# UNITED STATES
        SECURITIES 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, 2007

# 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:

|Title of Each
                Class        |  | Name of Each Exchange on
                Which Registered
|------------------------------------------ |  | ---------------------------------------------------------
|Common Stock, no
                par value |  | The NASDAQ Stock
                Market LLC              

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

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, 2007 (based
        on the last reported sale price on the NASDAQ Stock Market LLC as of such date) was
        $288,092,532.

The number of shares of the
        registrant’s Common Stock, no par value, outstanding as of December 3, 2007 was
        32,362,817.

# 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 6, 2008.

---

# SEMITOOL,
        INC.

# Index to Annual
        Report on Form 10-K
        Year Ended September 30, 2007

PART
        I

|                                                                                                                                                                                                                                          |                                                                                                                                                                                                                                                                                                                                                                                                                      |                                                                                                                                                                                                                                                                         
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ITEM 1.
                        
                         
                 ITEM 1A.
                ITEM 1B.
                ITEM 2.
                        
                 ITEM 3.
                        
                 ITEM 4. | INTRODUCTION - FORWARD-LOOKING STATEMENTSBUSINESS
                                                                   EXECUTIVE OFFICERS OF THE REGISTRANTRISK FACTORSUNRESOLVED STAFF COMMENTSPROPERTIES
                                                                   LEGAL PROCEEDINGS
                                                                   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS | PAGE
                       3
                       4
                  
                       11
                      11
                      18
                      19
                  
                       19
                  
                       19

PART
        II

|                                                                                                                                                                                                                                                                                                                                                                                                   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |                                                                                                                                                                                                                                                                                                                              
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|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
                  
                       21
                  
                       22
                  
                       31
                  
                       33
                  
                       58
                  
                       58
                  
                       58

PART
        III

|                                                                                                                                                                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |                                                                                                                       
|---------------------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------
|ITEM 10.
                        
                 ITEM 11.
                        
                 ITEM 12.
                ITEM 13.
                ITEM 14. | DIRECTORS,
                EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
                                                                                                              EXECUTIVE COMPENSATION
                                                                                                              SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
                  SHAREHOLDER MATTERSCERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCEPRINCIPAL ACCOUNTING FEES AND SERVICES | 59
                  
                 59
                  
                 59
                59
                59

PART
        IV

|         |                                                                      |                      
|-------- | -------------------------------------------------------------------- | ---------------------
|ITEM 15. | EXHIBITS AND
                FINANCIAL STATEMENT SCHEDULESSIGNATURES | 60
                62

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 single
            wafer 300mm processing, 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, 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, 3-D packaging, wafer thinning and solar market
            applications for our processes and equipment, 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 and our
            expectation that revenue from our Raider platform will continue to account for a
            significant portion of our revenue,
- 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 stronger
            sales in the Asian market in fiscal 2008, relative to 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 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 2008,
- inventory
            management,
- the sufficiency of funds and the
            ability to finance activities, including sources of liquidity and the availability of
            the funds for borrowing under the debt covenants contained in our revolving credit
            line,
- our expectation that existing
            debt financing arrangements and cash flows generated from operating activities will be
            sufficient to fund operations and planned capital expenditures through fiscal 2008,
            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-engineered 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 Front End of Line (FEOL), Back End of Line (BEOL) and wafer level
        packaging of ICs processes. Our single wafer FEOL surface preparation systems are used for
        photoresist stripping, post etch and pre-diffusion cleans. Our BEOL surface preparation
        systems are used for polymer removal and packaging applications. 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.
        Also, our surface preparation systems are used for cleaning and etching processes for wafer
        level packaging. Our primary product for all of these processes is the Raider platform,
        which is a multi-chamber single wafer tool. 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 (SEC): 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. Any materials the Company
        files with the SEC may be read and copied at the SEC’s Public Reference Room at 100 F
        Street, NE, Washington, DC 20549. Information on the operation of the Public Reference Room
        is available by calling the SEC at 1-800-SEC-0330.

# Industry
        Background

Growth
        in the semiconductor industry is driven by the global demand for semiconductor devices that
        are incorporated in an ever increasing array of electronics devices such as personal
        computers, network servers, digital televisions, audio systems including MP3 players, video
        game players, cellular phones, GPS devices and digital cameras to name a few. 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 can consist of over a billion 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 wire contacts and encapsulating the ICs in a polymer. In an effort to reduce the size
        of packaged ICs, some manufacturers are using newer wafer level packaging, which allows for
        attaching each IC’s package before dicing. Once diced, the entire packaged
        semiconductor device can then be placed into an electronic product, such as a cellular
        phone or other 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 a wet chemical 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
        which are spinning 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 the IC’s
        transistors and external devices. Interconnects are formed by the deposition of metal film
        layers, such as copper, into trenches and vias 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 and must be kept from
        direct contact with the silicon wafer as it will diffuse into the silicon. This will ruin
        the devices on the wafer and could potentially contaminate an entire fab. 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 devices
        follow Moore’s Law which states that approximately every two years the amount of
        transistors on a device doubles giving it twice the power in the same space. The continuing
        trend towards more advanced electronics applications continues the industry’s
        transition to smaller device features, enabling lower cost, as more ICs can be fabricated
        on each wafer. As the industry moves to 45 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 wiring. The use of copper, in particular, presents significant processing
        challenges to prevent copper contamination measured in parts per billion at the atomic
        level. To address these challenges, dedicated processes have been developed to provide
        better isolation of copper materials on the wafer, 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 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, reduced manufacturing cycle time, reduced
        chemical consumption and now greater throughput. Fab BEOL processes, where the interconnect
        wiring is placed on the wafer, have already made the transition from being a primarily
        batch process to a single wafer process. Currently, FEOL processes, which fabricate the
        devices’ transistors, are starting to transition from batch to single
        wafer.

Wafer Level and Other Advanced Packaging Enable Smaller Portable Products. New
        packaging technologies, including wafer level packaging, are being developed by the
        industry for the manufacture of smaller portable products such as GPS devices, 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. The packaging method allows for more efficient 3-D device
        mounting, or chip stacking, to further reduce the device’s footprint.

Emerging Need for Thinned Wafers and Chip Stacking 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.

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 28 years of experience building and supporting production-proven
        semiconductor manufacturing equipment. We utilize advanced modeling techniques in the
        design of our process chambers to address an increasingly complex manufacturing process. We
        have a strong intellectual property portfolio with 344 U.S. patents issued and
        approximately 182 U.S. patents pending.

Comprehensive Product Portfolio. We provide a broad suite of advanced,
        highly-engineered, innovative processing chambers that include surface preparation and ECD
        equipment. These chambers are incorporated into our single wafer platform and into our
        batch processing tools. We design a variety of chambers to optimize performance of each of
        the different processes.

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 14 interchangeable 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, high throughput, yield
        enhancement and a low cost of ownership. We plan to develop new technologies, such as
        porous silicon and solar applications, 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. New Raider developments
        will provide a significant throughput advantage with a reduced footprint compared to batch
        processing technology.

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 28 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. 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 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
        HiDRIS cleaning chamber used to remove high dose ion implant photo-resist from the surface
        of the wafer. We are developing porous silicon chambers for potential use in
        nano-technology and solar applications.

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 device 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 planarization characteristics of the downstream CMP
        process step.

# Products

Our
        broad product suite of 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 multi-chamber 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. We operate in one segment with net sales of $215.2
        million, $243.2 million and $190.4 million for fiscal 2007, 2006 and 2005,
        respectively.

# 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.
        Selling prices for these single wafer surface preparation products range from $700,000 to
        $4.0 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 chemicals,
        deionized water and gases to the wafer surface in an enclosed chamber. The wafers are
        rotated, on axis, and are showered by a sequenced spray of chemicals followed by heated
        nitrogen gas to 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 can minimize chemical disposal 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 $20,000 to $2.9 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 14 interchangeable process
        chambers. The Raider platform also features Nano-Megs cleaning capability, which uses
        megasonic energy to delicately but effectively clean the wafers, 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 chambers,
        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 contaminates, post-etch
        polymer removal, critical pre-deposition cleans, metal etching and 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 through silicon 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 $800,000 to $4.2 million.

# RAIDER ECD

The
        Raider ECD is an automated, 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 yield CMP improvements and reducing expensive CMP costs. Our
        cleaning chambers, which are also used in our Raider SP, are 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 2007:

|                                                                                                                                                                                                               |                                                                                                                                                                     |                                                                                                                                                                                                                                        
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Advanced Micro
                Devices
                Amkor
                Anadigics
                Bosch
                Casio
                Freescale Semiconductor
                Grace Semiconductor | Hitachi
                Infineon/Qimonda
                Maxim Integrated Products
                Micron/IM Flash
                Seagate
                Skyworks | Sony
                Spansion
                STMicroelectronics
                Taiwan Semiconductor Mfg. Co.
                TECH Semiconductor
                Texas Instruments
                United Microelectronics Corporation

Our
        top ten customers accounted for 67.8%, 54.0% and 58.2% of net sales in fiscal 2007, 2006
        and 2005, respectively. Advanced Micro Devices accounted for 23.8%, 13.8% and 16.7% of net
        sales in fiscal 2007, 2006 and 2005, respectively. Micron/IM Flash accounted for 10.2% of
        net sales in fiscal 2007.

International
        sales, primarily in Europe, Asia and Japan, accounted for approximately 62.5%, 62.5 % and
        72.7% of net sales for fiscal 2007, 2006 and 2005, respectively. 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.

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 $58.9 million as of September 30, 2007 and $85.3 million in fiscal 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, 2007, deferred revenue was $15.4 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.

In
        fiscal 2006 we increased our manufacturing capacity 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. In fiscal 2006, we also
        completed our facility in Salzburg, Austria which has space for light manufacturing and a
        repair facility. In fiscal 2007, we completed a 10,000 square foot expansion of a
        refurbishing facility at our Rhetech subsidiary.

# Research and
        Development (R&D)

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 $27.1 million, $24.5
        million and $19.7 million in fiscal 2007, 2006 and 2005, respectively. As a percentage of
        our net sales, these expenses represented approximately 12.6%, 10.1% and 10.4% in each of
        these fiscal years, respectively. Our surface preparation research and development efforts
        were focused on FEOL cleaning applications, wafer edge cleaning processes and related
        equipment. ECD R&D focused on the development of a new processing chamber capable of
        plating copper for devices at the 32 nanometer node and below, deep via applications,
        direct-on-barrier plating, thin seed layer enhancement processes, porous silicon processes
        and related equipment. R&D projects also included a single wafer copper annealing
        process.

# 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
        competitor in ECD is Novellus Systems, Inc. In wet surface preparation applications, our
        competition includes Dainippon Screen Manufacturing Co., 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 344 U.S. patents,
        some with pending foreign counterparts, have approximately 182 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, 2007, we had 1,157 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)
                Richard C. Hegger (6) | 66
                  48
                  58
                  53
                  44
                  51 | Chairman of the Board and Chief Executive Officer
                President and Chief Operating Officer
                Executive Vice President
                Vice President, Chief Financial Officer
                Vice President, Manufacturing
                General Counsel, Secretary

---

(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. Murphy joined 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. Dodkin has 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.

(6)    
        Richard C. Hegger joined us in 2000 as our General Counsel and has served as our
        Secretary since February 2005. Prior to joining the Company, Mr. Hegger worked for a major
        international law firm and specialized in corporate transactions. He is a graduate of
        Columbia University School of Law and a member of the bars of Montana, New York and
        Missouri.

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 four 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.

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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 $20,000 to in excess of
        $4.2 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 decreased 11.5% from
        approximately $243.2 million in fiscal 2006 to approximately $215.2 million in fiscal 2007.
        However, there have been periods of even more 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 decreased 30.9% from approximately $85.3 million at September 30,
        2006 to $58.9 million at September 30, 2007. 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 67.8%, 54.0% and 58.2% of net sales in fiscal 2007, 2006 and 2005,
        respectively. There are 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 2007, the Raider
        platform accounted for approximately 76% 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 were 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 2007, we wrote down inventory by
        approximately $3.0 million primarily due to product enhancements that changed the
        usage of certain component parts, making them obsolete.

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%, 62.5% and 72.7% in fiscal 2007, 2006 and 2005, 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, our cash flow from operations, and from a revolving credit
        facility we renewed in the fourth quarter of fiscal 2007 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. In addition, the credit facility
        contains financial covenants which must be met for the availability of funds. There is no
        assurance that the company will in the future be able to meet the requirements of these
        covenants so that the funds are available for borrowing.

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 344 U.S. patents, some with
        pending foreign counterparts, have approximately 182 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 2007, 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

None.

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 expanded by 10,000 square
        feet in fiscal 2007 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 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 13 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,
        including employment related litigations. 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 Stock Market LLC. The approximate number of
        shareholders of record at December 3, 2007 was 119 and the reported last sale price on that
        date of our common stock on the NASDAQ Stock Market LLC was $8.72. The high and low sales
        prices for our common stock reported by the NASDAQ Stock Market LLC 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.

# STOCK PERFORMANCE
        GRAPH

The following graph compares the
        percentage change in the cumulative total shareholder return on the Company’s Common
        Stock from September 30, 2002 through the end of the Company’s fiscal year ended
        September 30, 2007, with the percentage change in the cumulative total return for the
        NASDAQ Composite Index and the RDG Semiconductor Composite Index. The comparison assumes an
        investment of $100 on September 30, 2002 in the Company’s Common Stock and in each of
        the foregoing indices and assumes reinvestment of dividends. The stock performance shown
        on the graph below is not necessarily indicative of future price
        performance.



20

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# 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 (2)                         |                                          | 

|(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. In the fourth quarter of fiscal 2007, we
                wrote down inventory by approximately $3.0 million primarily due to product
                enhancements that changed the usage of certain component parts, making them
                obsolete.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | In conjunction
                with an equity offering of common stock in December 2005, the Company issued three
                million shares of common stock resulting in approximately $28.0 million in net cash
                proceeds.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

21

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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-engineered 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 Front
        End of Line (FEOL), Back End of Line (BEOL) and wafer level packaging of ICs processes. Our
        single wafer FEOL surface preparation systems are used for photoresist stripping, post etch
        and pre-diffusion cleans. Our BEOL surface preparation systems are used for polymer removal
        and packaging applications. 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. Also, our surface preparation systems
        are used for cleaning and etching processes for wafer level packaging. Our primary product
        for all of these processes is the Raider platform, which is a multi-chamber single wafer
        tool. 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 processing
            technologies for enhanced surface preparation;
- wafer level and other advanced
            packaging to enable smaller portable products; and
- emerging need for thinned wafers
            and chip stacking 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, deferred revenue and shipment-based results of operations.
        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 2007 includes:

- Our fiscal 2007 bookings were
            $193.6 million and include $118.9 million in bookings for our Raider platform. Fourth
            quarter fiscal 2007 bookings were $60.2 million. Our consolidated orders backlog of
            $58.9 million and deferred revenue of $15.4 million resulted in a revenue backlog of
            $74.3 million at September 30, 2007.
- Shipments in fiscal 2007 were
            $219.9 million including $135.0 million from Raider shipments.
- Net income was $5.2 million, or
            2.4%, on net sales of $215.2 million in fiscal 2007 compared with net income of $9.8
            million, or 4.0%, on net sales of $243.2 million in fiscal 2006.
- Our gross margin increased to
            47.2% of net sales, up from 46.4% in fiscal 2006. An inventory write off in the fourth
            quarter of fiscal 2007 negatively impacted fiscal year 2007 margins by approximately
            one percentage point.
- Cash and cash equivalents were
            $16.1 million at September 30, 2007, a decrease of $1.2 million from $17.3 million at
            September 30, 2006.

22

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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            |                                          | 
|Downsizing
                costs                    |                                          | 
|Gain on sale of
                building            |                                          | 
|                                                    |                                          | 
|Total operating
                expenses            |                                          | 
|                                                    |                                          | 
|Income from operations                              |                                          | 
|Other income
                (expense)              |                                          | 
|                                                    |                                          | 
|Income before
                income taxes          |                                          | 
|Income tax
                provision (benefit)      |                                          | 
|                                                    |                                          | 
|Net income                                          |                                          | 
|                                                    |                                          | 

# Fiscal 2007 Compared
        with Fiscal 2006 and Fiscal 2005

# 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 fees generated from our
        anode technology.

Net sales declined 11.5% or $28.0
        million to $215.2 million for fiscal 2007 as compared to $243.2 million in fiscal 2006.
        Business activity levels declined and we experienced a slow down in our bookings in the
        first three quarters of fiscal 2007. Revenues for ECD Raiders for copper interconnect
        applications increased by over 70% as compared with fiscal 2006 levels while revenues from
        our wafer level packaging applications decreased by approximately 23%. Revenues for our
        single-wafer surface preparation Raiders for FEOL applications increased approximately 23%
        while revenues for BEOL cleans applications declined approximately 38% from prior year
        levels. FEOL tools benefited from the transition away from batch processing to single wafer
        processing to more closely control cleaning processes of smaller geometry devices whereas
        BEOL applications for current industry standard 300mm wafer fabs had previously made the
        transition to single wafer and were affected by the overall decline in semiconductor
        industry business levels. Overall, revenues from our Raider platform contributed just more
        than 60% to our fiscal 2007 revenues and while Raider revenue declined in absolute dollars,
        the decline is the equivalent of two or three tools. Revenues from automated and manual
        batch tools, used primarily for cleaning applications declined by approximately $14 million
        when compared with fiscal 2006 levels as single wafer processing continues to supplant
        batch processing in 300mm fabs. The revenue contribution from spare parts, service and from
        our Rhetech subsidiary was proportionate with fiscal 2006 levels.

23

---

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 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 FEOL and 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 continued to expand, allowing us to recognize more revenue upon tool
        shipment as 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.

Geographically, the North American
        and European markets were our leading market areas in fiscal 2007, although we see
        additional opportunity in Asia when we compare ourselves to the rest of the
        industry.

European tool sales increased sharply
        making it our leading market area for tool sales in fiscal 2007 contributing 43.5% to total
        tool sales. This represents an increase of 16.6% from fiscal 2006 levels and 15.7% from
        fiscal 2005 levels.

North American tool sales were
        essentially flat in fiscal 2007 as compared with fiscal 2006, declining approximately one
        percentage point to 30.4% of total tool sales. Both fiscal 2006 and fiscal 2007 represent a
        strong increase from fiscal 2005 North American tool sales of 18.8%.

Asian tool sales declined to 26.1% of
        total tool sales in fiscal 2007 after contributing 41.5% and 53.4%, respectively, in fiscal
        2006 and fiscal 2005. We continue to place a strong focus on our sales and marketing
        efforts in this region and anticipate stronger sales in the Asian market in fiscal
        2008.

# Gross
        Profit

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

Gross profit declined $11.4 million
        in absolute dollars or 10.1% in fiscal 2007 as compared to fiscal 2006. Gross profit
        increased $16.0 million or 16.4% in fiscal 2006 compared to the fiscal 2005 gross profit of
        $97.0 million. As a percentage of net sales, gross profit increased 0.8 percentage points
        in fiscal 2007 as compared to fiscal 2006 after decreasing 4.5 percentage points in fiscal
        2006 from 50.9% in fiscal 2005.

Gross profit decreased in absolute
        dollars in fiscal 2007 because of lower sales volumes and improved by 0.8 percentage points
        from fiscal 2006. Margins improved a combined three percentage points on tool revenues,
        spare parts and service revenues and on sales from our Rhetech subsidiary. Our tool margins
        improved on copper interconnect, FEOL and BEOL tools. Margin improvements were realized in
        both North America and Asia. Installation revenues contributed more to overall revenue in
        both absolute dollars and on a percentage basis. Warranty and installation expense
        decreased in fiscal 2007, contributing approximately one percentage point to the margin
        increase. These margin improvements were partially offset by increased obsolescence and
        inventory reserve charges in the fourth quarter related to product enhancements on our
        Raider tool line that rendered certain component parts obsolete.

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.

# 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 decreased
        $1.9 million in fiscal 2007 as compared with fiscal 2006 and increased $7.1 million in
        fiscal 2006 as compared with fiscal 2005. As a percentage of net sales, SG&A expenses
        increased to 33.3% up from 30.3% in fiscal 2006 but down from 34.9% in fiscal
        2005.

24

---

In response to a slowdown in the
        semiconductor industry, we implemented a plan to align our cost structure with our business
        outlook for the remainder of the fiscal year in April 2007. The plan consisted primarily of
        a seven percent reduction in our worldwide work force, management pay cuts, reduced
        overtime and mandatory leave. As a result, travel, aircraft and general business costs
        decreased over the course of the year. Employment costs increased $2.4 million over fiscal
        2006 levels primarily related to expenses incurred prior to the implementation of the cost
        alignment plan in the second half of fiscal 2007. Employment costs decreased $1.9 million
        in the second half of fiscal 2007. Commission expense declined $2.8 million in fiscal 2007
        related to our transition to a direct marketing and sales force in Taiwan and China.
        Professional fees also declined in fiscal 2007 as compared with fiscal 2006 as fiscal 2006
        professional fees included certain duplicate expenses related to the change in our external
        auditors.

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.

# 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 $2.6
        million or from 10.1% of net sales to 12.6% of net sales in fiscal 2007 as compared with
        fiscal 2006. R&D expense increased $4.8 million in fiscal 2006 as compared to fiscal
        2005 and decreased slightly from 10.4% of net sales in fiscal 2005.

Increasing $1.7 million, prototype
        expense was the primary driver in the $2.6 million increase in R&D expense in fiscal
        2007 as compared with fiscal 2006. Our surface preparation research and development efforts
        were focused on FEOL cleaning applications, wafer edge cleaning processes and related
        equipment. ECD R&D focused on the development of a new processing chamber capable of
        plating copper for devices at the 32 nanometer node and below, deep via applications,
        direct-on-barrier plating, thin seed layer enhancement processes, porous silicon processes
        and related equipment. R&D projects also included a single wafer copper annealing
        process. Travel expense increased in fiscal 2007 related to increased process support for
        our tools.

Prototype expenses increased
        approximately $1.3 million in fiscal 2006 compared to fiscal 2005 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.

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.

25

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# Downsizing
        Costs

|                                        | Year Ended
                September 30, | 
|--------------------------------------- | ---------------------------------------- | 
|
|
|Downsizing costs                        |                                          | 
|Percentage of
                net sales |                                          | 

In April 2007, we announced and
        implemented a plan to align our cost structure with current business activity levels. The
        cost reduction plan consisted primarily of a seven percent reduction in our worldwide work
        force, management pay cuts, reduced overtime and mandatory leave. One-time involuntary
        termination costs of $677,000 were reported as a separate component of operating expenses
        in our fiscal third quarter. All costs related to the downsizing plan were fully incurred
        in the third quarter. Net of the downsizing costs, we saved approximately $5 million in
        employment, travel and general business expenses in the second half of fiscal 2007 as
        compared with spending in the first half of fiscal 2007.

# Gain on Sale of
        Building

|                                        | Year Ended
                September 30, | 
|--------------------------------------- | ---------------------------------------- | 
|
|
|Gain on sale of building                |                                          | 
|Percentage of
                net sales |                                          | 

We sold a manufacturing facility
        located near Kalispell, Montana during the first quarter of fiscal 2007 for approximately
        $1.9 million and recognized a gain on the sale of approximately $648,000.

# Other Income
        (Expense)

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

Net other income (expense) increased
        to a net other income of $706,000 in fiscal 2007 from a net other expense of $117,000 in
        fiscal 2006 and a net other income of $3.8 million in fiscal 2005. In fiscal 2007, we
        reported commission income of approximately $156,000 from Starview Technology, Inc., a
        provider of manufacturing software for the semiconductor industry in which Mr. Thompson,
        our chairman and chief executive officer and his son-in-law, Thomas Sulzbacher, are
        majority shareholders. We also reported rental income of a portion of our Cambridge
        facility. Interest income declined to $352,000 in fiscal 2007 from $493,000 in fiscal 2006
        because of lower investment levels. Interest expense increased to $649,000 in fiscal 2007
        because of increased use of our line of credit.

In October 2004, we received a seed
        layer enhancement litigation settlement payment of $2.9 million from Novellus Systems, Inc.
        which accounted for most of the fiscal 2005 net, other income.

We reported an exchange gain of
        $233,000 in fiscal 2007 as compared to exchange losses of $148,000 and $64,000 in fiscal
        2006 and 2005, respectively, related to fluctuations in the Yen, Euro and British pound.
        Beginning in April 2007, due to a change in how we conduct business and following an
        evaluation of the scope of our operations and business practices, we concluded that the
        Euro is the currency of the primary economic environment in which Semitool Austria operates
        and, consequently, changed the functional currency for Semitool Austria to the Euro.
        Semitool Austria invoices its customers in Euros and its financing and operating activities
        are denominated in the Euro. Accordingly, from April 1, 2007, all assets and liabilities of
        Semitool Austria are translated at period-end exchange rates and all revenues and expenses
        are re-measured at average rates prevailing during the period. Translation adjustments are
        reported as a separate component of accumulated other comprehensive loss.

26

---

# Income
        Taxes

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

Our estimated effective full year tax
        rate for fiscal 2007 was a benefit of 57% as compared to the effective tax rate for fiscal
        2006 of 33%. Our fiscal year 2007 tax rate is lower than in fiscal 2006 based on a
        combination of the extension of the federal Research and Experimentation Credit (Credit) in
        fiscal 2007 for fiscal 2006, the current year estimated Credit and the decline in our Net
        Income before Taxes (NIBT) from $14.7 million in fiscal 2006 to $3.3 million in fiscal
        2007. While the fiscal year NIBT decreased, the qualified research expenditures affecting
        the Credit are estimated to remain near the level generated on the fiscal year 2006 tax
        return, the combination of which results in a reduction of the effective tax rate for the
        fiscal year. The effective rate was also impacted by additional Montana R&D credits
        realized in excess of prior estimates and a tax benefit realized in the United Kingdom for
        an exchange loss incurred translating statutory financial statements from the Great Britain
        Pound to the U.S. Dollar.

For fiscal year 2007, we recorded an
        income tax benefit of $1.9 million as compared to a tax provision of $4.8 million for the
        corresponding period of fiscal year 2006. The first quarter of fiscal year 2007 included a
        benefit of $540,000 related to the extension of the Credit as it pertains to our fiscal
        year 2006. Legislation to extend the Credit was signed into law after the close of our
        fiscal year 2006 on September 30, 2006; therefore we were unable to recognize the full
        Credit in fiscal 2006. The third quarter of fiscal year 2007 includes a benefit of $808,000
        due to an increase in the Research and Experimentation Credit and deductions related to
        foreign sales on our fiscal year 2006 U.S. income tax return.

Our estimated effective tax rate
        increased to 33% in fiscal 2006 as compared to 32% in fiscal 2005. The effective tax rate
        in fiscal 2006 was 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 Statement of Financial Accounting Standards (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.

Our future effective tax rate is
        based on our continued investments in research and development programs qualifying for the
        Credit and our expectations of earnings from operations in jurisdictions with lower tax
        rates 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                        |                               | 

Approximately 79% of our current
        backlog is for Raider tools. Deferred revenue increased $1.0 million at September 30, 2007
        as compared with September 30, 2006 primarily because of shipments of Raiders into either
        new customer environments or into Japan, where title does not transfer until final customer
        acceptance, both of which require full deferral of tool revenue until final customer
        acceptance in accordance with our revenue recognition policy. Current deferrals include all
        or a part of 17 Raiders as compared with 23 Raiders at September 30, 2006 and 27 Raiders at
        September 30, 2005. The fiscal 2005 figure includes 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.

27

---

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

Effective the beginning of fiscal
        2006, we adopted SFAS No. 123(R), “Share-Based Payment,” 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. Stock-based compensation
        cost is measured at the grant date, based on the fair value of the award and is recognized
        as expense over the employees’ requisite service period. The fair value of each stock
        option grant is estimated using the Black-Scholes option pricing model. This model was
        developed for use in estimating the value of publicly traded options that have no vesting
        restrictions and are fully transferable. Our employee stock options have characteristics
        that differ from those of publicly traded options.

Total compensation cost recorded in
        fiscal 2007 and fiscal 2006 was $1.1 million and $1.4 million, respectively, or $1.1
        million and $940,000 after tax, respectively, in each period, an impact of approximately
        $0.03 per basic and diluted share in both periods. 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).

# Liquidity and Capital
        Resources

Operating Activities.
        Operations provided $2.9 million in cash during fiscal 2007. The primary use of cash in
        fiscal 2007 was a $10.4 million decrease in accounts payable as our payables declined due
        to lower business activity levels compared to fiscal 2006. As a result of the inventory
        reduction plan implemented in the third quarter as well as a write off of obsolete
        inventory in the fourth quarter, inventories declined by $6.6 million. Customer advances
        decreased $2.9 million as we shipped the tools underlying those advances. Income taxes
        payable and payroll related liabilities decreased $5.0 million. The primary sources of cash
        from operations during fiscal 2007 were net income of $5.2 million and non-cash components
        of net income including $10.7 million in depreciation and amortization expense offset by a
        $2.3 million decrease in deferred income taxes.

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 was 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.

Investing Activities.
        Investing activities in fiscal 2007 included $8.7 million in purchases of factory and
        laboratory equipment, other property and the expansion and remodeling of our Rhetech
        subsidiary facility. Additionally we invested $5.7 million in our development and
        demonstration laboratories by transferring finished goods inventory to property, plant and
        equipment. These investments in our equipment and facilities were partially offset by
        proceeds from the sale of property, plant and equipment, primarily a manufacturing facility
        located near Kalispell, Montana, which we sold for approximately $1.9 million. We also
        invested a net amount of $1.1 million in our patent portfolio.

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.

Financing Activities.
        Financing activities in fiscal 2007 provided cash of $3.6 million and consisted primarily
        of $1.6 million in borrowings under long-term debt for our Rhetech subsidiary expansion and
        remodeling project and $4.9 million in new long-term debt used to finance the acquisition,
        remodeling and equipping of a manufacturing facility located near Kalispell, Montana. The
        $4.9 million financing with First Interstate Bank is under a value-added loan program
        sponsored by the Montana Board of Investments (MBOI). The MBOI participation in 75% of the
        loan carries an interest rate of 2.5% for the first five years and 6.5% for the second five
        years of a ten-year term. The 25% of the loan financed by First Interstate Bank has a 7.75%
        interest rate over the ten-year term. Stock option exercises also provided $1.2 million in
        fiscal 2007. Offsetting these sources of cash, we repaid short-term borrowings of $3.1
        million on our revolving line of credit in fiscal 2007. There are currently no advances
        outstanding on the revolving credit line.

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.

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.

28

---

The following commitments as of
        September 30, 2007, 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 $2,839,200 for the year ended September 30, 2007 and $3,289,200
        in each of the years ended September 30, 2006 and 2005. The current rental rate is
        approximately $199,100 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. The terms of the lease
        agreements were based on comparable information on lease rates received from independent
        aircraft leasing dealers and finance entities for similar aircraft. We believe that these
        lease agreements are on terms no less favorable to us than could have been obtained from an
        unaffiliated party.

During the fiscal years 2005 through
        2007, the Company acted as a sales representative to Starview Technology, Inc., a provider
        of manufacturing software for the semiconductor industry in which Mr. Thompson and his
        son-in-law, Thomas Sulzbacher, are majority shareholders. The Company earned sales
        commissions from Starview Technology in the amount of $156,000 in fiscal 2007.

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, 2007, our
        principal sources of liquidity consisted of approximately $16.1 million of cash and cash
        equivalents and $30.0 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, 7.75% as of September 30, 2007, or at our option, LIBOR plus 2.25%, or 7.37%
        as of that date. The revolving credit line expires on March 1, 2009. 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
        covenants. If we were to default on the Credit Agreement or if there were a materially
        adverse change in our financial condition, the bank could accelerate payment of any
        advances outstanding under the Credit Agreement. In addition, the availability of funds
        requires compliance with certain financial covenants. We currently are in compliance with
        our debt covenants; however, there is no assurance that in the future we will be able to
        maintain compliance with these covenants so as to ensure availability of the
        line.

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 2008 and into the foreseeable future. However, continued growth
        in shipments of product may require additional funding. We estimate capital expenditures
        will be between $7.0 million and $9.0 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.

# 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.

29

---

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 50 and 145 days.

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.

30

---

We use the Black-Scholes option
        valuation model to value employee stock options, consistent with the provisions of SFAS No.
        123(R), 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, 2007,
        $2.2 million of total unrecognized compensation cost related to non-vested stock option
        awards is expected to be recognized over a weighted average period of 1.5 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, including employment related
        litigations. 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 July 2006, the Financial
        Accounting Standards Board (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 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.  On November 14, 2007, the FASB deferred the effective date of
        SFAS No. 157 for nonfinancial assets and liabilities, to fiscal years beginning after
        November 15, 2008 and interim periods within those fiscal years. Accordingly, we will adopt
        SFAS No. 157 in the first quarter of fiscal 2010. We are currently evaluating the impact
        this statement will have on our results of operations and financial condition.

In February 2007, the FASB issued
        SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities
        – Including an amendment of FASB Statement No. 115.”  SFAS No. 159
        allows entities to choose, at specified election dates, to measure eligible financial
        instruments and certain other items at fair value that are not otherwise required to be so
        measured. If a company elects the fair value option for an eligible item, changes in that
        item’s fair value in subsequent reporting periods must be recognized in current
        earnings. SFAS 159 is effective for fiscal years beginning after November 15, 2007.
        Accordingly we will adopt SFAS 159 in fiscal 2009. We are currently evaluating the impact
        of adopting SFAS 159 on our results of operations and financial condition.

# 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, 2007, we had
        approximately $11.2 million in long-term debt. 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, 7.75% as
        of September 30, 2007, or at our option, LIBOR plus 2.25%, or 7.57% as of that date. Our
        short-term debt bore interest at the bank’s prime lending rate, 8.25% as of September
        30, 2006, or at our option, LIBOR plus 2.25%, as of that date. 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 6 –
        Long-Term Debt and Capital Leases.

31

---

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,
        2007, we held forward contracts to sell Japanese Yen with a total face value of $4.8
        million and a total market value of $4.9 million and a total unrealized loss of
        approximately $100,000. 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.

32

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# Item 8.  Financial
        Statements and Supplementary Data

SEMITOOL, INC.
        CONSOLIDATED BALANCE SHEETS
        September 30, 2007 and 2006
        (Amounts in Thousands, Except Share Amounts)

|                                                                                                 | 2007 |  | 2006 |        
|------------------------------------------------------------------------------------------------ | ---- |  | ---- | -------
|
|Current assets:                                                                                  |      |  |      |        
|Cash and cash
                equivalents                                                        |      |  | $    | 16,090 
|Trade
                receivables, less allowance for doubtful accounts of $259 and $269         |      | 
|in
                2007 and 2006                                                                 |      |  |      | 56,999 
|Inventories                                                                                      |      |  |      | 78,017 
|Income tax
                refund receivable                                                     |      |  |      | 76     
|Prepaid
                expenses and other current assets                                        |      |  |      | 3,498  
|Deferred
                income taxes                                                            |      |  |      | 13,301 
|                                                                                                 |      |  |      |        
|Total
                current assets                                                             |      |  |      | 167,981
|Property, plant
                and equipment, net                                               |      |  |      | 49,148 
|Intangibles,
                less accumulated amortization of $3,279 and $2,390 in 2007 and 2006 |      |  |      | 8,336  
|Other
                assets                                                                     |      |  |      | 864    
|                                                                                                 |      |  |      |        
|Total assets                                                                                     |      |  | $    | 226,329
|                                                                                                 |      |  |      |        

|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,                |  | 
|32,107,457
                and 31,924,781 shares issued and outstanding in 2007 and 2006 |  | 
|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.

33

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SEMITOOL, INC.
        CONSOLIDATED STATEMENTS OF INCOME
        For the years ended September 30, 2007, 2006 and 2005
        (Amounts in Thousands, Except Per Share Amounts)

|                                                    | 2007 |  | 2006 |         | 2005 |  
|--------------------------------------------------- | ---- |  | ---- | ------- | ---- | -
|Net sales                                           |      |  | $    | 215,220 |      | $
|Cost of
                sales                       |      |  |      | 113,729 |      |  
|                                                    |      |  |      |         |      |  
|Gross profit                                        |      |  |      | 101,491 |      |  
|                                                    |      |  |      |         |      |  
|Operating expenses:                                 |      | 
|Selling,
                general and administrative |      |  |      | 71,749  |      |  
|Research
                and development            |      |  |      | 27,080  |      |  
|Downsizing
                costs                    |      |  |      | 677     |      |  
|Gain
                on sale of building            |      |  |      | (648    | )    |  
|                                                    |      |  |      |         |      |  
|Total
                operating expenses            |      |  |      | 98,858  |      |  
|                                                    |      |  |      |         |      |  
|Income from
                operations              |      |  |      | 2,633   |      |  
|                                                    |      |  |      |         |      |  
|Other income (expense):                             |      | 
|Interest
                income                     |      |  |      | 352     |      |  
|Interest
                expense                    |      |  |      | (649    | )    |  
|Other,
                net                          |      |  |      | 1,003   |      |  
|                                                    |      |  |      |         |      |  
|Total other
                income (expense)        |      |  |      | 706     |      |  
|                                                    |      |  |      |         |      |  
|Income before income taxes                          |      |  |      | 3,339   |      |  
|Income
                tax provision (benefit)      |      |  |      | (1,892  | )    |  
|                                                    |      |  |      |         |      |  
|Net income                                          |      |  | $    | 5,231   |      | $
|                                                    |      |  |      |         |      |  
|Earnings per share:                                 |      | 
|Basic                                               |      |  | $    | 0.16    |      | $
|                                                    |      |  |      |         |      |  
|Diluted                                             |      |  | $    | 0.16    |      | $
|                                                    |      |  |      |         |      |  
|Weighted average common shares outstanding:         |      | 
|Basic                                               |      |  |      | 32,034  |      |  
|Diluted                                             |      |  |      | 32,450  |      |  

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

34

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SEMITOOL, INC.
        CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
        For the years ended September 30, 2007, 2006 and 2005
        (Amounts in Thousands)

|                                                      | Common Stock |  |  |        | 
|----------------------------------------------------- | ------------ |  |  | ------ | 
|
|Balance September 30, 2004                            |              |  |  | 28,668 | 
|Net
                income                            |              |  |  | --     | 
|Issuance
                of common stock under        |              | 
|employee
                compensation plans           |              |  |  | 65     | 
|Income
                tax effect of stock option     |              | 
|transactions                                          |              |  |  | --     | 
|Compensation
                expense recognized under |              | 
|employee
                stock option plans           |              |  |  | --     | 
|Other
                comprehensive income            |              |  |  | --     | 
|                                                      |              |  |  |        | 
|Balance September 30, 2005                            |              |  |  | 28,733 | 
|Net
                income                            |              |  |  | --     | 
|Issuance
                of common stock under        |              | 
|employee
                compensation plans           |              |  |  | 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 | 
|Net
                income                            |              |  |  | --     | 
|Issuance
                of common stock under        |              | 
|employee
                compensation plans           |              |  |  | 182    | 
|Income
                tax effect of stock option     |              | 
|transactions                                          |              |  |  | --     | 
|Compensation
                expense recognized under |              | 
|employee
                stock option plans           |              |  |  | --     | 
|Other
                comprehensive loss              |              |  |  | --     | 
|                                                      |              |  |  |        | 
|Balance September 30, 2007                            |              |  |  | 32,107 | 
|                                                      |              |  |  |        | 

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

35

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SEMITOOL, INC.
        CONSOLIDATED STATEMENTS OF CASH FLOWS
        For the years ended September 30, 2007, 2006 and 2005
        (Amounts in Thousands)

|                                                                                   | 2007 |  | 2006 |         | 2005 |  
|---------------------------------------------------------------------------------- | ---- |  | ---- | ------- | ---- | -
|Operating activities:                                                              |      |  |      |         |      |  
|Net
                income                                                         |      |  | $    | 5,231   |      | $
|Adjustments to
                reconcile net income to net                         |      | 
|cash
                provided by (used in) operating activities:                   |      | 
|(Gain)
                Loss on disposition of assets                               |      |  |      | (398    | )    |  
|Depreciation
                and amortization                                      |      |  |      | 10,703  |      |  
|Deferred
                income taxes                                              |      |  |      | (2,308  | )    |  
|Income
                tax benefit received on the exercise of stock-based awards  |      |  |      | 29      |      |  
|Compensation
                expense recognized under employee stock options plans |      |  |      | 1,053   |      |  
|Change
                in:                                                         |      | 
|Trade
                receivables                                                  |      |  |      | (492    | )    |  
|Inventories                                                                        |      |  |      | 6,604   |      |  
|Income
                tax refund receivable                                       |      |  |      | 135     |      |  
|Prepaid
                expenses and other current assets                          |      |  |      | (646    | )    |  
|Other
                assets                                                       |      |  |      | 42      |      |  
|Accounts
                payable                                                   |      |  |      | (10,355 | )    |  
|Accrued
                commissions                                                |      |  |      | (764    | )    |  
|Accrued
                warranty                                                   |      |  |      | 407     |      |  
|Accrued
                payroll and related benefits                               |      |  |      | (1,964  | )    |  
|Income
                taxes payable                                               |      |  |      | (3,036  | )    |  
|Other
                accrued liabilities                                          |      |  |      | 1,591   |      |  
|Customer
                advances                                                  |      |  |      | (2,945  | )    |  
|Deferred
                profit                                                    |      |  |      | 41      |      |  
|                                                                                   |      |  |      |         |      |  
|Net
                cash provided by (used in) operating activities                |      |  |      | 2,928   |      |  
|                                                                                   |      |  |      |         |      |  
|Investing
                activities:                                              |      | 
|Purchases of
                marketable securities                                 |      |  |      | --      |      |  
|Proceeds from sale
                and maturities of marketable securities         |      |  |      | --      |      |  
|Purchases of
                property, plant and equipment                         |      |  |      | (8,726  | )    |  
|Increases in
                intangible assets                                     |      |  |      | (1,055  | )    |  
|Proceeds from sale
                of property, plant and equipment                |      |  |      | 1,885   |      |  
|                                                                                   |      |  |      |         |      |  
|Net
                cash used in investing activities                              |      |  |      | (7,896  | )    |  
|                                                                                   |      |  |      |         |      |  
|Financing
                activities:                                              |      | 
|Net
                proceeds from stock offering                                   |      |  |      | --      |      |  
|Proceeds from
                exercise of stock options                            |      |  |      | 1,177   |      |  
|Excess tax benefits
                received on the exercise of stock-based awards |      |  |      | 218     |      |  
|Borrowings under
                line of credit and short-term debt                |      |  |      | 20,538  |      |  
|Repayments of line
                of credit and short-term debt                   |      |  |      | (23,647 | )    |  
|Borrowings under
                long-term debt                                    |      |  |      | 6,466   |      |  
|Repayments of
                long-term debt and capital leases                    |      |  |      | (1,105  | )    |  
|                                                                                   |      |  |      |         |      |  
|Net
                cash provided by financing activities                          |      |  |      | 3,647   |      |  
|                                                                                   |      |  |      |         |      |  
|Effect of
                exchange rate changes on cash and cash equivalents       |      |  |      | 64      |      |  
|                                                                                   |      |  |      |         |      |  
|Net increase
                (decrease) in cash and cash equivalents               |      |  |      | (1,257  | )    |  
|Cash and cash
                equivalents at beginning of year                     |      |  |      | 17,347  |      |  
|                                                                                   |      |  |      |         |      |  
|                                                                                   |      |  |     
|Cash and cash equivalents at end of year                                           |      |  | $    | 16,090  |      | $
|                                                                                   |      |  |      |         |      |  

36

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SEMITOOL, INC.
        CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
        For the years ended September 30, 2007, 2006 and 2005
        (Amounts in Thousands)

|                                                                       | 2007 |  | 2006 |       | 2005 |  
|---------------------------------------------------------------------- | ---- |  | ---- | ----- | ---- | -
|Supplemental disclosures of cash flow information:                     |      |  |      |       |      |  
|Cash paid during the
                year for:                         |      | 
|Interest,
                net of amounts capitalized                   |      |  | $    | 664   |      | $
|Income
                taxes                                           |      |  |      | 3,330 |      |  
|Supplemental disclosures of non-cash financing and investing activity: |      | 
|Inventory
                transferred to equipment                     |      |  | $    | 5,732 |      | $
|Assets acquired by
                incurring debt and capital leases   |      |  |      | --    |      |  
|Intangible assets
                acquired with the sale of products   |      |  |      | --    |      |  

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

37

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SEMITOOL,INC.
        CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
        For the years ended September 30, 2007, 2006 and 2005
        (Amounts in Thousands)

|                                                                 | 2007 |  | 2006 |       | 2005 |  
|---------------------------------------------------------------- | ---- |  | ---- | ----- | ---- | -
|Net income                                                       |      |  | $    | 5,231 |      | $
|Net gain (loss)
                on cash flow hedges              |      |  |      | (363  | )    |  
|Unrealized gain
                on available-for-sale securities |      |  |      | --    |      |  
|Foreign
                currency translation adjustments         |      |  |      | 484   |      |  
|                                                                 |      |  |      |       |      |  
|Total comprehensive income                                       |      |  | $    | 5,352 |      | $
|                                                                 |      |  |      |       |      |  

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

38

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# 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-engineered equipment for use in the fabrication of semiconductor devices.
                Semitool’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. The
                Company’s surface preparation systems are designed for Front End of Line
                (FEOL), Back End of Line (BEOL) and wafer level packaging of ICs processes.
                Semitool’s single wafer FEOL surface preparation systems are used for
                photoresist stripping, post etch and pre-diffusion cleans. The Company’s BEOL
                surface preparation systems are used for polymer removal and packaging
                applications. Semitool’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. Also, the
                Company’s surface preparation systems are used for cleaning and etching
                processes for wafer level packaging. Semitool’s primary product for all of
                these processes is the Raider platform, which is a multi-chamber single wafer tool.
                The Company’s products address critical applications within the semiconductor
                manufacturing process, and help enable Semitool’s 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.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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 original or 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.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

39

---

| | 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 accumulated other
                comprehensive income (loss) (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 years ended September
                30, 2007 and 2006, the amount transferred from OCI to Other income (expense) was
                not material. The Company estimates that all $182,000 of net derivative losses,
                currently reported as a separate component of OCI, 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, 2007, 2006 and
                2005.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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 less accumulated depreciation. Depreciation and
                amortization are 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 the lesser of the
                estimated economic life or seven years.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

40

---

| | 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.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Semitool’s
                shipping terms are customarily FOB Semitool shipping point or equivalent terms. All
                sales, use, value added, excise or other taxes imposed by a governmental authority
                on customer sales are presented on a net basis, that is, excluded from
                revenues.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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 period-end exchange
                rates and all revenues and expenses are re-measured at average rates prevailing
                during the period. Translation adjustments are reported as a separate component of
                OCI. Transaction gains and losses are included in the Consolidated Statements of
                Income.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Beginning in
                April 2007, due to a change in how the Company conducts business and following an
                evaluation of the scope of its operations and business practices, the Company
                concluded that the Euro is the currency of the primary economic environment in
                which Semitool Austria operates and consequently, changed the functional currency
                for Semitool Austria to the Euro. Semitool Austria invoices its customers in Euros
                and its financing and operating activities are denominated in the Euro.
                Accordingly, from April 1, 2007, all assets and liabilities of Semitool Austria are
                translated at period-end exchange rates and all revenues and expenses are
                re-measured at average rates prevailing during the period. Translation adjustments
                are reported as a separate component of OCI. Transaction gains and losses are
                included in the Consolidated Statements of Income.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Transaction
                gains of $625,000, $33,000 and $110,000 in fiscal 2007, 2006 and 2005 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.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

41

---

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

| | Effective
                October 1, 2005, the Company adopted the provisions of Statement of Financial
                Accounting Standards (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.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The Company
                elected to adopt the modified prospective application method as provided by SFAS
                No. 123(R). As a result, the Company’s Consolidated Statements of Income as
                of September 30, 2007 and 2006 reflect compensation cost for new stock awards
                granted under the stock incentive plans during fiscal 2007 and fiscal 2006 and the
                nonvested portion of previous stock option grants which vested during fiscal 2007
                and fiscal 2006. Total compensation cost recorded in fiscal 2007 and fiscal 2006,
                respectively, was $1.1 million and $1.4 million pre-tax, or $1.1 million and
                $940,000 after tax, an impact of approximately $0.03 per basic and diluted share in
                both periods.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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 No. 123(R). 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 No. 123(R).
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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 was as follows (in
                thousands, except per share amounts):
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                               | 2005 | 
|-------------------------------------------------------------- | ---- | 
|Net income, as reported                                        |      | 
|Add:
                Compensation expense recorded             |      | 
|under
                APB No. 25, net of tax related effects   |      | 
|Deduct: Total
                stock-based compensation expense |      | 
|determined
                under fair value based method for   |      | 
|all
                awards, net of tax related effects         |      | 
|                                                               |      | 
|Pro forma net income                                           |      | 
|                                                               |      | 
|Basic earnings per share:                                      |      | 
|As
                reported                                    |      | 
|Pro
                forma                                      |      | 
|Diluted earnings per share:                                    |      | 
|As
                reported                                    |      | 
|Pro
                forma                                      |      | 

42

---

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

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

|                                                        | 2007 |  | 2006 |        | 2005 |  
|------------------------------------------------------- | ---- |  | ---- | ------ | ---- | -
|Numerator:                                              |      |  |      |        |      |  
|Net
                income used for basic and diluted   |      | 
|earnings
                per share                      |      |  | $    | 5,231  |      | $
|                                                        |      |  |      |        |      |  
|Denominator:                                            |      | 
|Weighted
                average common shares used for |      | 
|basic
                earnings per share                |      |  |      | 32,034 |      |  
|Effects
                of dilutive stock options       |      |  |      | 416    |      |  
|                                                        |      |  |      |        |      |  
|Denominator for diluted earnings per share              |      |  |      | 32,450 |      |  
|                                                        |      |  |      |        |      |  

| | Diluted earnings
                per share excludes the effects of antidilutive stock options to purchase 577,719,
                209,575, and 403,350 shares of common stock in fiscal 2007, 2006 and 2005,
                respectively.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | In
                July 2006, the Financial Accounting Standards Board (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 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. On November 14, 2007, the FASB deferred the effective date of SFAS
                No. 157 for nonfinancial assets and liabilities, to fiscal years beginning after
                November 15, 2008 and interim periods within those fiscal years. Accordingly, the
                Company will adopt SFAS No. 157 in the first quarter of fiscal 2010. The Company is
                currently evaluating the impact this statement will have on its results of
                operations and financial condition.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In February
                2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial
                Assets and Financial Liabilities – Including an amendment of FASB Statement
                No. 115.”  SFAS No. 159 allows entities to choose, at specified
                election dates, to measure eligible financial instruments and certain other items
                at fair value that are not otherwise required to be so measured. If a company
                elects the fair value option for an eligible item, changes in that item’s
                fair value in subsequent reporting periods must be recognized in current earnings.
                SFAS 159 is effective for fiscal years beginning after November 15, 2007.
                Accordingly the Company will adopt SFAS 159 in fiscal 2009. The Company is
                currently evaluating the impact of adopting SFAS 159 on its results of operations
                and financial condition.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

2.    Inventories:

| | Inventories at
                September 30, 2007 and 2006 are summarized as follows (in thousands):
| | ----------------------------------------------------------------------------------------------------

|                               | 2007 |  | 2006 |       
|------------------------------ | ---- |  | ---- | ------
|Parts and raw materials        |      |  | $    | 44,441
|Work-in-process                |      |  |      | 23,280
|Finished
                goods |      |  |      | 10,296
|                               |      |  |      |       
|                               |      |  | $    | 78,017
|                               |      |  |      |       

43

---

3.    Property, Plant and Equipment:

| | Property, plant
                and equipment at September 30, 2007 and 2006 are summarized as follows (in
                thousands):
| | --------------------------------------------------------------------------------------------------------------------------------------

|                                                               | 2007 |  | 2006 |        
|-------------------------------------------------------------- | ---- |  | ---- | -------
|Buildings and improvements                                     |      |  | $    | 31,950 
|Machinery and
                equipment                        |      |  |      | 46,926 
|Furniture,
                fixtures and leasehold improvements |      |  |      | 10,534 
|Vehicles and
                aircraft                          |      |  |      | 10,091 
|                                                               |      |  |      |        
|                                                               |      |  |      | 99,501 
|Less
                accumulated depreciation and amortization |      |  |      | (55,237
|                                                               |      |  |      |        
|                                                               |      |  |      | 44,264 
|Land and land
                improvements                     |      |  |      | 4,884  
|                                                               |      |  |      |        
|                                                               |      |  | $    | 49,148 
|                                                               |      |  |      |        

| | Depreciation
                expense was $9,785,000, $8,904,000, and $6,694,000 for fiscal 2007, 2006 and 2005,
                respectively.
| | ---------------------------------------------------------------------------------------------------------------------------------------------

4.    Intangible Assets:

| | Amortization
                expense for intangible assets was $936,000, $811,000, and $549,000 for fiscal 2007,
                2006 and 2005, respectively. Based primarily on patent rights granted and recorded
                at September 30, 2007, 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      | 
| | --------------------------------------------- |  | ---------- | 
| |                                               |  | 2008       | 
| |                                               |  | 2009       | 
| |                                               |  | 2010       | 
| |                                               |  | 2011       | 
| |                                               |  | 2012       | 
| |                                               |  | Thereafter | 

| | Accumulated
                amortization was $3,279,000 and $2,390,000 at September 30, 2007 and 2006,
                respectively.
| | ------------------------------------------------------------------------------------------------------------------------------------

5.    Note Payable to Bank:

| | The Company has
                a $30 million Credit Agreement, renewable annually, with a bank with an expiration
                date of March 1, 2009. Borrowings are collateralized by certain assets of the
                Company and bear interest at the bank’s prime lending rate, 7.75% as of
                September 30, 2007, or at our option, LIBOR plus 2.25%, or 7.37% as of that date.
                The agreement requires monthly interest payments only, until March 1, 2009, when
                the then outstanding principal balance is due and payable in full. The original
                agreement provided 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, 2008.
                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, 2007. At September 30, 2007,
                there were no advances outstanding on the agreement.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

44

---

6.    Long-Term Debt and Capital Leases:

| | Long-term debt
                and capital leases at September 30, 2007 and September 30, 2006 are summarized as
                follows (in thousands):
| | --------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                                                   | 2007 |  | 2006 |       
|---------------------------------------------------------------------------------- | ---- |  | ---- | ------
|Mortgage term note payable in monthly installments of                              |      |  |      |       
|$23,
                including interest at a blended rate of 5.5%, maturing on     |      | 
|September
                1, 2014. (A)                                             |      |  | $    | 1,524 
|Mortgage term note payable in monthly installments of $49                          |      | 
|including
                interest at a blended rate of 3.81% up to Jan 2012       |      | 
|when
                it will change to $53 including interest at a blended rate of |      | 
|6.81%,
                maturing on January 2017. (B)                               |      |  |      | 4,629 
|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.(C)      |      |  |      | 78    
|Mortgage term note payable to Sovereign Bank in monthly                            |      | 
|installments
                of $6 including interest at 4.5%, maturing            |      | 
|August
                15, 2021. (D)                                               |      |  |      | 1,804 
|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. (E)         |      |  |      | 3,093 
|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. Collateralized by equipment with a  |      | 
|net
                book value of $136.                                            |      |  |      | 57    
|                                                                                   |      |  |      |       
|                                                                                   |      |  |      | 11,185
|Less current
                portion                                               |      |  |      | 1,158 
|                                                                                   |      |  |      |       
|                                                                                   |      |  | $    | 10,027
|                                                                                   |      |  |      |       

|(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 is collateralized by a first lien deed of trust on the
                manufacturing facility located at Birch Grove Road in Kalispell, Montana and by all
                fixtures and personal property of the Company necessary for the operation of the
                facility. The Montana State Board of Investments provided 75% of the financing with
                First Interstate Bank providing the remaining 25%.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(C) | 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. The net book value of assets pledged under the
                agreement was $4.5 million at September 30, 2007, $2.4 million at September 30,
                2006 and $2.0 million at September 30, 2005.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(D) | The
                mortgage term note payable to Sovereign Bank for the expansion of the Rhetech, Inc.
                manufacturing facility is collateralized by a second lien upon the premises in
                Coopersburg, Pennsylvania by Lehigh County Industrial Development Authority and
                guaranteed by Semitool, Inc.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

45

---

| | Principal
                maturities for long-term debt and capital leases at September 30, 2007, are
                summarized as follows (in thousands):
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------

| | Year Ending
                    September 30, |  | Notes
                    Payable |  | Capital
                    Leases |  
| | --------------------------------------------- |  | --------------------------------- |  | ---------------------------------- | -
| |                                               |  | 2008                              |  |                                    | $
| |                                               |  | 2009                              |  |                                    |  
| |                                               |  | 2010                              |  |                                    |  
| |                                               |  | 2011                              |  |                                    |  
| |                                               |  | 2012                              |  |                                    |  
| |                                               |  | Thereafter                        |  |                                    |  
| |                                               |  |                                   |  |                                   
| |                                               |  |                                   |  |                                    | $
| |                                               |  |                                   |  |                                   

7.    Accumulated Other Comprehensive Loss:

| | The
                Company’s accumulated other comprehensive loss consists of unrealized losses
                on cash flow hedges and foreign currency translation adjustments resulting from
                translating both Semitool Japan’s financial statements from the Japanese Yen
                and Semitool Austria’s financial statements from the Euro, to the U.S.
                Dollar.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Accumulated
                other comprehensive loss at September 30, 2007 and 2006 consisted of the following
                components (in thousands):
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                                                                | 2007 |  | 2006 |     
|----------------------------------------------------------------------------------------------- | ---- |  | ---- | ----
|Unrealized gain (loss) on derivative instruments qualifying as cash flow
                hedges |      |  | $    | (182
|Cumulative
                translation adjustments                                              |      |  |      | (310
|                                                                                                |      |  |      |     
|                                                                                                |      |  | $    | (492
|                                                                                                |      |  |      |     

8.    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
                contribution cost for this plan was approximately $1.1 million, $1.0 million and
                $785,000 for the years ended September 30, 2007, 2006 and 2005,
                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. 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, 2007, 2006 and 2005 approximated $40,000, $38,000 and $51,000,
                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.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In February
                2004, the Board of Directors adopted and the shareholders approved the 2004 Stock
                Option Plan (the 2004 Plan), replacing the expiring 1994 Stock Option Plan. Upon
                approval of the 2007 Stock Incentive Plan (the 2007 Plan) in March 2007, the 2007
                Plan immediately replaced the 2004 Plan. Options that were granted under the 2004
                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 has granted options that qualify as incentive stock options to employees
                (including officers and employee directors) and nonqualified stock options to
                employees, directors and consultants. The options generally have a ten-year term,
                unless earlier terminated by the discontinuation of service by the grantee. Option
                exercises are settled with newly issued common shares.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

46

---

| | The total shares
                reserved for issuance under the 2007 Plan are 3,381,700 at September 30, 2007,
                which includes an initial 1,000,000 shares plus all shares that remained available
                for grants of options under the 2004 Plan as of the date the 2007 Plan was approved
                plus any shares that would otherwise return to the 2004 Plan as a result of
                forfeiture of options previously granted under the 2004 Plan. The 2007 Plan
                provides for the grant of various awards including stock options, restricted stock,
                restricted stock units, and stock appreciation rights. As of September 30, 2007,
                only stock options and restricted stock have been awarded. The Company may grant
                options that qualify as incentive stock options only to employees. Awards other
                than incentive stock options may be granted to employees, directors and
                consultants. Awards granted under the 2007 Plan generally vest at a rate of 20% per
                year with 20% vesting immediately upon issuance and have a requisite service period
                of four years. Stock options generally have a ten-year term, unless earlier
                terminated by the discontinuation of service by the grantee. Stock option exercises
                and restricted stock are settled with newly issued common shares.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The fair value
                of each stock 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 stock 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:
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                    | 2007 |  | 2006 |      | 2005 | 
|--------------------------------------------------- | ---- |  | ---- | ---- | ---- | 
|Expected stock price volatility                     |      |  |      | 51.6 | %    | 
|Risk-free
                interest rate             |      |  |      | 4.6  | %    | 
|Dividend
                yield                      |      |  |      | 0.0  | %    | 
|Expected life
                of options (in years) |      |  |      | 5.1  |      | 

| | The weighted
                average grant date fair values based on the Black-Scholes option pricing model for
                stock options granted in fiscal 2007, 2006 and 2005 were $5.58, $4.86 and $5.29 per
                share, respectively.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The following
                summary shows stock option activity for the three years ended September 30,
                2007:
| | -------------------------------------------------------------------------------------------------------------------------------

|                               | 2007 |  | 2006 |           | 2005 | 
|------------------------------ | ---- |  | ---- | --------- | ---- | 
|
|Outstanding, beginning of year |      |  |      | 1,922,426 |      | 
|Granted                        |      |  |      | 62,000    |      | 
|Exercised                      |      |  |      | (169,676  | )    | 
|Forfeited                      |      |  |      | (35,000   | )    | 
|                               |      |  |      |           |      | 
|Outstanding, end of year       |      |  |      | 1,779,750 |      | 
|                               |      |  |      |           |      | 
|Exercisable, end of year       |      |  |      | 1,246,956 |      | 

| | As of September
                30, 2007, $2.1 million of total unrecognized compensation cost related to
                non-vested stock options is expected to be recognized over a weighted average
                period of 1.5 years. The weighted average remaining contractual term for options
                outstanding and exercisable at September 30, 2007 was 5.4 years and 4.4 years,
                respectively. The aggregate intrinsic value for options outstanding and exercisable
                at September 30, 2007 was $4.1 million and $3.1 million, respectively. The total
                intrinsic value of stock options exercised during fiscal 2007, 2006 and 2005 was
                $900,000, $1.0 million and $230,000, respectively.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The Company
                granted a total of 62,000 stock options during fiscal 2007 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 $11.05
                and $5.58, respectively. Compensation expense recognized during fiscal 2007 under
                SFAS No. 123(R) was $1.1 million. All stock options issued in fiscal 2007 were
                issued at the then-current market price.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

47

---

| | The Company
                granted a total of 142,500 stock options 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 No. 123(R) was $1.4 million. All stock options issued in fiscal 2007 were
                issued at the then-current market price.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The Company
                granted a total of 286,500 stock options 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 options 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 options during fiscal 2005 with exercise prices greater
                than the market price of the stock on the grant date.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The following
                table summarizes information about stock options outstanding at September 30,
                2007:
| | ---------------------------------------------------------------------------------------------------------------------------------

|                                   | Options Outstanding |  | Options Exercisable |          
|---------------------------------- | ------------------- |  | ------------------- | ---------
|
|
|$  3.28  -   $4.88                 |                     |  |                     | 319,090  
|$
                 5.94  -   $8.73 |                     |  |                     | 1,004,085
|$
                 9.06  - $13.59  |                     |  |                     | 416,925  
|$13.73  - $19.25                   |                     |  |                     | 39,650   
|                                   |                     |  |                     |          
|                                   |                     |  |                     |          
|                                   |                     |  |                     | 1,779,750
|                                   |                     |  |                     |          

| | 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 $247,000, $427,000 and $29,000 in fiscal
                2007, 2006 and 2005, respectively, which were recorded as additional
                capital.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | A summary of the
                Company’s restricted stock activity for fiscal 2007 is as follows:
| | ---------------------------------------------------------------------------------------------------

|                                           | Number of
                    Shares |  | Weighted
                    Average
                    Grant Date
                    Fair Value |   
|------------------------------------------ | ------------------------------------ |  | -------------------------------------------------------------------------------------------------- | --
|
|Nonvested at September 30, 2006            |                                      |  |                                                                                                    | --
|Restricted
                stock granted   |                                      |  |                                                                                                    | 13
|Restricted
                stock vested    |                                      |  |                                                                                                    | (1
|Restricted
                stock forfeited |                                      |  |                                                                                                    | --
|                                           |                                      |  |                                                                                                    |   
|Nonvested at September 30, 2007            |                                      |  |                                                                                                    | 12
|                                           |                                      |  |                                                                                                    |   

| | The fair value
                of the restricted stock was calculated based upon the fair market value of the
                Company’s stock at the date of the grant. As of September 30, 2007, $100,000
                of total unrecognized compensation cost related to restricted stock awards is
                expected to be recognized over a weighted average period of 2.1 years.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

48

---

9.    Downsizing Costs:

| | In April 2007,
                the Company announced and implemented a plan to align its cost structure with
                current business activity levels. The cost reduction plan consisted primarily of a
                seven percent reduction in the Company’s worldwide work force, management pay
                cuts, reduced overtime and mandatory leave. One-time involuntary termination costs
                of $677,000 were reported as a separate component of operating expenses in the
                Company’s fiscal third quarter. All costs related to the downsizing plan have
                been fully incurred and paid. The Company’s downsizing costs and the amount
                remaining to be paid are summarized as follows (in thousands):
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                                                          | Fiscal Year Ended
                    September 30, 2007 | 
|----------------------------------------------------------------------------------------- | -------------------------------------------------------- | 
|Liability for one-time involuntary termination costs, beginning of
                period |                                                          | 
|One-time
                involuntary termination costs incurred during the period         |                                                          | 
|One-time
                involuntary termination costs paid during the period             |                                                          | 
|                                                                                          |                                                          | 
|Liability for one-time involuntary termination costs, end of period                       |                                                          | 
|                                                                                          |                                                          | 

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
                (benefit) for income taxes for the years ended September 30, 2007, 2006 and 2005
                consists of the following (in thousands):
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|         | 2007 |  | 2006 |        | 2005 |  
|-------- | ---- |  | ---- | ------ | ---- | -
|Federal: |      |  |      |        |      |  
|Current  |      |  | $    | (1083  | )    | $
|Deferred |      |  |      | (1,689 | )    |  
|State:   |      | 
|Current  |      |  |      | 638    |      |  
|Deferred |      |  |      | (702   | )    |  
|Foreign: |      | 
|Current  |      |  |      | 873    |      |  
|Deferred |      |  |      | 71     |      |  
|         |      |  |      |        |      |  
|         |      |  | $    | (1,892 | )    | $
|         |      |  |      |        |      |  

| | Domestic and
                foreign components of income (loss) before income taxes for the years ended
                September 30, 2007, 2006 and 2005 are as follows (in thousands):
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|         | 2007 |  | 2006 |        | 2005 |  
|-------- | ---- |  | ---- | ------ | ---- | -
|Domestic |      |  | $    | (1,681 | )    | $
|Foreign  |      |  |      | 5,020  |      |  
|         |      |  |      |        |      |  
|         |      |  | $    | 3,339  |      | $
|         |      |  |      |        |      |  

49

---

| | The components
                of the deferred tax assets and liabilities as of September 30, 2007 and 2006 are as
                follows (in thousands):
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                 | 2007 |  | 2006 |       
|------------------------------------------------ | ---- |  | ---- | ------
|Deferred tax assets:                             |      |  |      |       
|Accrued
                warranty                 |      |  | $    | 2,223 
|Net
                operating loss carryforwards |      |  |      | 255   
|Tax
                credit carryforwards         |      |  |      | 3,446 
|Deferred
                profit                  |      |  |      | 2,770 
|Other
                accrued liabilities        |      |  |      | 1,509 
|Inventories                                      |      |  |      | 2,392 
|Other                                            |      |  |      | 706   
|                                                 |      |  |      |       
|Deferred tax
                assets              |      |  |      | 13,301
|                                                 |      |  |      |       
|Deferred tax liabilities:                        |      | 
|Depreciation
                and amortization    |      |  |      | (2,828
|Other                                            |      |  |      | 9     
|                                                 |      |  |      |       
|Deferred tax
                liabilities         |      |  |      | (2,837
|                                                 |      |  |      |       
|Net deferred tax asset                           |      |  | $    | 10,464
|                                                 |      |  |      |       

| | 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
                $255,000. The losses expire in fiscal years 2008 through 2023. Semitool has a
                research and experimentation credit carryforward in the State of Montana of
                approximately $762,000, which will expire by fiscal year 2022. Semitool has a
                Federal research and experimentation credit carryforward of approximately $1.5
                million which will expire by fiscal year 2022. The Company also has an Alternative
                Minimum Tax credit carryforward of approximately $731,000 that does not expire and
                a Foreign Tax Credit carryforward of approximately $470,000 which will expire by
                fiscal year 2017.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Cumulative
                undistributed earnings of foreign subsidiaries, for which no U.S. income or foreign
                withholding taxes have been recorded, were approximately $20.6 million at September
                30, 2007. 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.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Semitool has
                concluded that based on their history of taxable income and other sources of future
                income, that it is more likely than not that all of the deferred tax assets will be
                realized and that no valuation allowance is necessary at this time.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The differences
                between the consolidated provision (benefit) 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, 2007, 2006 and 2005 are as follows (in
                thousands):
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                                   | 2007 |  | 2006 |         | 2005 |  
|------------------------------------------------------------------ | ---- |  | ---- | ------- | ---- | -
|Amount computed using the statutory rate                           |      |  | $    | 1,169   |      | $
|Increase
                (decrease) in taxes resulting from:       |      | 
|State
                taxes, net of federal benefit                |      |  |      | (173    | )    |  
|Effect
                of foreign taxes/foreign exchange           |      |  |      | (1,003  | )    |  
|Research
                and experimentation credit                |      |  |      | (2,388  | )    |  
|Meals
                and entertainment and other permanent items  |      |  |      | 777     |      |  
|Extraterritorial
                income exclusion                  |      |  |      | (520    | )    |  
|Incentive
                stock options                            |      |  |      | 222     |      |  
|Domestic
                production deduction                      |      |  |      | --      |      |  
|Subpart
                F income net of related foreign tax credit |      |  |      | 20      |      |  
|Other,
                net                                         |      |  |      | 4       |      |  
|                                                                   |      |  |      |         |      |  
|                                                                   |      |  | $    | (1,892) |      | $
|                                                                   |      |  |      |         |      |  

| | 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. Additionally, no Credit was recognized in the last nine months of
                fiscal 2006 as the extension expired on December 31, 2005. Legislation extending
                the Credit was signed into law during Q1 of fiscal 2007. Therefore the Company was
                unable to recognize approximately $843,000 of credit in fiscal 2006 until fiscal
                2007.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

50

---

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 $2,839,200
                for the year ended September 30, 2007 and $3,289,200 in each of the years ended
                September 30, 2006 and 2005. The rental rate for fiscal 2008 is anticipated to be
                $199,100 per month for both the aircraft and the hangar; the lease terms are
                month-to-month.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | During the
                fiscal years 2005 through 2007, the Company acted as a sales representative to
                Starview Technology, Inc., a provider of manufacturing software for the
                semiconductor industry in which Mr. Thompson, the Company’s chairman and
                chief executive officer and his son-in-law, Thomas Sulzbacher, are majority
                shareholders. The Company earned sales commissions in the amount of $156,000 in
                fiscal 2007.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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. The terms were negotiated with Mr. Murphy
                based on the estimated current market value of the condominium.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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 2007, 2006 and 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                                           |               | 
|                                                                                |               | 

51

---

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

| | The Company has
                various non-cancelable operating lease agreements for equipment and office space
                that expire through the year 2014. Total rent expense for the years ended September
                30, 2007, 2006 and 2005, exclusive of amounts paid to a related party as described
                in Note 12, was approximately $1.9 million, $1.8 million and $1.8 million,
                respectively. The following table summarizes future minimum lease payments under
                all non-cancelable operating leases with initial or remaining terms in excess of
                one year as of September 30, 2007 (in thousands):
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Year Ending
                    September 30, |  | Total      | 
| | --------------------------------------------- |  | ---------- | 
| |                                               |  | 2008       | 
| |                                               |  | 2009       | 
| |                                               |  | 2010       | 
| |                                               |  | 2011       | 
| |                                               |  | 2012       | 
| |                                               |  | Thereafter | 
| |                                               |  |           
| |                                               |  |            | 
| |                                               |  |           

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

| | The Company is
                involved in legal proceedings that arise in the ordinary course of its business,
                including employment related litigations. 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. At September 30, 2007 and 2006, no preferred
                shares were outstanding.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In conjunction
                with an equity offering of common stock in December 2005, the Company issued three
                million shares of common stock resulting in approximately $28.0 million in net cash
                proceeds.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

15.   Financial Instruments and Certain Concentrations:

| | The Company has
                estimated the fair value of its financial instruments including cash and cash
                equivalents 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, 2007 and 2006 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.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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 7.75% and 8.25% at
                September 30, 2007 and 2006, which the Company could currently obtain for debt with
                similar remaining maturities.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

52

---

| | The estimated
                fair value of financial instruments at September 30, 2007 and 2006 consisted of the
                following (in thousands):
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------

|                                     | 2007 |  | 2006 |       
|------------------------------------ | ---- |  | ---- | ------
|
|Cash and cash equivalents            |      |  | $    | 16,090
|Note payable to
                bank |      |  |      | --    
|Long-term
                debt       |      |  |      | 11,128

| | At
                September 30, 2007 and 2006, trade receivables of the Company were primarily
                from companies in the semiconductor industry, and included approximately $41.4
                million and $41.0 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.   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 23.8%, 13.8% and 16.7% of net sales in fiscal 2007, 2006 and
                2005, respectively. Micron/IM Flash accounted for 10.2% of net sales in fiscal
                2007.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Net sales information by geographic location
 for fiscal 2007, 2006 and 2005 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 information by geographic location for fiscal 2007 and 2006 is
      summarized as follows (in thousands):
| | ----------------------------------------------------------------------------------------------------------------------------------------

|                                    | Year Ended September 30, | 
|----------------------------------- | ------------------------ | 
|
|Property, plant and equipment, net: |                          | 
|United States                       |                          | 
|United Kingdom                      |                          | 
|Austria                             |                          | 
|Other countries                     |                          | 
|                                    |                          | 
|                                    |                          | 
|                                    |                          | 

53

---

17.   Quarterly Financial Data (Unaudited):

| | For each quarter
                of fiscal 2007 and 2006 (in thousands, except for per share amounts):
| | ------------------------------------------------------------------------------------------------------

|                                                  | Year Ended
                September 30, 2007 | 
|------------------------------------------------- | --------------------------------------------- | 
|
|Net sales                                         |                                               | 
|Gross profit
                (1)                  |                                               | 
|Net income
                (loss)                 |                                               | 
|Earnings (loss) per basic share                   |                                               | 
|Earnings (loss)
                per diluted share |                                               | 

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

| | (1) In the
                fourth quarter of fiscal 2007, we wrote down inventory by approximately
                $3.0 million primarily due to product enhancements that changed the usage of
                certain component parts, making them obsolete.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

54

---

# REPORT OF INDEPENDENT
        REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and
        Shareholders of
        Semitool, Inc.

We have audited the accompanying
        consolidated balance sheets of Semitool, Inc. (a Montana corporation) and subsidiaries as
        of September 30, 2007 and 2006, and the related consolidated statements of income,
        shareholders’ equity, cash flows, and comprehensive income for the years 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
        audits.

We conducted our audits 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 audits provide a reasonable basis for our
        opinion.

In our opinion, the consolidated
        financial statements referred to above present fairly, in all material respects, the
        financial position of Semitool, Inc. and subsidiaries as of September 30, 2007 and 2006,
        and the results of their operations and their cash flows for the years then ended in
        conformity with accounting principles generally accepted in the United States of
        America.

Our audits were 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, 2007, 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 December 10, 2007 expressed an unqualified opinion.

/s/ GRANT THORNTON
        LLP

Salt Lake City, Utah
        December 10, 2007

55

---

# REPORT OF INDEPENDENT
        REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and
        Shareholders
        Semitool, Inc.

We have audited Semitool, Inc. (a
        Montana Corporation) and subsidiaries internal control over financial reporting as of
        September 30, 2007, based on criteria established in Internal Control—Integrated
        Framework issued by the Committee of Sponsoring Organizations of the Treadway
        Commission (COSO). Semitool, Inc. and subsidiaries’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, included in the
        accompanying Management’s Report on Internal Control over Financial Reporting. Our
        responsibility is to express an opinion on Semitool, Inc. and subsidiaries’ 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, assessing the risk that a material weakness exists, testing and evaluating the
        design and operating effectiveness of internal control based on the assessed risk, and
        performing such other procedures as we considered necessary in the circumstances. We
        believe that our audit provides a reasonable basis for our opinion.

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, Semitool, Inc.
        and subsidiaries maintained, in all material respects, effective internal control
over         financial reporting as of September 30, 2007, based on criteria established
in Internal         Control—Integrated Framework issued by COSO.

We also have audited, in accordance
        with the standards of the Public Company Accounting Oversight Board (United States), the
        consolidated balance sheets of Semitool, Inc. and subsidiaries as of September 30, 2007 and
        2006, and the related consolidated statements of income, shareholders’ equity cash
        flows, and comprehensive income for years then ended and our report dated December 10, 2007
        expressed an unqualified opinion.

/s/ GRANT THORNTON
        LLP

Salt Lake City, Utah
        December 10, 2007

56

---

# REPORT OF INDEPENDENT
        REGISTERED PUBLIC ACCOUNTING FIRM

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

In our opinion, the accompanying
        consolidated statements of income and comprehensive income, of changes in
        shareholders’ equity and cash flows for the year ended September 30, 2005 present
        fairly, in all material respects, the results of operations and cash flows of Semitool,
        Inc. and its subsidiaries for the year 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 for the year ended September 30 ,2005 listed
        in the index appearing under Item 15(a)(2) presents fairly, in all material respects, the
        information set forth therein 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.

PricewaterhouseCoopers
        LLP
        Seattle, Washington
        December 13, 2005

57

---

# 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 Rule 13a-15(e) 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,
                2007. In making this assessment, management used the criteria set forth by the
                Committee of Sponsoring Organizations of the Treadway Commission (COSO) in
                Internal Control — Integrated Framework.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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,
                2007.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
                effectiveness of the Company’s internal control over financial reporting as
                of September 30, 2007 has been audited by Grant Thornton LLP, an independent
                registered public accounting firm, as stated in its report, which appears
                herein.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(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.

58

---

# PART III

# Item 10. 
        Directors, Executive Officers and Corporate Governance

|(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 2008
                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 2008 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 2008 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 2008 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, 2007:

|                                      | 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                          |                                                                                                                                                        |  |                                                                                                                    | 1,779,750 |                                                                                                                                                                       | 

# Item 13.  Certain
        Relationships and Related Transactions, and Director Independence

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 2008 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 2008 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.

59

---

# 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, 2007 and September 30, 2006
| | -------------------------------------------------------------------------------------------------------------

| | Consolidated
                Statements of Income
                     for the Years Ended September 30, 2007, September 30,
                2006 and September 30, 2005
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Consolidated
                Statements of Changes in Shareholders' Equity
                     for the Years Ended September 30, 2007, September 30,
                2006 and September 30, 2005
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Consolidated
                Statements of Cash Flows
                     for the Years Ended September 30, 2007, September 30,
                2006 and September 30, 2005
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Consolidated
                Statements of Comprehensive Income
                     for the Years Ended September 30, 2007, September 30,
                2006 and September 30, 2005
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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
                         
                 10.8
                10.9
                10.91
                10.92
                10.93
                10.94
                10.95
                         
                 10.96 | 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. (12)
                Term Loan Agreement between First Interstate Bank and the Company, dated December
                29, 2006 (13)
                Semitool 2007 Stock Incentive Plan (14)
                Semitool 2007 Non-Qualified Stock Option Award Agreement (14)
                Semitool 2007 Stock Option Award Agreement (14)
                Semitool 2007 Restricted Stock Bonus Award Agreement (Non-Employee Directors)
                (14)
                Semitool 2007 Restricted Stock Bonus Award Agreement (14)
                Amendment No. 3 dated June 5, 2007 to Aircraft Lease Agreement dated January 15,
                2004 between
                  Eagle I, LLC and Semitool, Inc. (15)
                Second Amendment to Credit Agreement between Wells Fargo HSBC Trade Bank, N.A. and
                the Company,
                  dated September 1, 2007

60

---

|                                                                                                                                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|-------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|21.1
                23.1
                23.2
                31.1
                31.2
                32.1
                    
                 32.2 | 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

---

|(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.
|---- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(12) | Incorporated
                herein by reference to the identically numbered exhibit to the Company’s
                Annual Report on Form 10-K, date of report September 30, 2006.
|---- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(13) | Incorporated
                herein by reference to the identically numbered exhibit to the Company’s
                Quarterly Report on Form 8-K, date of report December 29, 2006.
|---- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(14) | Incorporated
                herein by reference to the identically numbered exhibit to the Company’s
                Quarterly Report on Form 10-Q, date of report March 31, 2007.
|---- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(15) | Incorporated
                herein by reference to the identically numbered exhibit to the Company’s
                Quarterly Report on Form 8-K, date of report June 5, 2007.
|---- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|* | 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.
|--- | -----------------------------------------------------------------------

61

---

# 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, 2007 |  | SEMITOOL, INC.
                By: /s/Raymon F. Thompson
                ——————————————

                Raymon F. Thompson
                Chairman 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, 2007
                December 13, 2007
                December 13, 2007
                December 13, 2007
                December 13, 2007
                December 13, 2007
                December 11, 2007
                December 13, 2007
                December 13, 2007

62

---

SEMITOOL, INC.
        SCHEDULE II — VALUATION AND QUALIFYING ACCOUNTS
        For the years ended September 30, 2007, 2006 and 2005
        (Amounts in Thousands)

|                                                |  | Additions |   |       | 
|----------------------------------------------- |  | --------- | - | ----- | 
|
|Year ended September 30, 2007:                  |  |           |   |       | 
|Deducted from asset
                accounts:   |  |          
|Allowance
                for doubtful accounts |  |           | $ | 269   | 
|Inventory
                allowance             |  |           |   | 2,850 | 
|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   | 

63

---