----------------

| | The
functional currency for most of the Companys foreign subsidiaries is the U.S.
Dollar. For these foreign operations, realized gains and losses from foreign currency
transactions and unrealized gains and losses from re-measurement of the financial
statements of the foreign operations into the functional currency are included in the
Consolidated Statements of Income.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Semitool
Japan uses the Yen as its functional currency and invoices its customers in Yen. All
assets and liabilities of Semitool Japan are translated at year-end exchange rates and
all revenues and expenses are re-measured at average rates prevailing during the year.
Translation adjustments are reported as a separate component of accumulated other
comprehensive loss. Transaction gains of $33,000 and $110,000 in fiscal 2006 and fiscal
2005 and a loss of $1,500 in fiscal 2004 related to cash flow hedges and their underlying
receivables are included in other income (expense) in the Consolidated Statements of
Income.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Research
and Development Costs
| | ------------------------------

| | Research
and Development (R&D) expense consists of salaries, project materials, laboratory
costs, consulting fees and other costs associated with product development efforts. Costs
of research and development are expensed as incurred.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Stock-Based
Compensation
| | ------------------------

| | The 2004 Stock Option
PlanIn
February 2004, the Board of Directors adopted and the shareholders approved the 2004
Stock Option Plan (the Option Plan), replacing the Semitool, Inc. 1994 Stock Option Plan.
The total shares reserved for issuance under the Option Plan are 3,300,000 at September
30, 2006. Options granted under the Option Plan generally become exercisable at a rate of
5% per quarter commencing three months after the grant date, and have a requisite service
period of five years. The Company may grant options that qualify as incentive stock
options to employees and nonqualified stock options to employees, officers and directors,
independent contractors and consultants. Options generally have a ten year term. Option
exercises are settled with newly issued common shares.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
December 1994, the Board of Directors adopted and the shareholders approved the Semitool,
Inc. 1994 Stock Option Plan (the 1994 Option Plan). The total shares reserved for
issuance under the 1994 Option Plan were 3,300,000. Options granted under the 1994 Option
Plan generally became exercisable at a rate of 5% per quarter commencing three months
after the grant date. Semitool could grant options that qualified as incentive stock
options to employees and nonqualified stock options to employees, officers and directors,
independent contractors and consultants. The 1994 Option Plan also provided for automatic
grants of nonqualified stock options to independent directors. Upon adoption of the
Option Plan, no further options were granted under the 1994 Option Plan and it expired by
its own terms in December 2004. Options generally had a ten year term. Upon adoption of
the 2004 Stock Option Plan, no further options were granted under the 1994 Option Plan.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

39

---

| | Effective
October 1, 2005, the Company adopted the provisions of SFAS No. 123(R), Share-Based
Payment. SFAS No. 123(R) establishes accounting for stock-based awards exchanged
for employee services. Accordingly, stock-based compensation cost is measured at grant
date, based on the fair value of the award and is recognized as expense, amortized on a
straight-line basis, over the requisite service period of the individual grants, which
generally equals the vesting period.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Prior to the adoption
of SFAS No. 123(R)Prior
to the adoption of SFAS No. 123(R), the Company accounted for stock-based employee
compensation using the intrinsic value method under Accounting Principles Board Opinion
No. 25, Accounting for Stock Issued to Employees (APB No. 25) and had adopted
the disclosure-only provisions of Statement of Financial Accounting Standards No. 123,
Accounting for Stock-Based Compensation (SFAS No. 123) as amended by SFAS No.
148, Accounting for Stock-Based Compensation Transition and Disclosure (SFAS
No. 148). APB No. 25 provided that compensation expense relative to employee stock
options be measured based on the intrinsic value of the stock options granted.
Compensation expense was recognized in the statement of income in the case where the
stock options were granted at exercise prices below fair market value on the date of
grant. The Company amortized deferred stock-based compensation cost on the accelerated
vesting method described in FASB Interpretation Number 28, Accounting for Stock
Appreciation Rights and Other Variable Stock Option or Award Plans  an
Interpretation of APB Opinions No. 15 and 25 over the vesting periods of the
applicable stock options (normally five years). If the stock options were granted at
market value, no compensation expense was recorded. SFAS No. 123 provided for a fair
value based method of accounting for an employee stock option. For stock options, fair
value is determined using an option pricing model that takes into account the stock price
at the grant date, the exercise price, the expected life of the option, the volatility of
the underlying stock and the expected dividends on it, and the risk-free rate over the
expected life of the option. SFAS No. 123 required entities that continued to use the
intrinsic value based method of accounting prescribed by APB No. 25 to provide pro forma
disclosures of net income and earnings per share as if the fair value method of
accounting had been used. SFAS No. 148 required prominent disclosure of the method
used to value options and the effect of the method used on reported results in both annual
and interim financial statements. The pro forma information for fiscal 2005 and fiscal 2004 was
as follows (in thousands, except per share amounts):
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                               | 2005 |  | 2004 |       
|---------------------------------------------- | ---- |  | ---- | ------
|Net income, as reported                        |      |  | $    | 10,050
|Add: Compensation expense recorded             |      | 
|under APB No. 25, net of tax related effects   |      |  |      | 175   
|Deduct: Total stock-based compensation expense |      | 
|determined under fair value based method for   |      | 
|all awards, net of tax related effects         |      |  |      | (843  
|                                               |      |  |      |       
|Pro forma net income                           |      |  | $    | 9,382 
|                                               |      |  |      |       
|Basic earnings per share:                      |      | 
|As reported                                    |      |  | $    | 0.35  
|Pro forma                                      |      |  | $    | 0.33  
|Diluted earnings per share:                    |      | 
|As reported                                    |      |  | $    | 0.35  
|Pro forma                                      |      |  | $    | 0.32  

| | Impact of the
adoption of SFAS No. 123(R)The
Company elected to adopt the modified prospective application method as provided by SFAS
No. 123(R). As a result, the Companys statements of income as of September 30, 2006
reflect compensation cost for new stock options granted under the Option Plan during
fiscal 2006 and the unvested portion of previous stock option grants which vested during
fiscal 2006. Total compensation cost recorded in fiscal 2006 was $1.4 million pre-tax, or
$0.94 million after tax, an impact of approximately $0.03 per basic and diluted share. As
of September 30, 2006, $3.1 million of total unrecognized compensation cost related to
non-vested awards is expected to be recognized over a weighted average period of 1.9
years.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

40

---

| | The
fair value of each option grant is estimated on the date of grant using the Black-Scholes
option pricing model. Expected volatilities are based on a blended rate of historical and
implied volatilities from the traded options on the Companys stock. The expected
term of options granted is based on analyses of historical employee termination rates,
option exercises and other factors. The risk-free rates are based on the U.S. Treasury
yield in effect at the time of the grant. The assumptions used in the Black-Scholes model
are presented below:
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                    | 2006 |  | 2005 |      | 2004 | 
|----------------------------------- | ---- |  | ---- | ---- | ---- | 
|Expected stock price volatility     |      |  |      | 59.6 | %    | 
|Risk-free interest rate             |      |  |      | 4.6  | %    | 
|Dividend yield                      |      |  |      | 0.0  | %    | 
|Expected life of options (in years) |      |  |      | 5.2  |      | 

| | A
summary of the Companys option activity for fiscal 2006 is as follows:
| | -------------------------------------------------------------------------

|                                  | Number
of Shares |  | Weighted
Average
Exercise Price
Per share |       | Weighted
Average
Remaining
Contractual
Term |  | Aggregate
Intrinsic
Value | 
|--------------------------------- | ---------------- |  | ----------------------------------------- | ----- | ------------------------------------------- |  | ------------------------- | 
|
|Outstanding at September 30, 2005 |                  |  |                                           | 1,983 |                                             |  | $7.36                     | 
|Options granted                   |                  |  |                                           | 142   |                                             |  | 8.78                      | 
|Options exercised                 |                  |  |                                           | (192  | )                                           |  | 6.64                      | 
|Options forfeited                 |                  |  |                                           | (11   | )                                           |  | 7.89                      | 
|                                  |                  |  |                                           |      
|                                  |                  |  |                                           |      
|Outstanding at September 30, 2006 |                  |  |                                           | 1,922 |                                             |  | $7.53                     | 
|                                  |                  |  |                                           |      
|Exercisable at September 30, 2006 |                  |  |                                           | 1,167 |                                             |  | $7.50                     | 

| | The
weighted average grant date fair values based on the Black-Scholes option pricing model
for options granted in fiscal 2006, fiscal 2005 and fiscal 2004 were $4.86, $5.29 and
$5.68 per share, respectively. The total intrinsic value of options exercised during
fiscal 2006 was $1.0 million.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company elected to adopt the alternative transition method provided in the FASB Staff
Position No. FAS 123(R)-3, Transition Election Related to Accounting for Tax
Effects of Share-Based Payment Awards for calculating the tax effects of
stock-based compensation pursuant to SFAS 123R. The alternative transition method
includes computational guidance to establish the beginning balance of the additional
paid-in capital pool (APIC Pool) related to the tax effects of employee stock-based
compensation awards that are vested and outstanding upon adoption of SFAS 123(R).
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Computation
of Earnings Per Share
| | ---------------------------------

| | The
computation of basic and diluted earnings per share is based on the following (in
thousands):
| | -------------------------------------------------------------------------------------------------

|                                           | 2006 |  | 2005 |        | 2004 |  
|------------------------------------------ | ---- |  | ---- | ------ | ---- | -
|Numerator:                                 |      |  |      |        |      |  
|Net income used for basic and diluted      |      | 
|earnings per share                         |      |  | $    | 9,836  |      | $
|                                           |      |  |      |        |      |  
|Denominator:                               |      | 
|Weighted average common shares used for    |      | 
|basic earnings per share                   |      |  |      | 31,174 |      |  
|Effects of dilutive stock options          |      |  |      | 344    |      |  
|                                           |      |  |      |        |      |  
|Denominator for diluted earnings per share |      |  |      | 31,518 |      |  
|                                           |      |  |      |        |      |  

| | Diluted
earnings per share excludes the effects of antidilutive stock options to purchase
209,575, 403,350 and 194,250 shares of common stock in fiscal 2006, 2005 and 2004,
respectively.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

41

---

| | Reclassifications
| | -----------------

| | Certain
reclassifications have been made to the prior year financial statements to conform to the
current year presentation.
| | ----------------------------------------------------------------------------------------------------------------------------

| | New
Accounting Pronouncements
| | -----------------------------

| | In
May 2005, the Financial Accounting Standards Board (FASB) issued Statement of Financial
Accounting Standards (SFAS) No. 154, Accounting Changes and Error Corrections, a
replacement of APB Opinion No. 20 and FASB Statement No. 3. SFAS No. 154 requires
retrospective application to prior period financial statements for changes in accounting
principle, unless it is impracticable to determine either the period-specific effects or
the cumulative effect of the change. SFAS No. 154 also requires that retrospective
application of a change in accounting principle be limited to the direct effects of the
change. Indirect effects of a change in accounting principle should be recognized in the
period of the accounting change. SFAS No. 154 further requires a change in depreciation,
amortization or depletion method for long-lived, non-financial assets to be accounted for
as a change in accounting estimate effected by a change in accounting principle. SFAS No.
154 is effective for accounting changes and corrections of errors made in fiscal years
beginning after December 15, 2005. Accordingly, the Company will adopt SFAS No. 154 in
the first quarter of fiscal 2007. The Company will only be impacted by the adoption of
SFAS No. 154 if it implements changes in accounting principles that are addressed by the
standard or corrects accounting errors in future periods.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
July 2006, the FASB issued Interpretation No. 48, Accounting for
Uncertainty in Income Taxes-an Interpretation of FASB Statement 109,(FIN 48)
which clarifies the accounting for uncertain tax positions. FIN 48 provides that the tax
effects from an uncertain tax position be recognized in the Companys financial
statements, only if the position is more likely than not of being sustained on audit,
based on the technical merits of the position. The provisions of FIN 48 are effective for
fiscal years beginning after December 15, 2006. Accordingly, the Company will adopt FIN
48 in fiscal 2008. The Company is currently evaluating the impact of adopting FIN 48 on
its results of operations and financial condition.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
June 2006, the FASB ratified Emerging Issues Task Force (EITF) Issue No. 06-3, How
Taxes Collected from Customers and Remitted to Governmental Authorities Should Be
Presented in the Income Statement (That Is, Gross Versus Net Presentation) (EITF
06-3). This standard allows companies to present in their statements of income any taxes
assessed by a governmental authority that are directly imposed on revenue-producing
transactions between a seller and a customer, such as sales, use, value-added, and some
excise taxes, on either a gross (included in revenue and costs) or a net (excluded from
revenue) basis. The provisions of this EITF Issue are effective for interim and annual
reporting periods after December 15, 2006. Accordingly, the Company will adopt EITF 06-3
in fiscal 2007. The Company is currently evaluating the impact of adopting EITF 06-3 but
does not expect its adoption to have a significant impact on its results of operations
and financial condition.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
September 2006, the SEC staff issued Staff Accounting Bulletin (SAB) No. 108, Considering
the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year
Financial Statements.  In SAB No. 108, the SEC staff established an approach
that requires quantification of financial statement misstatements based on the effects of
the misstatements on each of the companys financial statements and the related
financial statement disclosures.  SAB No. 108 permits existing public companies to
initially apply its provisions either by (i) restating prior financial statements or (ii)
recording the cumulative effect as adjustments to the carrying values of assets and
liabilities with an offsetting adjustment recorded to the opening balance of retained
earnings.  SAB No. 108 is effective for the first fiscal year ending after November
15, 2006. The Company is required to adopt SAB No. 108 by the end of fiscal 2007 and does
not expect adoption to have a significant impact on its results of operations or
financial condition.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. SFAS
No. 157 clarifies the definition of fair value, establishes a framework for measuring
fair value in generally accepted accounting principles and expands disclosures about fair
value measurements.  SFAS No. 157 applies under other accounting pronouncements that
require or permit fair value measurements.  SFAS No. 157 is effective for fiscal
years beginning after November 17, 2007 and interim periods within those fiscal years.
Accordingly, the Company will adopt SFAS No. 157 in the first quarter of fiscal 2009. The
Company currently is evaluating the impact this statement will have on its consolidated
financial statements.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

2.     Securities
Available-For-Sale:

| | The
Company held no securities available for sale at September 30, 2006. Securities
available-for-sale in fiscal 2005 consisted of the following (in thousands):
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------

|                      | Amortized
Cost |  | Gross
Unrealized
Gain |     | Gross
Unrealized
Loss |   | Market
Value | 
|--------------------- | -------------- |  | --------------------- | --- | --------------------- | - | ------------ | 
|Non-taxable municipal |                |  | $                     | 865 |                       | $ | --           | 
|                      |                |  |                       |    

| | Cash
and cash equivalents included investments in debt instruments and other securities of
zero and $390,000 at September 30, 2006 and September 30, 2005, respectively.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------

42

---

| | Contractual
maturities of short-term investments at September 30, 2005 were all due in less than one
year. Gross realized gains or losses were immaterial on sales of available-for-sale
securities for fiscal 2005. Semitool manages its cash equivalents and short-term
investments as a single portfolio of highly liquid securities that is intended to be
available to meet the Companys current cash requirements.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

3.     Inventories:

| | Inventories
at September 30, 2006 and 2005 are summarized as follows (in thousands):
| | ------------------------------------------------------------------------------------

|                        | 2006 |  | 2005 |       
|----------------------- | ---- |  | ---- | ------
|Parts and raw materials |      |  | $    | 47,793
|Work-in-process         |      |  |      | 33,878
|Finished goods          |      |  |      | 8,488 
|                        |      |  |      |       
|                        |      |  | $    | 90,159
|                        |      |  |      |       

4.     Property,
Plant and Equipment:

| | Property,
plant and equipment at September 30, 2006 and 2005 is summarized as follows (in
thousands):
| | -----------------------------------------------------------------------------------------------------

|                                               | 2006 |  | 2005 |        
|---------------------------------------------- | ---- |  | ---- | -------
|Buildings and improvements                     |      |  | $    | 30,176 
|Machinery and equipment                        |      |  |      | 38,550 
|Furniture, fixtures and leasehold improvements |      |  |      | 10,563 
|Vehicles and aircraft                          |      |  |      | 9,724  
|                                               |      |  |      |        
|                                               |      |  |      | 89,013 
|Less accumulated depreciation and amortization |      |  |      | (48,838
|                                               |      |  |      |        
|                                               |      |  |      | 40,175 
|Land and land improvements                     |      |  |      | 4,435  
|                                               |      |  |      |        
|                                               |      |  | $    | 44,610 
|                                               |      |  |      |        

| | Depreciation
expense was $8,904,000, $6,694,000 and $5,187,000 for fiscal 2006, 2005 and 2004,
respectively.
| | ------------------------------------------------------------------------------------------------------------

5.     Intangible
Assets:

| | Amortization
expense for intangible assets was $811,000, $549,000 and $418,000 for fiscal 2006, 2005
and 2004, respectively. Based primarily on patent rights granted and recorded at
September 30, 2006, and assuming no subsequent impairment of the underlying assets, the
annual estimated amortization expense is expected to be as follows (in thousands):
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Year Ending
September 30, |  | Total      | 
| | ------------------------- |  | ---------- | 
| |                           |  | 2007       | 
| |                           |  | 2008       | 
| |                           |  | 2009       | 
| |                           |  | 2010       | 
| |                           |  | 2011       | 
| |                           |  | Thereafter | 
| |                           | 

| | Accumulated
amortization was $2,390,000 and $1,579,000 at September 30, 2006 and 2005, respectively.
| | ----------------------------------------------------------------------------------------------------

43

---

6.     Note
Payable to Bank:

| | On
November 1, 2004, the Company entered into a $15 million Credit Agreement with a bank,
with an expiration date of March 1, 2006. In the first quarter of fiscal 2006, the
Company amended the agreement to provide for up to $30 million and an expiration date of
March 1, 2008. Borrowings are collateralized by certain assets of the Company and bear
interest at the banks prime lending rate, 8.25% as of September 30, 2006, or at
our option, LIBOR plus 2.25%, or 7.57% as of that date. The agreement requires monthly interest payments only, until
March 1, 2008, when the then outstanding principal balance is due and payable in full.
The original agreement provides for a non-utilization fee payable quarterly at a rate of
0.30% per annum on the average daily amount of the unused portion of the overall credit
limit for each such year, and the amended agreement provides for a non-refundable annual
commitment fee equal to 0.10% of the credit limit, commencing March 1, 2006.
Additionally, the agreement contains various restrictive financial and non-financial
covenants. The financial covenants include measurements of tangible net worth, total
liabilities divided by tangible net worth, pre-tax profit and a maximum borrowing limit
based upon total accounts receivable. The Company was in compliance with its debt
covenants as of September 30, 2006. At September 30, 2006 there was $3.1 million in
advances outstanding on the agreement.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

7.     Long-Term
Debt and Capital Leases:

| | Long-term
debt and capital leases at September 30, 2006 and September 30, 2005 are summarized as
follows (in thousands):
| | ------------------------------------------------------------------------------------------------------------------------

|                                                               | 2006 |  | 2005 |      
|-------------------------------------------------------------- | ---- |  | ---- | -----
|Mortgage term note payable in monthly installments of          |      |  |      |      
|$23, including interest at a blended rate of 5.5%, maturing on |      | 
|September 1, 2014. (A)                                         |      |  | $    | 1,710
|Mortgage term note payable to the Pennsylvania Industrial      |      | 
|Development Authority (PIDA) in monthly installments of $6,    |      | 
|including interest at 4.25%, maturing on December 1, 2008. (B) |      |  |      | 142  
|Mortgage term note payable to Sovereign Bank in monthly        |      | 
|installments of $6 including interest at 4.5%, maturing        |      | 
|August 15, 2021. (C)                                           |      |  |      | 286  
|Mortgage term note payable to the Raiffeisenbank Hallein       |      | 
|in monthly installments of EUR 11 (US $13),                    |      | 
|including interest at 3.5%, maturing on March 5, 2016. (D)     |      |  |      | 3,034
|Capital lease obligation payable in monthly installments       |      | 
|of EUR 3 (US $4) including interest at 4.25% with an original  |      | 
|maturity date of June 1, 2008.                                 |      |  |      | 98   
|                                                               |      |  |      |      
|                                                               |      |  |      | 5,270
|Less current portion                                           |      |  |      | 571  
|                                                               |      |  |      |      
|                                                               |      |  | $    | 4,699
|                                                               |      |  |      |      

|(A) | The
mortgage term note payable is collateralized by a first lien deed of trust on the
Kalispell office and manufacturing facility and by all fixtures and personal property of
the Company necessary for the operation of the facility. The Montana State Board of
Investments provided 80% of the financing with Bank of America providing the remaining
20%. The notes are personally guaranteed by Raymon F. Thompson, the Companys
Chairman and Chief Executive Officer.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(B) | The mortgage term note payable to PIDA is collateralized by a first lien upon
          the premises in Coopersburg, Pennsylvania upon which the Rhetech, Inc. office
          and manufacturing facility resides, and was previously subordinate to the
          mortgage, between Rhetech, Inc. and Wachovia Bank (formerly First Union National
          Bank). The mortgage term note payable to Wachovia Bank was collateralized by a
          first lien deed of trust on the Coopersburg, Pennsylvania office and
          manufacturing facility and by all fixtures and personal property of Rhetech,
          Inc. necessary for the operation of the facility. This mortgage term note
          payable to Wachovia Bank was paid in full during fiscal 2003. The net book value
          of assets pledged under the agreement was $2.4 million at September 30, 2006,
          $2.0 million at September 30, 2005 and $1.9 million at September 30, 2004.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

44

---

|(C) | The
mortgage term note payable to Sovereign Bank provides for $1.8 million for           the
expansion of the Rhetech, Inc. manufacturing facility and is collateralized           by
a second lien upon the premises in Coopersburg, Pennsylvania by Lehigh County
          Industrial Development Authority and guaranteed by Semitool, Inc. At September
          30, 2006 there was $286,000 of advances outstanding on the note payable.
          Subsequent to the end of fiscal year 2006, $615,000 in additional advances has
          been drawn on the note payable. The total of the loan is expected to be
received           by the end of fiscal year 2007.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(D) | The
mortgage term note payable to Raiffeisenbank Hallein is collateralized by a
          lien on the Salzburg, Austria premises.
|--- | ---------------------------------------------------------------------------------------------------------------------------------

| | Principal
maturities for long-term debt and capital leases at September 30, 2006, are
summarized as follows (in thousands):
| | ---------------------------------------------------------------------------------------------------------------------------

| | Year Ending
September 30, |  | Notes
Payable |  | Capital
Leases |  
| | ------------------------- |  | ------------- |  | -------------- | -
| |                           |  | 2007          |  |                | $
| |                           |  | 2008          |  |                |  
| |                           |  | 2009          |  |                |  
| |                           |  | 2010          |  |                |  
| |                           |  | 2011          |  |                |  
| |                           |  | Thereafter    |  |                |  
| |                           |  |               |  |               
| |                           |  |               |  |                | $
| |                           |  |               |  |               

8.     Accumulated
Other Comprehensive Loss:

| | The
Companys accumulated other comprehensive loss consists of unrealized gains (losses)
on available-for-sale securities and cash flow hedges, and foreign currency translation
adjustments resulting from translating Semitool Japans financial statements from
the Japanese Yen to the U.S. Dollar.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Accumulated
other comprehensive loss at September 30, 2006 and 2005 consisted of the following
components (in thousands):
| | -------------------------------------------------------------------------------------------------------------------------

|                                                                         | 2006 |  | 2005 |      
|------------------------------------------------------------------------ | ---- |  | ---- | -----
|Unrealized loss on investments                                           |      |  | $    | --   
|Unrealized gain on derivative instruments qualifying as cash flow hedges |      |  |      | 181  
|Cumulative translation adjustments                                       |      |  |      | (794 
|                                                                         |      |  |      |      
|                                                                         |      |  | $    | (613)
|                                                                         |      |  |      |      

9.     Employee
Benefit and Stock Option Plans:

| | Semitool
maintains a profit-sharing plan and trust under Section 401(k) of the Internal Revenue
Code. Under the terms of the plan, U.S. employees may make voluntary contributions to the
plan. Semitool contributes a matching amount equal to 50% of the employees
voluntary contribution for up to 5% of the employees compensation. Semitool may
also make non-matching contributions to the plan. Total profit sharing contribution cost
for this plan was approximately $1,005,000, $785,000 and $735,000 for the years ended
September 30, 2006, 2005 and 2004, respectively.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Semitool
Europe Ltd. maintains a defined contribution pension agreement. This pension agreement is
open to all employees with more than three months of service. The employer and employee
contributions are invested in each individual members personal pension plan with a
United Kingdom insurance company as Trustee. The employer has an obligation to make
contributions at one-half of the contribution rate paid by the employee, subject to a
rate between 2.5% and 5.0% of the employees salary. The total pension cost for this
plan for the years ended September 30, 2006, 2005 and 2004 approximated $38,000, $51,000
and $44,000, respectively.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Companys other foreign subsidiaries do not operate their own pension plans, but
retirement benefits are generally provided to employees through government plans operated
in their respective countries.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

45

---

| | The
Company maintains a Stock Option Plan as disclosed in Note 1  Company Organization
and Summary of Significant Accounting Policies. The following summary shows stock option
activity for the three years ended September 30, 2006:
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                               | 2006 |  | 2005 |           | 2004 | 
|------------------------------ | ---- |  | ---- | --------- | ---- | 
|
|Outstanding, beginning of year |      |  |      | 1,983,305 |      | 
|Granted                        |      |  |      | 142,500   |      | 
|Exercised                      |      |  |      | (192,004  | )    | 
|Forfeited                      |      |  |      | (11,375   | )    | 
|                               |      |  |      |           |      | 
|Outstanding, end of year       |      |  |      | 1,922,426 |      | 
|                               |      |  |      |           |      | 
|Exercisable, end of year       |      |  |      | 1,167,366 |      | 

| | The
Company granted a total of 142,500 stock-based awards during fiscal 2006 with exercise
prices equal to the market price of the stock on the grant date. The weighted-average
exercise price and weighted-average fair market value of these awards were $8.78 and
$4.86, respectively. Compensation expense recognized during fiscal 2006 under SFAS 123(R)
was $1.4 million. The Company did not grant stock-based awards during fiscal 2006 with
exercise prices greater than or less than the market price of the stock on the grant date.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company granted a total of 286,500 stock-based awards during fiscal 2005 with exercise
prices equal to the market price of the stock on the grant date. The weighted-average
exercise price and weighted-average fair value of these awards were $8.22 and $5.27,
respectively. The Company granted a total of 153,200 stock-based awards during fiscal
2005 with exercise prices less than the market price of the stock on the grant date and
recognized compensation expense of $253,000 pre-tax or $175,000 after tax on those
options. The weighted-average exercise price and weighted-average fair value of these
awards were $8.20 and $5.33, respectively. The Company did not grant stock-based awards
during fiscal 2005 with exercise prices greater than the market price of the stock on the
grant date.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company granted a total of 318,500 stock-based awards during fiscal 2004 with exercise
prices equal to the market price of the stock on the grant date. The weighted-average
exercise price and weighted-average fair value of these awards were $8.76 and $5.66,
respectively. The Company granted a total of 52,000 stock-based awards during fiscal 2004
with exercise prices less than the market price of the stock on the grant date and
recognized compensation expense of $283,000 pre-tax or $194,000 after tax on those
options. The weighted-average exercise price and weighted-average fair value of these
awards were $4.84 and $5.77, respectively. The Company did not grant stock-based awards
during fiscal 2004 with exercise prices greater than the market price of the stock on the
grant date.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

46

---

| | The
following table summarizes information about stock options outstanding at September 30,
2006:
| | -------------------------------------------------------------------------------------------------

|                 | Options Outstanding |  | Options Exercisable |          
|---------------- | ------------------- |  | ------------------- | ---------
|
|
|$  3.28 -  $4.88 |                     |  |                     | 364,226  
|$  5.44 -  $7.45 |                     |  |                     | 545,975  
|$  7.50 - $11.25 |                     |  |                     | 949,650  
|$11.70 - $15.88  |                     |  |                     | 52,075   
|$19.19 - $19.25  |                     |  |                     | 10,500   
|                 |                     |  |                     |          
|                 |                     |  |                     | 1,922,426
|                 |                     |  |                     |          

| | The
exercise and sale of certain qualified options resulted in the treatment of those options
as nonqualified options for tax purposes. As a result, the Company received tax benefits
associated with those options of $427,000 and $29,000 in fiscal 2006 and fiscal 2005,
respectively, which were recorded as additional capital.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

10.     Other
Income (Expense):

| | Other,
net for fiscal 2005 includes a $2.9 million seed layer enhancement litigation settlement
payment received from Novellus Systems, Inc. in October 2004.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------

11.     Income
Taxes:

| | The
provision for income taxes for the years ended September 30, 2006, 2005 and 2004 consists
of the following (in thousands):
| | ------------------------------------------------------------------------------------------------------------------------------

|         | 2006 |  | 2005 |        | 2004 |  
|-------- | ---- |  | ---- | ------ | ---- | -
|Federal: |      |  |      |        |      |  
|Current  |      |  | $    | 4,977  |      | $
|Deferred |      |  |      | (1,863 | )    |  
|State:   |      | 
|Current  |      |  |      | 282    |      |  
|Deferred |      |  |      | (78    | )    |  
|Foreign: |      | 
|Current  |      |  |      | 1,556  |      |  
|Deferred |      |  |      | (57    | )    |  
|         |      |  |      |        |      |  
|         |      |  | $    | 4,817  |      | $
|         |      |  |      |        |      |  

| | Domestic
and foreign components of income before income taxes for the years ended September 30,
2006, 2005 and 2004 are as follows (in thousands):
| | --------------------------------------------------------------------------------------------------------------------------------------------------

|         | 2006 |  | 2005 |        | 2004 |  
|-------- | ---- |  | ---- | ------ | ---- | -
|Domestic |      |  | $    | 10,217 |      | $
|Foreign  |      |  |      | 4,436  |      |  
|         |      |  |      |        |      |  
|         |      |  | $    | 14,653 |      | $
|         |      |  |      |        |      |  

47

---

| | The
components of the deferred tax assets and liabilities as of September 30, 2006 and 2005
are as follows (in thousands):
| | --------------------------------------------------------------------------------------------------------------------------

|                                 | 2006 |  | 2005 |       
|-------------------------------- | ---- |  | ---- | ------
|Deferred tax assets:             |      |  |      |       
|Accrued warranty                 |      |  | $    | 2,209 
|Net operating loss carryforwards |      |  |      | 255   
|Credit carryover                 |      |  |      | 172   
|Deferred profit                  |      |  |      | 4,441 
|Other accrued liabilities        |      |  |      | 1,725 
|Inventories                      |      |  |      | 1,810 
|Other                            |      |  |      | 656   
|                                 |      |  |      |       
|Deferred tax assets              |      |  |      | 11,268
|                                 |      |  |      |       
|Deferred tax liabilities:        |      | 
|Depreciation and amortization    |      |  |      | (3,123
|Other                            |      |  |      | --    
|                                 |      |  |      |       
|Deferred tax liabilities         |      |  |      | (3,123
|                                 |      |  |      |       
|Net deferred tax asset           |      |  | $    | 8,145 
|                                 |      |  |      |       

| | Semitool
has net operating loss carryforwards of approximately $12 million in various states. The
Company estimates the tax effect of these net operating losses to be approximately
$237,000. The losses expire in fiscal years 2007 through 2023. Semitool has a research
and experimentation credit carryforward in the State of Montana of approximately
$172,000, which will expire by fiscal year 2020. The Company also has an Alternative
Minimum Tax credit carryforward of approximately $647,000 that does not expire.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Cumulative
undistributed earnings of foreign subsidiaries, for which no U.S. income or foreign
withholding taxes have been recorded, were approximately $16.6 million at September 30,
2006. Such earnings are expected to be reinvested indefinitely. Determination of the
amount of unrecognized deferred tax liability with respect to such earnings is not
practicable. The additional taxes payable on the earnings of foreign subsidiaries, if
remitted, would be substantially offset by U.S. tax credits for foreign taxes already
paid.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
American Jobs Creation Act of 2004 provides for a special one-time dividend received
deduction on the repatriation of certain foreign earnings to a United States company
(parent of a controlled foreign corporation). Semitool has determined that it will not
make the special one-time dividend received deduction election as provided by the
American Jobs Creation Act of 2004.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
differences between the consolidated provision for income taxes and income taxes computed
using income before income taxes and the U.S. federal income tax rate for the years ended
September 30, 2006, 2005 and 2004 are as follows (in thousands):
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                   | 2006 |  | 2005 |       | 2004 |  
|-------------------------------------------------- | ---- |  | ---- | ----- | ---- | -
|Amount computed using the statutory rate           |      |  | $    | 5,129 |      | $
|Increase (decrease) in taxes resulting from:       |      | 
|State taxes, net of federal benefit                |      |  |      | 228   |      |  
|Effect of foreign taxes                            |      |  |      | (179  | )    |  
|Research and experimentation credit                |      |  |      | (304  | )    |  
|Meals and entertainment and other permanent items  |      |  |      | 450   |      |  
|Extraterritorial income exclusion                  |      |  |      | (529  | )    |  
|Incentive stock options                            |      |  |      | 204   |      |  
|Domestic production deduction                      |      |  |      | (155  | )    |  
|Subpart F income net of related foreign tax credit |      |  |      | 152   |      |  
|Other, net                                         |      |  |      | (179  | )    |  
|                                                   |      |  |      |       |      |  
|                                                   |      |  | $    | 4,817 |      | $
|                                                   |      |  |      |       |      |  

| | The
Research and Experimentation Credit (Credit) expired on June 30, 2004. Legislation
extending the Credit was not signed into law by September 30, 2004. Therefore, the
Company was unable to recognize approximately $186,000 of the Credit generated in the
fourth quarter of fiscal 2004 until the first quarter of fiscal 2005 when the Credit was
again reenacted. No Credit was recognized in the last nine months of fiscal 2006 as the
extension expired on December 31, 2005.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

48

---

12.     Related
Party Transactions:

| | Semitool
has agreements with limited liability companies wholly-owned by Mr. Raymon F. Thompson,
the Companys Chairman and Chief Executive Officer, to lease aircraft and an
aircraft hangar. Under these agreements, rent expense was approximately $3,289,200 for
the years ended September 30, 2006 and 2005 and $2,933,600 for the year ended September
30, 2004. The rental rate for fiscal 2007 is anticipated to be $274,000 per month for
both the aircraft and the hangar; the lease terms are month-to-month. In fiscal 2004,
Semitool incurred $802,000 of leasehold improvements to leased aircraft. The improvements
are being amortized over a three-year period, which represents the estimated useful life.
Any unamortized leasehold improvements are refundable to the Company upon termination of
the lease.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
December 2004, the Company sold a condominium located in Kalispell, Montana to Larry E.
Murphy, its President and Chief Operating Officer, for $250,000 in cash. The condominium
had previously been used to provide short-term housing to employees who were not located
in the Kalispell area.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

13.     Commitments
and Contingencies:

| | The
Company, in its Articles of Incorporation, has indemnified its officers and the members
of its Board of Directors to the extent permitted by law against any and all liabilities,
costs, expenses, amounts paid in settlement and damages incurred in such capacity as a
result of any lawsuit, or any judicial, administrative or investigative proceeding in
which the officers or directors are named.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company has entered into agreements with customers that include limited intellectual
property indemnification obligations that are customary in the industry. These guarantees
generally require the Company to compensate the other party for certain damages and costs
incurred as a result of third party intellectual property claims arising from these
transactions. The nature of the intellectual property indemnification obligations
prevents the Company from making a reasonable estimate of the maximum potential amount it
could be required to pay to its customers. The Company has not made any indemnification
payments under such agreements and no amount has been accrued in the accompanying
condensed consolidated financial statements with respect to these indemnification
obligations.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Product
Warranties
| | ------------------

| | Obligations
for warranties are accrued concurrently with the revenue recognized on the related
equipment. Provisions for warranty obligations are made based upon historical costs
incurred for such obligations adjusted, as necessary, for current conditions and factors.
Due to the significant uncertainties and judgments involved in estimating warranty
obligations, including changing product designs and specifications, the ultimate amount
incurred for warranty costs could change in the near term from the Companys current
estimate.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Changes
in the Companys accrued warranty liability, for fiscal 2006 and fiscal 2005, were
as follows (in thousands):
| | ---------------------------------------------------------------------------------------------------------------------

|                                                      | September 30, | 
|----------------------------------------------------- | ------------- | 
|
|Accrued warranty balance, beginning of year           |               | 
|Accruals for new warranties issued during the year    |               | 
|Expirations and changes in estimates to pre-existing  |               | 
|warranties                                            |               | 
|Warranty labor and materials provided during the year |               | 
|                                                      |               | 
|Accrued warranty balance, end of year                 |               | 
|                                                      |               | 

49

---

| | Operating
Leases
| | ----------------

| | The
Company has various operating lease agreements for equipment and office space that expire
through the year 2014. Total rent expense for the years ended September 30, 2006, 2005
and 2004, exclusive of amounts paid to a related party as described in Note 12, was
approximately $1.8 million, $1.8 million and $1.5 million, respectively. At September 30,
2006, future rental payments under these agreements are as follows (in thousands):
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Year Ending
September 30, |  | Total      | 
| | ------------------------- |  | ---------- | 
| |                           |  | 2007       | 
| |                           |  | 2008       | 
| |                           |  | 2009       | 
| |                           |  | 2010       | 
| |                           |  | 2011       | 
| |                           |  | Thereafter | 
| |                           |  |           
| |                           |  |            | 
| |                           |  |           

| | Litigation
| | ----------

| | The
Company is involved in legal proceedings that arise in the ordinary course of its
business. Although there can be no assurance as to the ultimate disposition of these
matters, it is the opinion of management, based upon the information available at this
time, that the currently expected outcome of these matters, individually or in the
aggregate, will not have a material adverse effect on its business, financial condition,
results of operations or cash flows.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Periodically,
but not less than quarterly, the Company reviews the status of each significant matter
and assesses its potential financial exposure. If the potential loss from any legal
proceeding or claim is considered probable and the amount can be reasonably estimated,
the Company accrues a liability for the estimated loss. Significant judgment is required
in both the determination of probability and the determination as to whether an exposure
is reasonably estimable. Due to the uncertainties related to these matters, accruals are
based on the best information available at the time. As additional information becomes
available, the Company reassesses the potential liability related to its pending
litigation and claims and may revise its estimates. Although the Company has not made
such revisions, any future revisions could have a material impact on its results of
operations and financial condition.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

14.     ShareholdersEquity:

| | The
Board of Directors has the authority to issue preferred stock of Semitool in one or more
series and to fix the rights, privileges, preferences and restrictions granted to or
imposed upon any unissued shares of preferred stock, without further vote or action by
the common shareholders.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

15.     Financial
Instruments and Certain Concentrations:

| | The
Company has estimated the fair value of its financial instruments including cash and cash
equivalents, marketable securities and long-term debt. The fair value estimates are made
at a discrete point in time based on relevant market information and information about
the financial instruments. Fair value estimates are based on judgments regarding current
economic conditions, risk characteristics of various financial instruments, and other
factors. These estimates are subjective in nature and involve uncertainties and matters
of significant judgment and, therefore, cannot be determined with precision. Changes in
assumptions could significantly affect the estimates. Accordingly, the estimates are not
necessarily indicative of what the Company could realize in a current market exchange.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
following methods and assumptions were used to estimate the fair value of each class of
financial instrument at September 30, 2006 and 2005 for which it is practicable to
estimate that value:
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Cash
and Cash Equivalents  The carrying value of cash and cash equivalents approximates
fair value due to the nature of the cash investments.
| | ----------------------------------------------------------------------------------------------------------------------------------------------

| | Marketable
Securities  Marketable securities are marked-to-market at September 30, 2006 and
September 30, 2005 to approximate fair value.
| | ------------------------------------------------------------------------------------------------------------------------------------------

| | Long-Term
Debt  The fair value of notes payable is based on the discounted value of
contractual cash flows using an estimated discount rate of 8.25% and 6.75% at September
30, 2006 and 2005, which the Company could currently obtain for debt with similar
remaining maturities.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

50

---

| | The
estimated fair value of financial instruments at September 30, 2006 and 2005 consisted of
the following (in thousands):
| | ---------------------------------------------------------------------------------------------------------------------------

|                          | 2006 |  | 2005 |       
|------------------------- | ---- |  | ---- | ------
|
|Cash and cash equivalents |      |  | $    | 17,347
|Marketable securities     |      |  |      | --    
|Note payable to bank      |      |  |      | 3,109 
|Long-term debt            |      |  |      | 5,172 

| | At
September 30, 2006 and 2005, trade receivables of the Company were primarily from
companies in the semiconductor industry, and included approximately $41.0 million and
$32.4 million, respectively, of foreign receivables. Accordingly, the Company is exposed
to concentrations of credit risk. The Company routinely assesses the financial strength
of its customers.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

16.     Subsequent
Event:

| | The
Company sold a 21,000 square foot fabrication facility near Kalispell, Montana in
November 2006 for $1.9 million.
| | ---------------------------------------------------------------------------------------------------------------------

17.     Segments,
Geographic Location and Major Customers:

| | The
Company currently operates in one segment whose primary products perform wet processing.
The Companys current product offerings qualify for aggregation under SFAS No. 131,
Disclosure About Segments of an Enterprise and Related Information as its
products are manufactured and distributed in the same manner, have similar economic
characteristics and are sold to the same customer base.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Advanced
Micro Devices accounted for 13.8% and 16.7% of net sales in fiscal 2006 and fiscal 2005,
respectively. No customer accounted for over 10% of net sales in fiscal 2004.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Financial
information by geographic location for 2006, 2005 and 2004 is summarized as follows (in
thousands):
| | -------------------------------------------------------------------------------------------------------------

|                                    | Year Ended September 30, | 
|----------------------------------- | ------------------------ | 
|
|Net Sales, by customer location:    |                          | 
|United States                       |                          | 
|Germany                             |                          | 
|Europe, excluding Germany           |                          | 
|Japan                               |                          | 
|Taiwan                              |                          | 
|Singapore                           |                          | 
|Asia and Other, excluding Taiwan,   |                          | 
|Singapore and Japan                 |                          | 
|                                    |                          | 
|                                    |                          | 
|                                    |                          | 
|Property, Plant and Equipment, Net: |                          | 
|United States                       |                          | 
|United Kingdom                      |                          | 
|Austria                             |                          | 
|Other Countries                     |                          | 
|                                    |                          | 
|                                    |                          | 
|                                    |                          | 

51

---

18.     Quarterly
Financial Data (Unaudited):

| | For
each quarter of fiscal 2006 and 2005 (in thousands, except for per share amounts):
| | --------------------------------------------------------------------------------------

|                           | Year Ended September 30, 2006 | 
|-------------------------- | ----------------------------- | 
|
|Net sales                  |                               | 
|Gross profit               |                               | 
|Net income                 |                               | 
|Earnings per basic share   |                               | 
|Earnings per diluted share |                               | 

|                           | Year Ended September 30, 2005 | 
|-------------------------- | ----------------------------- | 
|
|Net sales                  |                               | 
|Gross profit               |                               | 
|Net income                 |                               | 
|Earnings per basic share   |                               | 
|Earnings per diluted share |                               | 

52

---

REPORT OF INDEPENDENTREGISTERED PUBLIC
ACCOUNTING FIRM

Board of Directors andShareholders of
Semitool, Inc.

We have audited the accompanying
consolidated balance sheet of Semitool, Inc. (a Montana corporation) and subsidiaries as
of September 30, 2006, and the related consolidated statements of income,
shareholders equity, cash flows, and comprehensive income for the year then ended.
These financial statements are the responsibility of the Companys management. Our
responsibility is to express an opinion on these financial statements based on our audit.

We conducted our audit in accordance
with the standards of the Public Company Accounting Oversight Board (United States). 
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 audit provides 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 Semitool, Inc. and subsidiaries as of September 30, 2006, and the
results of their operations and their cash flows for the year then ended in conformity
with accounting principles generally accepted in the United States of America.

Our audit was conducted for the
purpose of forming an opinion on the basic financial statements taken as a whole. Schedule
II is presented for purposes of additional analysis and is not a required part of the
basic financial statements. This schedule has been subjected to the auditing procedures
applied in the audit of the basic financial statements and, in our opinion, is fairly
stated in all material respects in relation to the basic financial statements taken as a
whole.

We also have audited, in accordance
with the standards of the Public Company Accounting Oversight Board (United States), the
effectiveness of Semitool Inc.s internal control over financial reporting as of
September 30, 2006, based on criteria established in Internal ControlIntegrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO) and our report dated November 17, 2006 expressed an unqualified opinion.

/s/ GRANT THORNTON LLP

Salt Lake City, UtahNovember
17, 2006

53

---

REPORT OF INDEPENDENTREGISTERED PUBLIC
ACCOUNTING FIRM

Board of Directors andShareholders of
Semitool, Inc.

We have audited managements
assessment, included in the Managements Report on Internal Control Over Financial
Reporting, that Semitool, Inc. (a Montana Corporation) maintained effective internal
control over financial reporting as of September 30, 2006, based on criteria established
in Internal Control  Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). Semitool Inc.s management is
responsible for maintaining effective internal control over financial reporting and for
its assessment of the effectiveness of internal control over financial reporting. Our
responsibility is to express an opinion on managements assessment and an opinion on
the effectiveness of the companys internal control over financial reporting based on
our audit.

We conducted our audit in accordance
with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable assurance about
whether effective internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over financial
reporting, evaluating managements assessment, testing and evaluating the design and
operating effectiveness of internal control, and performing such other procedures as we
considered necessary in the circumstances. We believe that our audit provides a reasonable
basis for our opinions.

A companys internal control over
financial reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles. A
companys internal control over financial reporting includes those policies and
procedures that (1) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are being made
only in accordance with authorizations of management and directors of the company; and (3)
provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the companys assets that could have a material
effect on the financial statements.

Because of its inherent limitations,
internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk
that controls may become inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.

In our opinion, managements
assessment that Semitool Inc. maintained effective internal control over financial
reporting as of September 30, 2006 is fairly stated, in all material respects, based on
the criteria established in Internal Control  Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO). Also in our
opinion, Semitool, Inc. maintained, in all material respects, effective internal control
over financial reporting as of September 30, 2006, based on the criteria established in
Internal Control  Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO).

We also have audited, in accordance
with the standards of the Public Company Accounting Oversight Board (United States), the
consolidated balance sheet of Semitool, Inc. (a Montana corporation) and subsidiaries as
of September 30, 2006, and the related consolidated statements of income,
shareholders equity, cash flows, and comprehensive income for the year then ended
and our report dated November 17, 2006 expressed an unqualified opinion on those financial
statements.

/s/ GRANT THORNTON LLP

Salt Lake City, UtahNovember
17, 2006

54

---

REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To The Board of Directors
and Shareholders Semitool, Inc.:

In our opinion, the accompanying consolidated balance sheet as of
September 30, 2005 and the related consolidated statements of income and comprehensive income, of changes in
shareholders equity and cash flows for each of two years in the period ended September 30, 2005  present fairly,
in all material respects, the financial position of Semitool, Inc. and its subsidiaries at September 30, 2005, and
the results of their operations and their cash flows for each of the two years in the period ended September 30,
2005, in conformity with accounting principles generally accepted in the United States of America.  In addition,
in our opinion, the financial statement schedule listed in the index appearing under Item 15(a)(2) presents
fairly, in all material respects, the information set forth therein for each of the two years in the period ended
September 30, 2005 when read in conjunction with the related consolidated financial statements.  These financial
statements and financial statement schedule are the responsibility of the Company's management.  Our
responsibility is to express an opinion on these financial statements and financial statement schedule based on
our audits.  We conducted our audits of these statements in accordance with the standards of the Public Company
Accounting Oversight Board (United States).  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, assessing
the accounting principles used and significant estimates made by management, and evaluating the overall financial
statement presentation.  We believe that our audits provide a reasonable basis for our opinion.

/s/PricewaterhouseCoopers
LLPSeattle, WashingtonDecember 13, 2005

55

---

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

None.

# Item 9A.  Controls and
Procedures

|(a) | Evaluation
of Disclosure Controls and Procedures. As of the end of the                period
covered by this report, Semitool conducted an evaluation, under the
               supervision and with the participation of our principal executive officer
and                principal financial officer, of our disclosure controls and procedures
(as                defined in Rules 13a-14(c) and 15d-14(c) under the Securities
Exchange Act                of 1934 (the Exchange Act)). Based on this
evaluation, our principal                executive officer and principal financial
officer concluded that our disclosure                controls and procedures are
effective to ensure that information required to be                disclosed by us in
reports that we file or submit under the Exchange Act is                recorded,
processed, summarized and reported within the time periods specified                in
Securities and Exchange Commission rules and forms and such information is
               accumulated and communicated to management to allow timely decisions
regarding                required disclosure.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(b) | Managements
Report on Internal Control over Financial Reporting.               The management of
Semitool is responsible for establishing and maintaining                adequate internal
control over financial reporting, as such term is defined in                Rule 13a-15(f)
under the Exchange Act. Semitools internal control                over financial
reporting was designed to provide reasonable assurance regarding                the
reliability of financial reporting and the preparation of financial
               statements for external purposes in accordance with generally accepted
               accounting standards. Under the supervision and with the participation of
               management, including our Chairman and Chief Executive Officer and Chief
               Financial Officer, we conducted an assessment of the effectiveness of our
               internal control over financial reporting as of September 30, 2006. In
making                this assessment, management used the criteria set forth by the
Committee of                Sponsoring Organizations of the Treadway Commission (COSO) in
Internal                Control  IntegratedFramework.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Based on
our assessment using the criteria set forth by COSO in Internal Control Integrated
Framework, management concluded that our internal control over financial reporting
was effective as of September 30, 2006.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Managements
assessment of the effectiveness of Semitools internal control over financial
reporting as of September 30, 2006 has been audited by Grant Thornton LLP, an independent
registered public accounting firm, as stated in their report included herein.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Because of
its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may
deteriorate.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(c) | Changes
in Internal Control over Financial Reporting. There have not been                any
changes in our internal control over financial reporting during our most
               recently completed fiscal quarter which have materially affected, or are
               reasonably likely to materially affect, our internal control over
financial                reporting.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# Item 9B.  Other Information

None.

56

---

# PART III

# Item 10.  Directors and
Executive Officers

|(a) | The
information concerning our directors, our audit committee and our audit
               committee financial expert, is contained in our Proxy Statement to be
filed in                connection with our 2007 Annual Meeting of Shareholders and is
incorporated                herein by reference.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(b) | For
information with respect to executive officers, see Part I, Item 1 of this
               Annual Report on Form 10-K, under Executive Officers of the
               Registrant.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(c) | The
information concerning compliance with Section 16(a) of the Securities
               Exchange Act of 1934, as amended, required under this item is contained in
our                Proxy Statement to be filed in connection with our 2007 Annual Meeting
of                Shareholders under the caption Other Matters  Section 16(a)
               Beneficial Ownership Reporting Compliance and is incorporated herein
by                reference.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

We have adopted a code of business
conduct for all of our employees and directors, including our principal executive officer,
other executive officers, principal financial officer and senior financial personnel. A
copy of our code of business conduct is available free of charge on our company Web site
at www.semitool.com. We intend to post on our Web site any material changes to, or
waivers from our code of business conduct, if any, within five business days of any such
event.

# Item 11.  Executive
Compensation

The information concerning
compensation of executive officers and directors required under this item is contained in
our Proxy Statement to be filed in connection with our 2007 Annual Meeting of Shareholders
under the caption Executive Compensation and Other Information and is
incorporated herein by reference.

# Item 12.  Security
Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters

The information concerning certain principal
holders of securities and security ownership of executive officers and directors required
under this item is contained in our Proxy Statement to be filed in connection with our
2007 Annual Meeting of Shareholders under the caption Security Ownership of Certain
Beneficial Owners and Management and is incorporated herein by reference.

# Equity Compensation Plans

The following table summarizes our
equity compensation plans as of September 30, 2006:

|                                      | Number of
securities to be
issued upon
exercise of
outstanding options |  | Weighted-average
exercise price
of outstanding
options |           | Number of securities
remaining available
for future issuance
under stock option
plans | 
|------------------------------------- | ---------------------------------------------------------------------- |  | ------------------------------------------------------ | --------- | ------------------------------------------------------------------------------------- | 
|Equity compensation plans approved by |                                                                        |  |                                                        |           |                                                                                       | 
|shareholders                          |                                                                        |  |                                                        | 1,922,426 |                                                                                       | 

# Item 13.  Certain
Relationships and Related Transactions

The information concerning certain
relationships and related transactions required under this item is contained in our Proxy
Statement to be filed in connection with our 2007 Annual Meeting of Shareholders under the
caption Certain Transactions and is incorporated herein by reference.

# Item 14.  Principal
Accounting Fees and Services

The information on principal
accounting fees and services required under this item is contained in our Proxy Statement
to be filed in connection with our 2007 Annual Meeting of Shareholders under the captions
Audit Fees and Non-Audit Fees and Policy on Audit Committee Pre-Approval
of Audit and Non-Audit Services of the Independent Registered Public Accounting Firm
and is incorporated herein by reference.

57

---

# PART IV

# Item 15.  Exhibits and
Financial Statement Schedules

|(a) | The
following documents are filed as a part of this report:
|--- | -----------------------------------------------------------

|1. | Financial
Statements:
|-- | ---------------------

| | The financial
statements and reports of independent registered public accounting firms listed below are
set forth under Item 8 of this Annual Report on Form 10-K and are incorporated herein by
reference:
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Consolidated Balance
Sheets     at September 30, 2006 and September 30, 2005
| | ----------------------------------------------------------------------------

| | Consolidated Statements
of Income     for the Years Ended September 30, 2006, September
30, 2005 and September 30, 2004
| | -----------------------------------------------------------------------------------------------------------------------

| | Consolidated Statements
of Changes in Shareholders' Equity     for the Years Ended
September 30, 2006, September 30, 2005 and September 30, 2004
| | ------------------------------------------------------------------------------------------------------------------------------------------------

| | Consolidated Statements
of Cash Flows     for the Years Ended September 30, 2006,
September 30, 2005 and September 30, 2004
| | ---------------------------------------------------------------------------------------------------------------------------

| | Consolidated Statements
of Comprehensive Income     for the Years Ended September 30,
2006, September 30, 2005 and September 30, 2004
| | -------------------------------------------------------------------------------------------------------------------------------------

| | Notes to
Consolidated Financial Statements
| | ------------------------------------------

| | Reports of
Independent Registered Public Accounting Firms
| | ---------------------------------------------------------

|2. | Financial
Statement Schedules:
|-- | ------------------------------

Schedule II  Valuation and
Qualifying Accounts

|3. | Exhibits:
|-- | ---------

|(a) | The
exhibits listed below are filed as part of this Annual Report on Form 10-K or
are incorporated herein by reference:
|--- | -----------------------------------------------------------------------------------------------------------------------

|Exhibit No.                                                                                                                                                                                                                                                                                                                | Description                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|3.1      
3.8      
3.9      
3.2 (ii) 
10.1     
10.2/10.3
         
10.4     
10.12    
10.41    
10.42    
10.43    
10.44    
10.45    
         
10.46    
         
10.47    
         
10.48    
10.5     
10.6     
10.7     
         
21.1     
23.1     
23.2     
31.1     
31.2     
32.1     
         
32.2 | Restated Articles of Incorporation of the Company   (1)
Amendment to the Restated Articles of Incorporation of the Company   (2)
Correction to the Amendment of the Restated Articles of Incorporation of the Company   (2)
Amended Bylaws of Semitool, Inc.   (3)
Semitool, Inc. 2004 Stock Option Plan   (3)  *
Aircraft lease agreement, dated January 15, 2004, as amended by Amendment No 1, dated March 31, 2004,   between the
Company and EAGLE I LLC.   (3)
Aircraft lease agreement, dated March 31, 2004, between the Company and EAGLE II LLC.   (3)
Agreement between the Company and the Semitool European Companies   (1)
Employment Agreement between Larry A. Viano and the Company dated June 1, 2003   (4)  *
Employment Agreement between Timothy C. Dodkin and the Company dated June 30, 2003   (4)  *
Employment Agreement between Larry Murphy and the Company dated April 20, 2004   (5)  *
Aircraft lease agreement, dated August 22, 2004, between the Company and EAGLE III LLC.   (6)
Credit Agreement, dated as of November 1, 2004, between the Company and
   Wells Fargo HSBC Trade Bank, N.A.   (6)
Loan Agreement, dated May 17, 2005, between Raiffeisenbank Hallein and
   Semitool Austria, GmbH   (7)
First Amendment to Credit Agreement between Wells Fargo HSBC Trade Bank, N.A. and the Company,   dated December 6,
2005   (8)
Executive Bonus Plan for Larry E. Murphy, President and Chief Operating Officer dated October 1, 2005   (9)
Supplemental Executive Health Plan, dated February 15, 2006.   (10)
Guaranty and Suretyship agreement dated August 15, 2006.   (11)
Loan Agreement, dated August 15, 2006, between Sovereign Bank, Lehigh County Industrial Development   Authority and
Rhetech, Inc.
Subsidiaries of Registrant
Consent of Independent Registered Public Accounting Firm - Grant Thornton LLP
Consent of Independent Registered Public Accounting Firm - PricewaterhouseCoopers LLP
Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
   Section 906 of the Sarbanes-Oxley Act of 2002
Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
   Section 906 of the Sarbanes-Oxley Act of 2002

---

58

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|(1) | Incorporated
herein by reference to the identically numbered exhibits to the                Companys
Registration Statement on Form S-1 (File No. 33-87548), which                became
effective on February 2, 1995.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Incorporated
herein by reference to the identically numbered exhibit to the                Companys
Quarterly Report on Form 10-Q, date of report March 31, 2000.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Incorporated
herein by reference to the identically numbered exhibit to the                Companys
Quarterly Report on Form 10-Q, date of report March 31, 2004.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) | Incorporated
herein by reference to the identically numbered exhibit to the                Companys
Quarterly Report on Form 10-Q, date of report June 30, 2003.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------

|(5) | Incorporated
herein by reference to Exhibit 10.1 to the Companys Quarterly                Report
on Form 10-Q, date of report June 30, 2004.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------

|(6) | Incorporated
herein by reference to the identically numbered exhibit to the                Companys
Annual Report on Form 10-K, date of report September 30, 2004.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(7) | Incorporated
herein by reference to the identically numbered exhibit to the                Companys
Quarterly Report on Form 10-Q, date of report June 30, 2005.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------

|(8) | Incorporated
herein by reference to the identically numbered exhibit to the                Companys
Quarterly Report on Form 10-Q, date of report December 6, 2005.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(9) | Incorporated
herein by reference to the identically numbered exhibit to the                Companys
Quarterly Report on Form 10-Q, date of report October 1, 2005.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(10) | Incorporated
herein by reference to the identically numbered exhibit to the                Companys
Quarterly Report on Form 10-Q, date of report February 15, 2006.
|---- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(11) | Incorporated
herein by reference to the identically numbered exhibit to the                Companys
Quarterly Report on Form 8-K, date of report August 15, 2006.
|---- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------

* Denotes a management contract or
compensatory plan or arrangement.

|(b) | Exhibits.
The Exhibits listed in Item 15(a)(3)(a) hereof are filed as                part of this
Annual Report on Form 10-K or are incorporated herein by reference.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(c) | Financial
Statement Schedules. See Item 15(a)(2) above.
|--- | -------------------------------------------------------

59

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# Signatures

Pursuant to the requirements of
Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned, thereunto duly authorized.

|Dated:  December 13, 2006 |  | SEMITOOL, INC.By: /s/Raymon F. Thompson
Raymon F. ThompsonChairman of the Board and Chief Executive Officer(Principal Executive Officer)
|------------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------

Pursuant to the requirements of the
Securities Exchange Act of 1934, this report has been signed below by the following
persons on behalf of the Registrant and in the capacities and on the dates indicated:

|Signature                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |  | Title                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |  | Date                                                                                                                                                                                                                                                                                                             
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|/s/Raymon F. Thompson  
Raymon F. Thompson     
                       
                       /s/Larry A. Viano      
Larry A. Viano         
                       
                       /s/Howard E. Bateman   
Howard E. Bateman      /s/Donald P. Baumann   
Donald P. Baumann      /s/C. Richard Deininger
C. Richard Deininger   /s/Timothy C. Dodkin   
Timothy C. Dodkin      
        /s/Daniel J. Eigeman   
Daniel J. Eigeman      /s/Charles P. Grenier  
Charles P. Grenier     /s/Steven C. Stahlberg 
Steven C. Stahlberg |  | Chairman of the Board and                   
Chief Executive Officer
(Principal Executive Officer)
                                            
Vice President, Chief Financial Officer     
and Treasurer
(Principal Accounting and Financial Officer)
                                            
           Director                         
                                            
           Director                         
                                            
           Director                         
                                            
Director and Executive Vice President       
                                            
           Director                         
                                            
           Director                         
                                            
           Director |  | December 13, 2006
                 
December 13, 2006
                 
December 13, 2006
                 
December 13, 2006
                 
December 13, 2006
                 
December 13, 2006
                 
December 13, 2006
                 
December 13, 2006
                 
December 13, 2006

60

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SEMITOOL, INC.SCHEDULE II 
VALUATION AND QUALIFYING ACCOUNTS For the years ended
September 30, 2006, 2005 and 2004(Amounts in Thousands)

|                                |  | Additions |   |       | 
|------------------------------- |  | --------- | - | ----- | 
|
|Year ended September 30, 2006:  |  |           |   |       | 
|Deducted from asset accounts:   |  |          
|Allowance for doubtful accounts |  |           | $ | 270   | 
|Inventory allowance             |  |           |   | 1,107 | 
|Year ended September 30, 2005:  |  |          
|Deducted from asset accounts:   |  |          
|Allowance for doubtful accounts |  |           |   | 271   | 
|Inventory allowance             |  |           |   | 645   | 
|Year ended September 30, 2004:  |  |          
|Deducted from asset accounts:   |  |          
|Allowance for doubtful accounts |  |           |   | 319   | 
|Inventory allowance             |  |           |   | --    | 

61

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