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, 1998

                                       OR

              [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
                   OF THE SECURITIES AND 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                   (I.R.S. Employer
incorporation or organization)                    Identification No.)

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

Securities registered pursuant to Section 12(b) of the Act:  None  
Securities registered pursuant to Section 12(g) of the Act:
                     Common Stock, no par value

Indicate by check mark 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. [X]

The   approximate   aggregate   market   value  of  the  voting  stock  held  by
non-affiliates  of the  registrant  on  December  14,  1998  (based  on the last
reported  sale  price  on the  Nasdaq  National  Market  as of  such  date)  was
$40,558,452.

The number of shares of the registrant's Common Stock, no par value, outstanding
as of December 14, 1998 was 13,792,023.


                       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 February 9, 1999.



<PAGE>



                                     PART I


Item 1.   Business

INTRODUCTION

Statements  contained in this Report on Form 10-K which are not historical facts
are  forward-looking  statements  within  the  meaning  of  Section  21E  of the
Securities  Exchange  Act of 1934,  as amended,  including  without  limitation,
statements  regarding  trends  in the  semiconductor  industry,  future  product
development, strategic business development, pursuit of new and growing markets,
competition,  patent  filings,  results  from  operations,  and the  adequacy of
manufacturing facilities,  and are subject to the safe harbor provisions created
by that  statute.  A  forward-looking  statement may contain words such as "will
continue to be," "will be," "continue to," "expect to," "anticipates  that," "to
be" or "can impact."  Management  cautions that  forward-looking  statements are
subject to risks and uncertainties that could cause the Company's actual results
to differ  materially from those projected in such  forward-looking  statements.
These risks and  uncertainties  include,  but are not  limited to, the  cyclical
nature of the semiconductor  industry in general,  lack of market acceptance for
new products,  decreasing demand for the Company's existing products,  impact of
competitive  products and pricing,  product development,  commercialization  and
technological  difficulties,  capacity and supply  constraint  difficulties  and
other risks detailed under the heading "Risk Factors" and elsewhere herein.  The
Company's  future  results will depend on its ability to continue to enhance its
existing  products  and to develop and  manufacture  new products and to finance
such  activities.  There can be no assurance that the Company will be successful
in the  introduction,  marketing  and  cost-effective  manufacture  of  any  new
products or that the Company  will be able to develop and  introduce in a timely
manner new products or enhancements to its existing products and processes which
satisfy customer needs or achieve widespread market acceptance.

The Company  undertakes no obligation  to release  revisions to  forward-looking
statements  to  reflect  subsequent  events,  changed   circumstances,   or  the
occurrence of unanticipated events.

THE COMPANY

Semitool, Inc. ("Semitool" or the "Company"), a Montana corporation organized in
1979,  designs,  manufactures,   markets  and  services  equipment  and  factory
monitoring  and  control   automation   systems  used  in  the   fabrication  of
semiconductors. In February 1996, the Company acquired Semy Engineering, Inc., a
manufacturer  of  factory   automation   monitoring  and  control  systems  (fab
supervisory  systems)  for  semiconductor   fabrication  facilities  (fab).  The
Company's  products include batch and single substrate  surface  preparation and
cleaning  equipment,   electrochemical   deposition  (ECD)  equipment,   thermal
processing  equipment,  and fab supervisory  software systems. The process steps
performed  by  the  Company's   products   occur   repeatedly   throughout   the
semiconductor  fabrication  cycle,  and  constitute  an  integral  part  of  the
manufacturing  process for virtually every  semiconductor  produced  today.  The
Company's products are also used to manufacture materials and devices fabricated
with similar  processes,  including  thin film heads used for disk drives,  flat
panel displays,  multichip modules,  ink jet print heads,  compact disc masters,
solder  bumping for  advanced  device  packaging,  high speed  gallium  arsenide
communication  devices,  micro  electromechanical  systems (MEMS), and hard disk
media.  The Company's  products are designed to provide  improved yields through
higher  process  uniformity  and  reduced  contamination,  increased  throughput
through  advanced  processes  which reduce  cycle times,  and lower direct costs
through reduced  consumables  usage and smaller  footprints,  thereby  providing
lower overall cost of ownership.  The Company  markets and sells its products to
customers   worldwide   through   its  own  sales   force   and   manufacturer's
representatives.

INDUSTRY BACKGROUND

The fabrication of semiconductor  devices is a complex process involving several
distinct phases repeated  numerous times during the  fabrication  process.  Each
production phase requires different processing technology and equipment, and the
Company believes no one semiconductor  equipment  supplier currently produces an
entire  state-of-the-art   fabrication  system.  Rather,   semiconductor  device
manufacturers   typically   construct   fabrication   facilities   by  combining
manufacturing  equipment produced by several different suppliers,  each of which
performs specific  functions in the manufacturing  process.  

Industries that use semiconductors are demanding  increasingly  complex,  higher
performance devices. Fabrication of these devices requires increasing the number
of process steps and reducing  feature  sizes,  necessitating  narrower  process
tolerances.  These factors, together with the industry's history of migration to
larger wafer sizes and a greater number of semiconductor  devices on some wafers
have led to a substantial increase in the manufacturers' per wafer investment.

The  semiconductor  industry is characterized by continuing  change and evolving
technologies. Traditionally,  semiconductor devices have used aluminum alloys to
connect the millions of transistors on a micro chip. As line  geometries  become
increasingly  smaller to accommodate the ever shrinking chip,  aluminum  becomes
less  efficient.  Copper  has  long  been  known  to  have  superior  electrical
properties when compared to aluminum, but due to its high mobility,  copper will
migrate  through the device and ruin the  transistors.  This  drawback  has been
overcome and the industry is moving forward with copper  interconnect  adoption.
This  major  interconnect   technology   development  will  require  specialized
production  equipment.  The  existing  equipment  used for  aluminum  cannot  be
retrofitted to deposit copper interconnect layers.

Because of the  increasing  cost of  equipping  fabrication  facilities  and the
greater  number of devices  manufactured  on each wafer,  the  Company  believes
semiconductor  manufacturers are placing greater  importance on the overall cost
of ownership of each piece of process equipment.  The principal elements of cost
of ownership are yield,  throughput,  and direct costs. Yield, or the percentage
of good devices per wafer,  is primarily  determined by operating  contamination
levels and process  uniformity.  Achieving  high yields becomes more critical to
manufacturers as their per wafer investment increases. Throughput, or the number
of wafers  processed  by a  particular  tool in a given  period,  is primarily a
function of the time  required to complete a process cycle and the handling time
between  process steps.  Major  components of direct  operating cost include the
amount of consumables used in the manufacturing  process,  the cost of the clean
room space occupied by the equipment (i.e., the "footprint"), the purchase price
of the equipment, and other operating costs such as repairs and maintenance.

The  Company  believes  that  semiconductor   device  manufacturers  are  asking
equipment  suppliers  to  take  an  increasingly  active  role  in  meeting  the
manufacturers'  technology  requirements  and cost  constraints by  researching,
developing,  and  supporting  the products and  processes  required to fabricate
advanced  products.  Certain  manufacturers are seeking strategic  relationships
with  equipment  suppliers  for  specific  process  steps  on  existing  and new
products.  As a result,  equipment companies are being asked to provide advanced
process  expertise,  superior  product  performance,  reduced  overall  cost  of
ownership,   and  worldwide  customer  support  to  meet  the  needs  of  device
manufacturers.

In addition to the semiconductor industry,  certain semiconductor  manufacturing
equipment has application in the  manufacturing  processes of other  industries.
For  example,  manufacturers  of thin film  heads for disk  drives,  flat  panel
displays,  multichip modules, ink jet print heads, compact disc masters,  solder
bumping  for  advanced   device   packaging,   high  speed   gallium   arsenide,
communication  devices,  micro  electromechanical  systems  and hard disk  media
utilize  many of the  same  basic  technological  building  blocks  as does  the
semiconductor  manufacturing  industry,  in that  certain  production  equipment
provides  the  same  basic   function  or   applications   for  a  substrate  as
semiconductor manufacturing equipment does for a silicon wafer.

THE SEMITOOL STRATEGY

The key elements of the Company's business strategy are as follows:

         Develop  Innovative  Solutions.  The Company is committed to developing
new  products  and  processes,  new  applications  for  existing  products,  and
enhancing   existing   products  to  address  evolving   process   requirements.
Accordingly, the Company devotes substantial resources to product innovation and
collaborative development efforts.

         Offer a Broad Range of Products to  Customers in Diverse  Markets.  The
Company  focuses  on  offering  a broad  range  of  products  including  surface
preparation and cleaning tools,  electrochemical  deposition equipment,  thermal
processing equipment, and fab supervisory systems to semiconductor manufacturers
for use in diverse process  applications.  The Company  leverages its technology
and expertise to provide  solutions to  manufacturers of other products that are
fabricated  using  similar  processes,  such as thin  film  heads  used for disk
drives, flat panel displays, multichip modules, ink jet print heads used in disk
drives, compact disc masters,  solder bump bonding, and hard disk media. Some of
these  other  applications  involve  substrates  with  surfaces  larger than the
current typical semiconductor substrates.

         Capitalize on  Manufacturing  Expertise.  The  Company's  manufacturing
strategy is to identify and perform  internally  those  manufacturing  functions
which add value to the Company's  products.  The Company  believes it achieves a
number of  competitive  advantages  from its  selective  vertical  manufacturing
integration,  including the ability to achieve cost and quality benefits, and to
bring quickly new products and product enhancements to market.

         Focus on Low Overall Cost of Equipment  Ownership.  The Company designs
and  manufactures  process  equipment  and  develops  processes  with a focus on
providing its customers with a low overall cost of ownership.  Additionally, the
Company  sells fab  supervisory  systems  that have the  ability to monitor  and
control  multiple  tools,  not only those  manufactured by the Company but those
manufactured  by others,  on a fab-wide  basis which can provide  better process
control and improve yields.

         Address Worldwide  Markets.  The Company markets and sells its products
worldwide  with  emphasis  on  Europe  and Asia as its  principal  international
markets.  The  Company  believes  the  strength of its  international  sales and
service organizations is important to its continued success in these markets. To
facilitate  its  worldwide  marketing   strategy,   the  Company  has  dedicated
international  sales and  support  organizations  in England,  France,  Germany,
Italy, Japan, Korea, Singapore, and Taiwan.

SEMITOOL'S PRODUCTS AND SOLUTIONS

The  Company  designs,  manufactures,  markets  and  services  batch and  single
substrate surface preparation and cleaning equipment, electrochemical deposition
systems,   thermal  processing  equipment,   and  fab  supervisory  systems  for
computer-integrated manufacturing.

The Company conducts  research and development in a number of process areas. In
July 1998, the Company introduced a new surface preparation and cleaning process
called HydrOzone.  HydrOzone uses environmental friendly ozone to provide better
cleans  than was  previously  achieved  with  highly-toxic  chemicals.  This new
process  can  be  used  for a  variety  of  cleaning  and  photo-resist  removal
applications  while reducing  contaminants  and water  consumption.  Compared to
traditional technology, the HydrOzone process has a shorter cycle time resulting
in  higher  throughput,  and  is  cleaner  because  the  chemistry  contains  no
background  particle  levels.  Also, the process is more cost effective  because
there is less chemical usage, the chemicals are less expensive to purchase,  and
chemical disposal costs are greatly reduced.  The HydrOzone process is available
on the Company's Magnum and Spectrum products.

In July 1998, the Company  announced the  Millennium,  a single wafer  processor
that   complements  the  Company's   Equinox   product.   The  Millennium  is  a
revolutionary  approach to single  wafer  surface  preparation  through a unique
Capsule  process  chamber  providing  process  control to specific areas on both
surfaces of the wafer for critical clean  applications.  Wafer backside cleaning
for copper  interconnect is an anticipated  application.  The system is based on
the  Company's  proven  linear  platform  which is designed for high  throughput
manufacturing.  The Capsule takes advantage of a  spin-assisted  surface tension
effect to tightly control surface  processing and provide clean,  dry wafers for
further  fabrication  steps. The Company expects to begin selling the Millennium
in fiscal 1999.

Copper  interconnect was the focus of the Company's  electrochemical  deposition
research  and  development  and  centered on  increasing  film  uniformity,  and
developing methods to prevent "back-side" contamination. The LT-210C, introduced
in fiscal 1998, uses a small footprint  linear  configuration  designed for high
throughput and high  productivity  manufacturing.  The LT-210C employs two track
robots to feed process chambers and has optional  automatic on-line  electrolyte
control systems to ensure constant  solution  concentration for repeatability of
deposition,  and various  proprietary  systems to ensure  uniformity  of plating
across the wafer.  The LT-210C  consistently  deposits  films with superior step
coverage, lower electrical resistance, at a lower cost and at a rate faster than
is possible with conventional vacuum deposition systems.

The Company has  developed a broad range of products  that enables its customers
to perform advanced fabrication  processes.  The Company's products are designed
to provide  improved  yields  through  higher  process  uniformity  and  reduced
contamination,  increased  throughput  through  advanced  processes which reduce
cycle times,  and lower direct costs through  reduced usage of  consumables  and
smaller  footprints,  thereby  providing  lower overall cost of  ownership.  The
process steps performed by the Company's  products occur  repeatedly  throughout
the  fabrication  cycle and  constitute  an integral  part of the  manufacturing
process for virtually every semiconductor produced today.

Surface Preparation and Cleaning

The fabrication of semiconductors  involves  numerous  distinct  processes which
can,  depending on the complexity of the device,  exceed 250 steps.  The surface
preparation processing steps involved in semiconductor manufacturing can include
cleaning,  developing,  stripping, etching, and micro-machining.  Such processes
have  traditionally  been  performed  using  wet-benches  which  consist of open
chemical and rinse tanks,  in which  cassettes  of wafers are  immersed,  either
manually or automatically.  Multiple process steps are performed by transferring
wafers from one chemical bath to another.  There are  significant  disadvantages
relating to process  uniformity and contamination  control inherent in wet-bench
processing,  which are becoming  increasingly  problematic as process tolerances
narrow.  Wet-benches also lack the flexibility to readily change processes,  and
are relatively costly to operate because they consume large amounts of deionized
water and process  chemicals and have large  footprints  that use valuable clean
room space. The Semitool solution utilizes spray processing as a replacement for
wet-bench  processing.  The  Company  believes  it is the market  leader in this
technology.

The Company's surface  preparation and cleaning equipment uses centrifugal spray
technology   to  process   wafers  and   substrates   by  exposing   them  to  a
user-programmable,  sequenced  spray of  chemicals  inside an enclosed  chamber.
Spray  technology  avoids  non-uniformity  of process by  applying  the  process
chemicals via spray. This technique  enhances chemical reaction on the substrate
surface,  which increases process  reliability and shortens process cycle times.
The enclosed  process chamber  technology also allows for more efficient use and
disposal of process chemicals through recirculation, reclamation, and filtration
as well as increased  operator  safety.  The Company sells both manual and fully
automated  batch  (multiple wafer  processing)  platforms that cluster  multiple
chemical  processing  modules for silicon wafers and other  substrates,  thereby
increasing yield and throughput,  and providing a complete process solution in a
single unit.

Batch tools process multiple wafers in a carrier which is loaded into a rotating
fixture  mounted in a process  chamber.  The process  chamber is then sealed and
chemicals are  sequentially  dispensed into the chamber via spray manifolds in a
closed-loop  system. As the rotating fixture turns the carrier, a chemical spray
is applied to the wafer surfaces.  This technique  enhances chemical reaction on
the substrate surface,  which increases process reliability and shortens process
cycle times. After application of the process chemicals,  deionized ("DI") water
can be sprayed  into the  chamber to stop the  chemical  reaction  and to remove
chemical  residues.  The  wafers,   carrier,  and  chamber  are  then  dried  by
centrifugal  spinning  coupled with a flow of warm nitrogen,  either in the same
process chamber or in an adjacent  rinser/dryer module. The Company believes its
batch spray chemical processing and cleaning tools offer significant  advantages
over  conventional  wet-benches.  Other  advantages  include  higher  yields  by
providing  better  process  uniformity  and  lower  particulate   contamination,
increased  throughput  by providing  shorter  process  cycle times,  and reduced
direct  costs  by  providing   more  effective  use  of  chemicals  and  smaller
footprints,  thereby  lowering  overall cost of ownership.  All of the Company's
batch chemical processing and cleaning tools are 300mm ready.

         Batch Processing Tools

The  Magnum,   Magnum  3000,  and  Spectrum  are  Semitool's   automated   batch
multi-module  surface  processing  products.  These tools  cluster the Company's
solvent,  acid and spin rinser/dryer  capabilities into a single automated unit.
These tools offer standard  mechanical  interface ("SMIF") loading  capabilities
and a  touch  screen  computer  interface  customized  for  ease  of  operation.
Introduced during fiscal year 1998,  Spectrum represents a more compact version,
of Semitool's  automated  spray  technology  which through  advanced  design has
retained high  productivity and performance  standards and is easier to retrofit
into existing  semiconductor fabs. All of these multi-module batch tools provide
customers  with the  flexibility  to mix and match  process  modules,  including
immersion modules as appropriate, thereby providing them with a complete surface
processing  solution to meet their particular process  requirements.  The Magnum
and Spectrum possess  significant  competitive  advantages over both stand-alone
tools and other automated products, including the ability to replace two or more
wet-benches  with a single,  smaller  footprint  tool which  provides  increased
yields and  increased  throughput  per  square  foot of clean  room  space.  The
purchase  price of the Magnum and Magnum 3000 ranges from  $800,000 to over $3.1
million, depending on configuration. Spectrum selling price ranges from $900,000
to $2.0 million.

The  Company's  manually  loaded batch spray  chemical  processing  and cleaning
products  include the Spray Acid Tool and the Spray Solvent Tool. The Spray Acid
Tool is used in  applications  using acids and all of its areas exposed to acids
are made  entirely  of teflon  and  other  acid-resistant  materials.  This tool
addresses applications such as resist-stripping,  pre-diffusion cleaning,  oxide
etching,  polymer removal and chemical milling. The Company's Spray Solvent Tool
is primarily  constructed of stainless  steel and addresses  processes which use
solvents to dissolve and strip the lithographic  media from substrate  surfaces,
remove polymer residues,  and develop lithographic images on substrate surfaces.
In addition to  customary  semiconductor  applications,  the Spray Acid Tool and
Spray Solvent Tool are being used in the manufacturing  process for a variety of
other products  including flat panel displays and thin film heads,  and are used
with  substrates as large as 500 square  millimeters.  The purchase price of the
Company's  manual  batch  chemical  processing  tools  range  from  $120,000  to
$750,000, depending on configuration.

The Company's  manually loaded Spin  Rinser/Dryer is a batch tool used primarily
for removing  chemical  residue  from  substrate  surface  with "DI" water,  and
utilizes the same enclosed  chamber,  spray  processing and  centrifugal  drying
technologies employed in the Company's Spray Acid Tools and Spray Solvent Tools.
The Spin Rinser/Dryer  incorporates a "DI" water  resistivity  monitor to ensure
the  required  level  of  cleanliness.  Additionally  this  rinsing  and  drying
technology can be used to clean and dry the carriers and boxes used to transport
wafers  throughout  the fab.  Since these  carriers  are made of  plastic,  high
temperatures  cannot  be used for  drying  as  deformation  will  occur.  If the
carriers and boxes are not rinsed and dried properly,  they can be a significant
source of contamination that will decrease device yields. The Company introduced
the Spin  Rinser/Dryer in 1979 and, as of September 30, 1998, had delivered over
22,000 units to customers.  The purchase price of the Spin  Rinser/Dryer  ranges
from $10,000 to $100,000, depending on configuration.  The Spin Rinser/Dryer has
been redesigned to handle 300mm substrates.

         Single Substrate Processing Tools

The Company's single substrate  processing  equipment employs chemical spray and
allows multiple chemistries to be used within a self-cleaning,  enclosed process
chamber.  These tools enable customers to conduct  sequential surface processing
steps, and then within the same chamber, rinse and centrifugally dry substrates,
thereby reducing contamination during and between process steps.

The Company's  Equinox tool  addresses the needs of customers  employing  single
substrate  processing  for  specialized  applications.  The  Equinox  utilizes a
variety of processes, including immersion, spray, vapor and infrared heating, to
address cleaning, stripping,  etching, developing,  micro-machining and plating.
All of these  processes are performed with the substrate  suspended  device side
down in an  enclosed  process  chamber.  This face down  positioning  allows for
enhanced  liquid,  vapor,  or gas  delivery  of the  process  to the  substrate,
resulting in greater process uniformity and reduced  contamination.  The Equinox
is a flexible  platform which may contain  multiple process  chambers,  allowing
customers to cluster multiple process technologies into a single tool to perform
sequential  processes.  The Equinox has been used to process ceramic substrates,
thin film heads and photo masks in addition to its customary silicon and gallium
arsenide  wafer  applications.  The price of the Equinox ranges from $300,000 to
$1.1 million, depending on configuration.

The Company  introduced the Millennium  single wafer processor to complement its
Equinox  product.  The Millennium  provides a  revolutionary  approach to single
wafer surface  preparation  through a unique Capsule  process chamber to provide
process  control to specific  areas on both  surfaces of the wafer for  critical
clean  applications.  Wafer  backside  cleaning for copper  interconnects  is an
anticipated  application.  The system is based on the  Company's  proven  linear
platform which is designed for high throughput manufacturing.  The Capsule takes
advantage of a  spin-assisted  surface tension effect to tightly control surface
processing  and provide clean,  dry wafers for further  fabrication  steps.  The
Company expects to begin selling the Millennium in fiscal 1999.

         Wafer Carrier Cleaning System

The  Company's  Storm wafer carrier  cleaning  system cleans and dries the wafer
carriers  in a unique  rinsing/drying  process  that  occurs  inside an enclosed
chamber.  Solution is sprayed  inside the chamber,  cleaning  both the boxes and
cassettes  and the inside of the chamber,  followed by a "DI" water  rinse.  The
boxes and  cassettes  are then dried using  centrifugal  force and warm filtered
ambient air. The Storm monitors the humidity inside the enclosed process chamber
to ensure  consistent  drying  results.  The Company  believes the Storm removes
particles more  effectively than  conventional  technology and has a low cost of
ownership.   The  Storm  also  has  a  patented   loading  feature  that  allows
through-the-wall installation whereby unwashed boxes and cassettes can be loaded
into the Storm from outside the clean room and then  unloaded  directly into the
clean room after the cleaning  cycle has been  completed.  This feature  enables
customers to avoid  bringing  contaminated  boxes and  cassettes  into the clean
room.  The price of a Storm  ranges from  $150,000  to  $400,000,  depending  on
configuration.

Electrochemical Deposition

Semitool introduced its first electrochemical deposition (ECD) tool in 1993. The
Company's  ECD  tools  have been used for gold,  platinum,  solder,  and  copper
deposition  production  and  research  and  development  applications.  Semitool
developed the first high throughput copper plating tool, the Equinox LT-210, for
the semiconductor industry.

Copper has several  advantages over the aluminum alloys that have  traditionally
been used for device  interconnects.  Copper  will  significantly  minimize  the
number of metal layers required,  reduce heat dissipation,  reduce manufacturing
cost,  and increase  chip speed.  Copper has lower  electrical  resistance  than
aluminum  so much  smaller  lines  of  copper  have  the  same  current-carrying
capability as today's aluminum interconnects.  A limited number of semiconductor
device  manufacturers have begun delivering  devices with copper  interconnects.
The  Company  believes  the  emerging  copper  interconnect  market  will  be  a
high-growth market when the semiconductor  industry begins widespread production
of  semiconductor  copper  interconnect  based  devices  and  the  semiconductor
industry begins its economic recovery.

Other applications for electrochemical  deposition are also emerging such as the
deposition of gold  interconnects on gallium arsenide in the manufacture of high
speed  communication  devices and solder bump application to semiconductors  for
flip chip  attachment.  Flip chip attachment makes the die attach operation much
more efficient than conventional wire bonding  processes,  becomes  increasingly
necessary as the number of inputs and outputs per chip increase,  and provides a
higher level of performance than is otherwise available.  ECD provides technical
capability while maintaining low cost solder  application.  MEMS and sensors are
used in a number of new products and are  instrumental in the functioning of the
automobile air bag. The  manufacture of thin-film  heads and ink-jet print heads
also utilizes electrochemical deposition.

Semitool offers two models of fully automated single wafer processing tools that
are designed for  electrochemical  deposition.  Its radial tool, the Equinox, is
designed  for   flexibility   to  handle   process   development  or  production
applications.  It's versatility in configuration allows multiple chemistries and
processes to be performed in the same tool.  The LT-210C,  introduced  in fiscal
1998, uses a small footprint,  linear configuration designed for high throughput
and high  productivity  manufacturing.  The LT-210C  employs two track robots to
feed process chambers and has optional  automatic  on-line  electrolyte  control
systems  to  ensure  constant   solution   concentration  for  repeatability  of
deposition,  and various  proprietary  systems to ensure  uniformity  of plating
across the wafer.  The LT-210C  consistently  deposits  films with superior step
coverage, lower electrical resistance, at a lower cost and at a rate faster than
is possible  with  conventional  vacuum  deposition  systems.  Both models plate
copper or gold for  device  interconnects,  gold or solder  for  bonding  bumps,
copper and gold for ink jet devices and copper for  magnetoresistive  heads used
in hard drives.  The  Company's ECD tools range upward in price from $575,000 to
$2.2 million

Thermal

Thermal processing generally addresses the  oxidation/diffusion and low pressure
chemical  vapor  deposition  (LPCVD)  steps  of  the  semiconductor  fabrication
process.  The  Company's  VTP 1500 and EXPRESS  vertical  furnaces  address this
market.  They employ a patented design which provides a continuously  controlled
process  environment  that allows for  oxidation/diffusion  and LPCVD processing
steps to be performed sequentially in the same processing chamber. The Company's
furnaces  feature a stationary base plate and quartz process tower with a double
lift  system  which  allows the process  chamber and heating  element to each be
raised and lowered  independently over the process tower. The double lift design
also  permits  the  heating  element to be lifted  away from the sealed  process
chamber,  allowing  wafers to cool more  rapidly  in a  controlled  environment,
thereby  improving  overall thermal  processing cycle time. The Company believes
its furnaces  produce  higher  quality film with fewer  impurities and increased
electrical   properties,   and  have  been   designed  to  meet   manufacturers'
requirements for the production of semiconductor devices with line geometries as
small as .18  micron.  The  EXPRESS is  designed  with  model-based  temperature
control technology which provides a shortened period to reach desired processing
temperature thereby providing increased  throughput.  The prices of the VTP 1500
and EXPRESS range from $600,000 to $1.5 million, depending on configuration. The
EXPRESS has been redesigned to handle 300mm wafers.

Spare Parts and Service

The Company sells spare part kits and spare part  components  for its equipment.
The Company employs customer  service and process  engineers to assist and train
the Company's  customers in  performing  preventive  maintenance  and service on
Semitool  equipment and developing process  applications for the equipment.  The
Company currently  provides one, two or three year warranty on new equipment and
a 90-day  warranty on parts.  The Company offers a variety of process,  service,
and maintenance  programs that may be purchased for a fee. A number of customers
have purchased  maintenance  contracts  whereby the Company's  service employees
work full-time at the customer's  facility,  and provide service and maintenance
support for Semitool equipment.

Fab Supervisory Systems

A  state-of-the-art  semiconductor fab contains many pieces of complex equipment
and each one performs a complicated  process.  Monitoring  and  controlling  the
processes on each piece of equipment are critical to achieving high yields, high
quality devices,  and meeting  production  targets.  Typically,  this is done by
highly  trained  operators.   However,  a  monitoring  and  control  system  can
significantly  enhance a fabs' ability to achieve yield,  quality and production
goals.

In February 1996, the Company acquired Semy Engineering, Inc., a manufacturer of
monitoring  and  control  systems.  The  core  of  these  systems  is  a  highly
sophisticated  communication  software  applied  through  a  specially  equipped
computer workstation. These workstations are networked with the process tools to
provide  monitoring and control.  The Company's Unix based systems have a number
of features  including process recipe management,  statistical  process control,
data logging and data warehouse management, preventive maintenance tracking, and
process analysis.

Another Semy product is the MYPRO Model Based Temperature Control (MBTC) System.
The MYPRO MBTC system provides  state-of-the-art  temperature control capability
for both new and retrofit  diffusion  furnace  applications and offers increased
temperature control. In October 1998, Semiconductor  International selected Semy
Engineering, Inc's MYPRO MBTC system as an Editor's Choice Best Product.

During fiscal 1998, the Company invested $2.2 million in software development to
enhance its Unix based fab  supervisory  system  product  line and  extended its
control   capability   to  virtually   every  major  machine  in  the  front-end
manufacturing  process  of a  semiconductor  manufacturer.  This new  family  of
software  and  hardware  offerings  has  enabled  the Company to be the first to
successfully  implement a fab-wide data collection,  analysis and control system
which  interfaces  directly  with  the  semiconductor   manufacturer's  computer
integrated manufacturing system and individual process tools.

CUSTOMERS, SALES AND MARKETING

The Company's customers include leading worldwide semiconductor manufacturers as
well as major  manufacturers of thin film heads, flat panel displays,  multichip
modules,  ink jet print heads,  compact disc masters,  and hard disk media.  The
following is a  representative  list of the Company's  largest United States and
international  customers,  which had purchases of approximately  $2.0 million or
more in fiscal 1998:

Advanced Micro Devices      Lucent Technologies         Philips Semiconductor
Chartered Semiconductor     Matsushita Semi.            STMicrelectronics
Fujitsu                     Micro Chip Corporation      Siemens
Hewlett-Packard             Motorola                    Sony
IBM                         National Semiconductor      Taiwan Semiconductor
Intel                       NEC                         United Micro Electronics
LSI Logic                   Oliver Design               Whiteoak Semiconductor



The Company  believes  that its  Company-staffed  worldwide  sales,  service and
customer  support  organizations  are important to the long-term  success of its
customer relationships.

International  sales,  primarily in Europe and Asia accounted for  approximately
38%,  36% and  44% of  total  sales  for  fiscal  years  1998,  1997  and  1996,
respectively.  The  Company  markets  and sells its  products  in North  America
through  its sales  organization  which  includes  direct  sales  personnel  and
independent sales  representatives.  The Company currently has sales and service
offices located  throughout the United States. In Europe, the Company has direct
sales  personnel.  In Asia, the Company sells through direct sales personnel and
independent  sales  representatives  as well as through Tokyo Electron,  Limited
("TEL") pursuant to a non-exclusive distribution agreement. The TEL distribution
agreement is in phased  termination which is expected to be final in March 1999.
TEL  sells  the  Company's   stand-alone   batch  processing   products  (except
electrochemical  deposition  products) in Japan.  The Company has a direct sales
and customer  support  organization  located in Japan,  Singapore and Korea that
sells Semitool products.

To enhance its sales  capabilities,  the Company  maintains a demonstration  and
process  development  laboratory  and a  clean  room at its  Kalispell,  Montana
facility and is installing a demonstration laboratory in Japan.

The  Company  currently  provides  one,  two or  three  year  warranties  on new
equipment  and a 90-day  warranty  on  parts.  The  Company  has  field  service
personnel and application  engineers  servicing  customers in the United States,
Europe and Asia, who directly provide warranty service,  post-warranty  service,
and equipment  installations.  Field service engineers are located in nine sites
throughout the United States,  including  dedicated  site-specific  engineers at
certain customer  locations pursuant to customer  agreements.  To further ensure
customer  satisfaction,  the  Company  also  provides  service  and  maintenance
training as well as process application training for its customers' personnel on
a fee basis. The Company  maintains an extensive  inventory of spare parts which
allows  the  Company  to  provide  overnight  delivery  in most  instances.  The
Company's  vertically  integrated  manufacturing  allows the  Company to quickly
manufacture parts to address customers' service needs.

BACKLOG

Orders Backlog decreased nearly 52% to approximately  $30.8 million at September
30, 1998,  from  approximately  $63.8 million at September 30, 1997. The Company
includes in its backlog those customer orders for which it has received purchase
orders or purchase order numbers and for which shipment is scheduled  within the
next twelve months. Orders are generally subject to cancellation or rescheduling
by customers  with limited or no penalty.  As the result of systems  ordered and
shipped in the same quarter,  possible changes in customer  delivery  schedules,
cancellations of orders and delays in product  shipments,  the Company's backlog
at any  particular  date is not  necessarily  indicative of actual sales for any
succeeding period.

MANUFACTURING

Most of the Company's  manufacturing  is conducted at its facilities  located in
Kalispell, Montana. The Company's vertically integrated manufacturing operations
include metals and plastics  fabrication and finishing  capabilities;  component
part and final product assembly; and extensive product testing capabilities. The
Company's   manufacturing   personnel  work  closely  with  product  development
engineers  to  ensure  that  products  are  engineered  for   manufacturability,
affording a smooth transition from prototype to full scale production. Component
and product  prototyping is performed  internally,  and design  engineers  often
receive prototypes of newly designed parts from  manufacturing  within 24 hours.
The Company  believes it achieves a number of  competitive  advantages  from its
vertically integrated manufacturing operations, including the ability to achieve
cost and  quality  advantages,  and to bring  quickly new  products  and product
enhancements to market.

RESEARCH AND DEVELOPMENT

The market for semiconductor  equipment is characterized by rapid  technological
change and  product  innovation.  The Company  believes  that  continued  timely
development of products for both existing and new markets is necessary to remain
competitive.  The Company devotes significant  resources to programs directed at
developing new and enhanced  products,  as well as new applications for existing
products.   The  Company  maintains  an  extensive   demonstration  and  process
development laboratory at its facilities in Montana,  including a clean room for
testing and  developing its products.  Company  research and  development  (R&D)
personnel work directly with customers to provide process solutions, develop new
processes and to design and evaluate new pieces of equipment.

The  Company  developed  new  models  for its single  substrate  processing  and
automated batch chemical  processing  product line during fiscal 1998. The major
equipment  R&D projects  during  fiscal 1998 were the LT-210C,  a linear  copper
plating tool, the high throughput fully automated Spectrum, and Millennium which
utilizes a unique "Capsule" processing chamber. The Company also developed a new
family of software for its factory  automation  business the costs of which were
capitalized once technological feasibility was reached.

Expenditures  for R&D, which are expensed as incurred,  during fiscal 1998, 1997
and 1996 were approximately  $24.5 million,  $21.2 million and $19.5 million and
represented 13.6%, 10.9% and 11.2% of net sales, respectively.

COMPETITION

The markets in which the Company  competes are highly  competitive.  The Company
faces  substantial  competition from established  competitors,  certain of which
have  greater  financial,  marketing,  technical  and other  resources,  broader
product lines, more extensive customer support capabilities, and larger and more
established sales organizations and customer bases than the Company. The Company
may also face  competition  from new  domestic  and  overseas  market  entrants.
Significant  competitive factors in the semiconductor equipment market and other
markets  in  which  the  Company   competes   include  system   performance  and
flexibility,  cost of  ownership,  the  size of  each  manufacturer's  installed
customer base,  customer  service and support,  and breadth of product line. The
Company believes that it competes  favorably on the basis of these factors.  The
primary  competition to the Company's batch chemical spray products is currently
from wet-bench chemical  processing  equipment.  The Company is also aware of at
least two other competing  manufacturers  of spray chemical  processors.  As the
demand for more precise and reliable chemical processing increases,  the Company
anticipates  greater  competition in the centrifugal  spray technology area. The
Company  is  aware  of  vertical  furnaces  produced  by  at  least  four  other
manufacturers which compete with the Company's thermal processing equipment. The
single substrate  processing  market in which the Company's Equinox competes and
the wafer  carrier  cleaning  market in which the Company's  Storm  competes are
highly fragmented markets. The Company is aware of at least two major companies,
both larger than the Company,  and several  smaller  companies  competing in the
electrochemical deposition market.

The  Company  expects  its  competitors  to  continue  to improve the design and
performance  of their  products.  There can be no assurance  that the  Company's
competitors  will  not  develop  enhancements  to,  or  future  generations  of,
competitive products that will offer superior price or performance  features, or
that new processes,  or  technologies  will not emerge that render the Company's
products less competitive or obsolete. As a result of the substantial investment
required to integrate  capital  equipment  into a production  line,  the Company
believes that once a manufacturer has selected certain capital  equipment from a
particular vendor, the manufacturer generally relies 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,  the
Company  may be at a  competitive  disadvantage  with  respect  to a  particular
customer  if that  customer  utilizes a  competitor's  manufacturing  equipment.
Increased  competitive  pressure  could lead to lower  prices for the  Company's
products,  thereby  adversely  affecting the  Company's  business and results of
operations.  There can be no assurance  that the Company will be able to compete
successfully in the future.

PATENTS AND OTHER INTELLECTUAL PROPERTY

The Company's success depends in significant part on the technically  innovative
features of its products.  The Company  currently  holds numerous  United States
patents,  some with pending  foreign  counterparts,  has several  United  States
patent  applications  pending and intends to file additional patent applications
as  appropriate.  There can be no assurance  that patents will issue from any of
the Company's  pending  applications  or that existing or future patents will be
sufficiently  broad to protect the Company's  technology.  The Company  believes
that patents and trademarks are of less  significance  in its industry than such
factors as product  innovation,  technical  expertise and its ability to quickly
adapt its products to evolving processing  requirements and technologies.  While
the  Company  attempts  to protect  its  intellectual  property  rights  through
patents,  copyrights and  non-disclosure  agreements,  there can be no assurance
that the Company  will be able to protect its  technology,  or that  competitors
will not be able to develop similar technology  independently.  In addition, the
laws of certain  foreign  countries may not protect the  Company's  intellectual
property to the same extent as the laws of the United  States.  Moreover,  there
can be no assurance  that the Company's  existing or future  patents will not be
challenged,  invalidated or circumvented,  or that the rights granted thereunder
will provide meaningful  competitive  advantages to the Company.  In any of such
events,  the  Company's  business,  operating  results  and cash flows  could be
adversely affected.

There has been substantial  litigation  regarding patent and other  intellectual
property rights in semiconductor-related industries. Although the Company is not
aware of any  infringement by its products of any patents or proprietary  rights
of others,  further  commercialization  of the Company's  products could provoke
claims of infringement  from third parties.  In August,  1998, the Company filed
suit against Novellus Systems,  Inc. in the United States District Court for the
Northern District of California (Case No.  C-98-3089DLJ),  alleging infringement
of two of the Company's  patents relating to single  substrate  processing tools
used in  electrochemical  deposition of copper onto  semiconductor  wafers.  The
Company  seeks damages for past  infringement,  a permanent  injunction,  treble
damages for willful  infringement,  pre-judgment  interest and  attorneys  fees.
Novellus answered the complaint by denying all allegations,  counterclaiming for
declaratory judgment of invalidity and non-infringement. Discovery is commencing
and no trial has been set. In the future, litigation may be necessary to enforce
patents issued to the Company, to protect trade secrets or know-how owned by the
Company or to defend the Company 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 result in substantial  cost and diversion of
effort by the Company,  which by itself could have a material  adverse effect on
the  Company's  financial  condition  and operating  results.  Further,  adverse
determinations  in  such  litigation  could  result  in the  Company's  loss  of
proprietary  rights,  subject the Company to  significant  liabilities  to third
parties,  require the Company to seek licenses from third parties or prevent the
Company from  manufacturing  or selling its products,  any of which could have a
material adverse effect on the Company's business and results of operations.

EMPLOYEES

At  September  30,  1998,  the  Company  had 1,045  full time  employees  and 24
temporary contract employees worldwide. This includes 471 in manufacturing,  363
in marketing, sales and field service, 134 in research and development,  and 101
in general  administration.  The Company's worlwide  employment has declined 31%
since the end of the last  fiscal  year.  None of the  Company's  employees  are
represented  by a labor  union  and the  Company  has never  experienced  a work
stoppage or strike. The Company considers its employee relations to be good.

RISK FACTORS

Introduction

The risks detailed in this section as well as risks and uncertainties  discussed
elsewhere  in this  annual  report on Form 10-K and in the  Company's  other SEC
filings  constitute  some of the  risks  common in the  semiconductor  equipment
industry or risks specific to Semitool.  Shareholders or potential  shareholders
should read these risks carefully to better understand the potential  volatility
of the Company's  results and volatility in the Company's share price.  The fact
that some of the risk factors may be the same or similar to the  Company's  past
filings means only that the risks are present in multiple  periods.  The Company
believes  that  many of the risks  detailed  are part of doing  business  in the
semiconductor  equipment  industry  and will  likely be present  in all  periods
reported.  The fact that  certain  risks are  endemic to the  industry  does not
lessen the significance of the risk.

Cyclical Nature of the Semiconductor Industry

The  Company's  business  depends  primarily  on  the  capital  expenditures  of
semiconductor manufacturers,  who correspondingly depend on the demand for final
products  or  systems  that use such  devices.  The  semiconductor  industry  is
cyclical and has historically  experienced  periodic downturns  characterized by
oversupply  and weak demand,  which often have had a material  adverse effect on
capital expenditures by semiconductor  manufacturers.  These downturns generally
have  adversely  affected the business and  operating  results of  semiconductor
equipment suppliers, including the Company. The semiconductor device industry is
presently  experiencing  a slowdown in terms of product demand and volatility in
terms of product pricing. In 1998, the average selling price of memory chips and
certain other semiconductor  devices significantly  decreased.  This slowdown in
conjunction  with  manufacturers  ability to produce  more devices per wafer has
resulted  in  excess   production   capacity  and  many   semiconductor   device
manufacturers  are delaying  expansion  plans.  This slowdown and volatility has
caused  the  semiconductor  industry  to reduce  its  demand  for  semiconductor
processing  equipment  and,  in  some  instances,  to  delay  capital  equipment
decisions.  In some cases this has resulted in order  cancellations or delays of
orders and delays of  delivery  dates for the  Company's  products.  The current
downturn  has  negatively  impacted  the Company  resulting in reduced new order
rates and order  backlog  and  declining  sales and  profitability.  The Company
expects the  downturn  to  continue  into fiscal 1999 and will result in further
sales and  profitability  declines.  Currently,  analysts  are not  expecting  a
recovery in the semiconductor  equipment  industry until late calendar year 1999
or early 2000. In addition,  the need for  continued  investment in research and
development,  marketing and customer support may limit the Company's  ability to
reduce  expenses in response to this and future  downturns in the  semiconductor
industry.

Fluctuations in Future Operating Results

The Company's  business and results of operations have fluctuated  significantly
in the  past  and the  Company  expects  them to  fluctuate  significantly  on a
quarterly  or  annual  basis in the  future.  During  a  particular  quarter,  a
significant  portion of the Company's revenues is often derived from the sale of
a  relatively  small number of high selling  price  systems.  The number of such
systems  sold in,  and the  results  for a  particular  quarter or year can vary
significantly  due to a variety of factors,  including the timing of significant
orders,  the  timing  of  new  product  announcements  by  the  Company  or  its
competitors, patterns of capital spending by customers, market acceptance of new
and  enhanced  versions  of the  Company's  products,  changes in pricing by the
Company, its competitors or suppliers,  the mix of products sold and cyclicality
in the  semiconductor  industry and other industries  served by the Company.  In
addition,  the cancellation or rescheduling of customer orders or any production
difficulty could adversely  impact  shipments which would negatively  impact the
Company's  business and results of operations for the period or periods in which
such  cancellation  or  rescheduling  occurs.  In light of  these  factors,  the
cyclical nature of the semiconductor industry and the current industry downturn,
the Company  expects to  continue  to  experience  significant  fluctuations  in
quarterly and annual operating results. Moreover, many of the Company's expenses
are  fixed in the  short-term  which,  combined  with  the  need  for  continued
investment in research and development,  marketing and customer support,  limits
the Company's ability to reduce expenses quickly.  As a result,  declines in net
revenues could have a material adverse effect on the Company's business, results
of operations and cash flows.

Dependence on Product Development

Semiconductor  equipment  is  subject to rapid  technological  change as well as
evolving industry  standards.  The Company believes that its future success will
depend in part upon its ability to continue to enhance its existing products and
their  process  capabilities,  to  continue  to  decrease  the  overall  cost of
ownership  of such  products,  and to continue to develop  and  manufacture  new
products with improved process  capabilities  which conform to evolving industry
standards.  As a result,  the Company  expects to  continue to make  significant
investments in research and development.  Although  historically the Company has
had adequate  funds from its  operations to devote to research and  development,
there can be no assurance that such funds will be available in the future or, if
available,  that they will be  adequate.  The Company  also must manage  product
transitions  successfully,  since announcements or introductions of new products
by the  Company or its  competitors  could  adversely  affect  sales of existing
Company  products.  There can be no  assurance  that the Company will be able to
develop and introduce new products or enhancements to its existing products on a
timely  basis  or  in a  manner  which  satisfies  customer  needs  or  achieves
widespread  market  acceptance.  The failure to do so could adversely affect the
Company's business, results of operations and cash flows.

Market Acceptance of New Products

The Company  believes  that its growth  prospects  depend in large part upon its
ability to gain  customer  acceptance  of its  products and  technology.  Market
acceptance   of  new  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 the Company's new 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
the Company will be  successful  in obtaining  broad  market  acceptance  of its
systems and technology.

Competition

The markets in which the Company  competes are highly  competitive.  The Company
faces  substantial  competition from established  competitors,  certain of which
have  greater  financial,  marketing,  technical  and other  resources,  broader
product lines, more extensive customer support capabilities, and larger and more
established sales organizations and customer bases than the Company. The Company
may also face  competition  from new  domestic  and  overseas  market  entrants.
Significant  competitive factors in the semiconductor equipment market and other
markets  in  which  the  Company   competes   include  system   performance  and
flexibility,  cost of  ownership,  the  size of  each  manufacturer's  installed
customer base,  customer  service and support,  and breadth of product line. The
Company  believes that it competes  favorably on the basis of these factors.  In
order  to  remain  competitive,  the  Company  must  maintain  a high  level  of
investment in research and  development,  marketing,  and customer service while
controlling operating expenses.  There can be no assurance that the Company will
have  sufficient  resources  to  continue to make such  investments  or that the
Company's  products  will  continue to be viewed as  competitive  as a result of
technological  advances by  competitors or changes in  semiconductor  processing
technology.  The Company's  competitors  may also increase their efforts to gain
and retain market share through competitive pricing.  Such competitive pressures
may necessitate  significant  price  reductions by the Company or result in lost
orders  which  could  adversely  affect  the  Company's  business,   results  of
operations, and cash flows.

The  Company  expects  its  competitors  to  continue  to improve the design and
performance  of their  products.  There can be no assurance  that the  Company's
competitors  will  not  develop  enhancements  to,  or  future  generations  of,
competitive products that will offer superior price or performance  features, or
that new  processes or  technologies  will not emerge that render the  Company's
products less competitive or obsolete. As a result of the substantial investment
required to integrate  capital  equipment  into a production  line,  the Company
believes that once a manufacturer has selected certain capital  equipment from a
particular vendor, the manufacturer generally relies 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,  the
Company  may be at a  competitive  disadvantage  with  respect  to a  particular
customer if that customer utilizes a competitor's manufacturing equipment. There
can be no assurance that the Company will be able to compete successfully in the
future.

Environmental Regulations

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

International Business

Approximately  38%, 36% and 44% of the Company's sales for fiscal 1998, 1997 and
1996,  respectively,  were  attributable to customers outside the United States.
The Company  expects  sales outside the United States to continue to represent a
significant  portion of its future sales.  Sales to customers outside the United
States  are   subject  to  various   risks,   including   exposure  to  currency
fluctuations, the imposition of governmental controls, the need to comply with a
wide variety of foreign and United  States  export laws,  political and economic
instability,  trade  restrictions,  changes  in tariffs  and  taxes,  and longer
payment cycles  typically  associated with  international  sales.  The Company's
international  sales activities are also subject to the difficulties of managing
overseas  distributors  or  representatives,  and  difficulties  of staffing and
managing foreign subsidiary operations.  In addition,  because a majority of the
Company's  international  sales are  denominated in United States  dollars,  the
Company's  ability  to  compete  overseas  could  be  adversely  affected  by  a
strengthening United States dollar. Moreover,  although the Company endeavors to
meet technical standards established by foreign standards setting organizations,
there can be no  assurance  that the Company will be able to comply with changes
in foreign  standards  in the  future.  The  inability  of the Company to design
products  to comply with  foreign  standards  or any  significant  or  prolonged
decline in the  Company's  international  sales  could  have a material  adverse
effect on the Company's business, results of operations, and cash flows.

Patents and Other Intellectual Property

The Company's success depends in significant part on the technically  innovative
features of its products.  The Company  currently  holds numerous  United States
patents,  some with pending  foreign  counterparts,  has several  United  States
patent  applications  pending and intends to file additional patent applications
as  appropriate.  There can be no assurance  that patents will issue from any of
the Company's  pending  applications  or that existing or future patents will be
sufficiently  broad to protect the Company's  technology.  The Company  believes
that patents and trademarks are of less  significance  in its industry than such
factors as product  innovation,  technical  expertise and its ability to quickly
adapt its products to evolving processing  requirements and technologies.  While
the  Company  attempts  to protect  its  intellectual  property  rights  through
patents,  copyrights and  non-disclosure  agreements,  there can be no assurance
that the Company  will be able to protect its  technology,  or that  competitors
will not be able to develop similar technology  independently.  In addition, the
laws of certain  foreign  countries may not protect the  Company's  intellectual
property to the same extent as the laws of the United  States.  Moreover,  there
can be no assurance  that the Company's  existing or future  patents will not be
challenged,  invalidated or circumvented,  or that the rights granted thereunder
will provide meaningful  competitive  advantages to the Company.  In any of such
events,  the  Company's  business,  operating  results  and cash flows  could be
adversely affected.

There has been substantial  litigation  regarding patent and other  intellectual
property rights in semiconductor-related industries. Although the Company is not
aware of any  infringement by its products of any patents or proprietary  rights
of others,  further  commercialization  of the Company's  products could provoke
claims of  infringement  from third  parties.  In the future,  litigation may be
necessary to enforce patents issued to the Company,  to protect trade secrets or
know-how  owned  by  the  Company  or to  defend  the  Company  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  result  in
substantial  cost and diversion of effort by the Company,  which by itself could
have  a  material  adverse  effect  on the  Company's  financial  condition  and
operating  results.  Further,  adverse  determinations  in such litigation could
result in the  Company's  loss of  proprietary  rights,  subject  the Company to
significant  liabilities to third parties,  require the Company to seek licenses
from third  parties or prevent the  Company  from  manufacturing  or selling its
products,  any of which could have a material  adverse  effect on the  Company's
business and results of operations.

Dependence on Key Personnel

The  Company's  success  depends to a  significant  extent  upon the  efforts of
certain  senior  management  and  technical  personnel,  particularly  Raymon F.
Thompson,  the Company's  Chairman.  The Company's future success will depend in
large part upon its  ability to attract  and retain  highly  skilled  technical,
managerial, and marketing personnel. Competition for such personnel is high and,
while to date the Company  does not believe  that its  geographic  location  has
hindered it in recruiting  qualified  personnel,  no assurance can be given that
the  Company's  location  will not  adversely  affect  future  recruiting of key
personnel.  The loss of the services of Mr. Thompson or of one or more other key
management  or  technical  personnel,  or the  inability  to attract  and retain
additional qualified  personnel,  could adversely affect the Company's business,
results of  operations  and cash flows.  The Company does not carry key man life
insurance on Mr. Thompson.

Dependence on Key Customers

The  Company's  ten  largest  customers  accounted  for 55%,  52% and 42% of the
Company's net sales in fiscal 1998,  1997 and 1996,  respectively.  Although the
composition of Semitool's  largest  customers has changed from year to year, the
loss  of,  or a  significant  curtailment  of  purchases  by one or  more of the
Company's key customers could adversely affect the Company's  business,  results
of operations and cash flows.

Dependence on Key Suppliers

Certain  components  and  subassemblies  included in the Company's  products are
obtained  from a single  source or a limited  group of  suppliers.  Although the
Company has vertically integrated much of its manufacturing operations, the loss
of, or disruption in shipments  from,  certain sole or limited source  suppliers
could in the short-term  adversely affect the Company's  business and results of
operations.  The Company believes that it could either manufacture components or
secure an alternate  supplier with no long-term  material  adverse effect on the
Company's business or operations.  Further, a significant  increase in the price
of one or  more  of  these  components  could  adversely  affect  the  Company's
business, results of operations and cash flows.

Effect of Certain Anti-Takeover Provisions

The  Company's  Articles  of  Incorporation  authorize  the  Company's  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 wholly
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.  Although  the Company  has no present  plans to issue any
Preferred  Stock,  and  views  the  authorized  Preferred  Stock as a  potential
financing  vehicle for the Company,  the Board of Directors may issue  Preferred
Stock with voting and conversion  rights which could adversely affect the voting
power of the holders of Common Stock.  Any issuance of Preferred  Stock may have
the  effect of  delaying,  deferring  or  preventing  a change in control of the
Company.

Volatility of Stock Price

The Company's  Common Stock has experienced in the past, and could experience in
the future,  substantial  price  volatility  as a result of a number of factors,
including quarter to quarter  variations in the actual or anticipated  financial
results,  announcements  by the  Company,  its  competitors  or  its  customers,
government  regulations,   developments  in  the  industry  and  general  market
conditions.  In addition,  the stock market has  experienced  extreme  price and
volume  fluctuations  which have  affected the market  price of many  technology
companies in particular  and which have at times been unrelated to the operating
performance  of the  specific  companies  whose  stock is traded.  Broad  market
fluctuations,  as well as economic conditions generally and in the semiconductor
industry  specifically,  may adversely  affect the market price of the Company's
Common Stock.

YEAR 2000

The Company's Year 2000 (Y2K)  readiness  project is well underway.  The project
consists of six major phases:

     1.  Planning (completed July 1998)
     2.  Assessment (completed October 1998)
     3.  Testing  (in  progress,  scheduled  to  be  completed  March  1999)
     4.  Repairs/Reinstallations (in progress, scheduled to be completed 
         March 1999)
     5.  Retesting  (in  progress,  scheduled  to be  completed  June  1999)
     6.  Contingency plans (June 1999 - October 1999).

The planning phase has been  completed and consisted of assigning  resources and
timelines to tasks with the projects  scheduled to be complete by June 1999. The
plan is updated as new information is collected.  The assessment  phase has also
been  completed  and  consisted of taking an inventory of products,  Information
Technology (IT) systems, non-IT systems, and customers/suppliers that need to be
tested and certified as to Y2K readiness.

      Products.  Other than some spare  parts,  many of the  Company's  products
      include  software both  internally  developed and purchased  from vendors.
      Some equipment also includes numerous  sub-systems with embedded software.
      Much of this software is customized to meet customers' specific needs.

      IT System.  These systems include the Company's business and manufacturing
      systems,  computer-aided  design, e-mail and others. The majority of these
      systems were developed by software vendors, are not highly customized, and
      are either  under a software  maintenance  agreement  which  requires  the
      vendor to make the systems Y2K ready or have been updated to Y2K compliant
      revisions.  Many of the systems have been certified by the manufacturer to
      be Y2K ready.

      Non-IT  Systems.  These systems include but are not limited to controllers
      on machinery used in production, the heating and air conditioning systems,
      communication  systems,  and electronic  security devices.  We are working
      closely  with  suppliers of such  systems to ensure  their  products  work
      properly.

      Customers/Suppliers.  The  Company  is  working  with  its  customers  and
      suppliers  to  determine  Y2K  readiness to insure that goods and services
      will be delivered  timely and that transaction  processing is proper.  The
      Company does have electronic data interface (EDI)  transactions  with some
      customers,  however,  these EDI transactions are provided by third parties
      who have certified  their Y2K  readiness.  The Company is working with key
      vendors who supply Y2K sensitive products.

The assessment  phase consisted of identifying  which systems have potential Y2K
problems  and the possible  affects of those  problems.  The problems  were then
prioritized  and those with the  largest  potential  impact on  operations  were
scheduled for early testing.

The  Company is  currently  in the  testing  phase with its IT  systems,  non-IT
systems,  and its customers and suppliers.  The Company is using test procedures
developed  by  Sematech,   a  consortium  of  semiconductor   and  semiconductor
manufactures  for its IT systems.  This work is  performed  by the  Company's IT
personnel. The non-IT systems and customers and suppliers testing is either done
jointly   or   completely   by  the   supplier.   As   testing   is   completed,
repairs/reinstallations, and retesting will occur.

Some of the Company's  equipment and the fab  supervisory  systems that it sells
contain  hardware and software  components that are subject to the Y2K problems.
The Company is currently in the testing,  repairs/reinstallation  and  retesting
phases with its  products.  All  products  shipped  since April 11, 1998 are Y2K
ready  and  most of the  products  shipped  prior  to that  date  have  upgrades
available or installed. The installed upgrades have been retested.

The Company will formulate  contingency plans for those systems not Y2K ready by
June of 1999. It is not anticipated the contingency plans will be needed for the
mission  critical  IT and  non-IT  systems,  nor does the  Company  expect  that
contingency plans will be needed for its internally developed software products.
It is not  known  at  this  point  if  contingency  plans  will  be  needed  for
customers/suppliers and for outsourced components.

The cost  incurred  thus far with regard to Y2K consists  mainly of IT personnel
payroll  expenses  for  IT,  non-IT  and  customers/suppliers  issues.  Software
engineering  payroll cost has been the primary  expense  related to Y2K products
related issues.  The Company does not track Y2K costs as a separate cost.  Total
estimated costs are not anticipated to exceed $250,000.

Due to the inherent  uncertainty  surrounding the Y2K issue,  the Company cannot
anticipate  all of the possible  problems that may occur.  Adverse  consequences
from Y2K issues may  materially  effect the Company's  warranty  liability,  the
value of its  capitalized  software and the carrying  value of its  inventory as
well as the Company's financial condition, results of operations and cash flows.
The Y2K problems could also subject the Company to litigation  which may include
consequential damages.


Item 2.  Properties

The Company owns a number of  facilities  around the world.  The Company has two
facilities located on sites in Kalispell, Montana. The building and land for the
Company's  European  sales and  customer  service  headquarters  is  located  in
Cambridge,  England and is owned by the Company.  The land holdings in Cambridge
were  increased  during  fiscal 1998 with the  purchase  of  adjacent  property.
Building and land were purchased in Coopersburg, Pennsylvania as a manufacturing
facility for the Rhetech,  Inc.,  subsidiary.  Also, during the year the Company
purchased  land in  Scottsdale,  Arizona  with the intent to build a facility to
house its Semy Engineering subsidiary. That project was canceled during the year
and the Company  intends to sell the land.  In early  fiscal  1999,  the Company
purchased  a building  and land in Phoenix,  Arizona to house Semy.  The Company
believes that its existing  manufacturing  facilities,  will be adequate to meet
its  requirements  for the  foreseeable  future and that suitable  additional or
substitute  space will be available as needed.  The Company also leases  various
other smaller facilities  worldwide which are used as sales and customer service
centers.

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


Item 3.  Legal Proceedings

On July 17,  1998 an  agreement  to settle was  reached in a Montana  securities
class  action  (Case No.  DV-96-124A)  filed in the  Montana  Eleventh  Judicial
District Court. Flathead County, Kalispell, Montana. A Stipulation of Settlement
was presented to the District Court for its  preliminary  approval on August 25,
1998. In connection with the settlement,  the plaintiff class has also agreed to
dismiss  with  prejudice  their  alleged  claims  against  the  Company  and its
Chairman,  Raymon F.  Thompson.  Insurance  policies  will  fully fund the class
action  settlement.  The settlement was  conditioned  upon the District  Court's
approval and a judgment settling all claims became final on October 27, 1998.

In August,  1998, the Company filed suit against Novellus  Systems,  Inc. in the
United States District Court for the Northern  District of California  (Case No.
C-98-3089DLJ), alleging infringement of two of the Company's patents relating to
single substrate  processing tools used in electrochemical  deposition of copper
onto semiconductor  wafers.  The Company seeks damages for past infringement,  a
permanent  injunction,  treble  damages for willful  infringement,  pre-judgment
interest and  attorneys  fees.  Novellus  answered the  complaint by denying all
allegations,   counterclaiming  for  declaratory   judgment  of  invalidity  and
non-infringement. Discovery is commencing and no trial has been set.

A lawsuit brought by Mitsubishi Silicon America Corporation, successor to Siltec
Corporation  (Case No.  CV-98-826AA)  was  filed on July 7,  1998 in the  United
States  Federal  District  Court for the District of Oregon against the Company.
The lawsuit  alleges breach of warranties and seeks damages and attorney's  fees
in excess of $5 million.  The Company  believes the lawsuit to be without  merit
and  intends  to contest  the action  vigorously.  However,  given the  inherent
uncertainty  of litigation  and the early stages of  discovery,  there can be no
assurance  that the ultimate  outcome will be in the Company's  favor.  Further,
regardless of the ultimate outcome, there can be no assurance that the diversion
of management's  attention,  and any costs associated with the lawsuit, will not
have a material adverse effect on the Company's financial condition,  results of
operations or cash flows.

The Company is subject to other legal  proceedings  and claims which have arisen
in the ordinary  course of its  business and have not been finally  adjudicated.
Although  there can be no  assurance  as to the  ultimate  disposition  of these
matters,  it is  the  opinion  of  the  Company's  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 the results of  operations,  financial  condition or cash flows of the
Company.


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.
                                     Part II

Item 5.  Market for Semitool's Common Stock and Related Shareholder Matters

The Company's Common Stock is traded under the symbol "SMTL"  principally on the
Nasdaq  National  Market.  The  approximate  number of shareholders of record at
December  14,  1998 was 219 and the  reported  last sale price of the  Company's
common  stock on the Nasdaq  National  Market was $5.50.  The high and low sales
prices for the Company's common stock reported by the Nasdaq National Market are
shown below.

                                         Common Stock Price Range
                                                Fiscal Year
                                            Ended September 30,
                                   1998                           1997
                             High          Low             High             Low
First Quarter               $26.25       $12.00           $11.63           $8.38
Second Quarter              $14.75       $11.63           $14.88           $9.50
Third Quarter               $14.50        $7.88           $13.50           $9.50
Fourth Quarter               $9.63        $5.13           $26.88          $12.88


Since the Company's initial public offering of Common Stock in February of 1995,
it has never  declared or paid any cash  dividend nor has any intent to do so in
the near future.

Item 6.  Selected Financial Data

This  summary  should be read in  conjunction  with the  consolidated  financial
statements and related notes included elsewhere herein.

<TABLE>
<CAPTION>

                                    Summary Consolidated Financial Information
                                       (in thousands, except per share data)
<S>                                          <C>          <C>          <C>          <C>            <C>

                                                               Year Ended September 30,
                                                1998         1997         1996         1995          1994

Statement of Operations Data:
Net sales                                    $180,501     $193,952     $174,204     $128,326       $62,597
Gross profit                                   90,979       91,090       84,631       65,858        31,957
Income from operations                          8,087       20,432       24,182       20,927         3,020
Net income                                      4,805       12,523       15,136       14,885         2,170

Pro forma Statement of Operations Data:
Income from operations (1)                      8,087       20,432       24,182       22,599         6,509
Net income (2)                                  4,805       12,523       15,136       14,403         3,723
Basic earnings per share                         0.35         0.92         1.11         1.19          0.40
Diluted earnings per share                       0.35         0.91         1.09         1.15          0.37
Average number of basic common shares          13,783       13,676       13,651       12,080         9,349
Average number of diluted common shares        13,904       13,833       13,858       12,563         9,946

Balance Sheet Data:
Working capital                                52,408       50,047       43,797       37,209         6,109
Total assets                                  127,990      131,725      114,954       88,067        39,807
Short-term debt                                 3,596        4,393        4,374          924         7,409
Long-term debt                                  3,836        3,364        3,637        4,011         6,089
Shareholders' equity (3)                       86,694       81,580       68,003       52,813        12,487
</TABLE>


(1) Pro forma income from operations has been determined by eliminating for 1995
and 1994  payments  for  technology  rights that ceased in February  1995,  upon
closing of the initial public offering of the Company's common stock.

(2)  Between  October 1, 1986 and  February 1, 1995,  the Company  elected to be
taxed under the provisions of Subchapter S of the Code. Under those  provisions,
the  Company  had not been  subject to federal  corporate  income  taxation.  In
connection  with the  closing of the  Company's  initial  public  offering,  the
Company  terminated  its S  corporation  status.  Pro forma net  income has been
determined by assuming  that the Company had been taxed as a C  corporation  for
federal  income tax  purposes  for 1995 and 1994.  The pro forma  provision  for
income taxes has been  calculated by using statutory rates for federal and state
taxes applied to pro forma income before  income taxes,  net of actual  research
and  development  credits  generated in each year.  The pro forma  effective tax
rates in fiscal 1995 and 1994 were 37.1% and 36.4%, respectively.

(3) Prior to the termination of S corporation status, dividends were paid by the
Company only in amounts sufficient to cover  shareholders' tax liabilities other
than the final distribution of prior accumulated S Corporation earnings. The per
share dividend information has therefore not been presented.



<PAGE>



Item 7.  Management's Discussion and Analysis of Financial Condition and
                  Results of Operations

CAUTION

Statements contained in this "Management's  Discussion and Analysis of Financial
Condition and Results of Operations" and elsewhere in this Annual Report on Form
10-K which are not historical facts are  forward-looking  statements  within the
meaning of Section  21E of the  Securities  Exchange  Act of 1934,  as  amended,
including without  limitation,  statements  regarding use of sales,  service and
support  organizations,  gross  margins,  research  and  development,  costs  of
manufacturing, future balances, and effects of new accounting standards, and are
subject to the safe harbor provisions created by that statute. A forward-looking
statement may contain words such as "will  continue to be," "will be," "continue
to,"  "expect  to,"  "anticipates  that,"  "to be" or "can  impact."  Management
cautions that forward-looking  statements are subject to risks and uncertainties
that could cause the Company's  actual results to differ  materially  from those
projected  in such  forward-looking  statements.  These risks and  uncertainties
include,  but are not  limited  to,  the  cyclical  nature of the  semiconductor
industry in general,  lack of market  acceptance  for new  products,  decreasing
demand for the Company's existing products,  impact of competitive  products and
pricing, product development,  commercialization and technological difficulties,
capacity and supply constraint difficulties and other risks detailed herein. The
Company's  future  results will depend on its ability to continue to enhance its
existing  products  and to develop and  manufacture  new products and to finance
such  activities.  There can be no assurance that the Company will be successful
in the  introduction,  marketing  and  cost-effective  manufacture  of  any  new
products or that the Company  will be able to develop and  introduce in a timely
manner new products or enhancements to its existing products and processes which
satisfy customer needs or achieve widespread market acceptance.

The Company  undertakes no obligation  to release  revisions to  forward-looking
statements  to  reflect  subsequent  events,  changed   circumstances,   or  the
occurrence of unanticipated events.

OVERVIEW

The  Company  was  incorporated  in  1979 to  develop,  manufacture  and  market
innovative  manufacturing  equipment for the semiconductor industry, and shipped
its first product, a spin rinser/dryer, that year. During the 1980s, the Company
introduced several generations of its acid and solvent spray surface preparation
and cleaning  tools and vertical  furnaces,  and began to market its products to
manufacturers  outside the semiconductor  industry.  Since 1990, the Company has
developed its single  substrate  surface  preparation and cleaning  system,  its
Storm wafer carrier  cleaning  system,  and its automated  multi-module  surface
preparation  processing  system.  The Company also developed the high throughput
production-ready copper plating tool, the LT-210C.

The unit  selling  prices  for the  Company's  products  range  from  $15,000 to
$150,000  for a spin  rinser/dryer,  to  $900,000  to over $2.0  million for the
Magnum  and ECD tools.  Due to these  relatively  high unit  selling  prices,  a
significant  portion  of the  Company's  revenue  in any  given  period is often
derived from the sale of a relatively small number of units.  From time to time,
the Company has experienced, and expects to continue to experience,  significant
fluctuations in its results of operations,  particularly  on a quarterly  basis.
The Company's  expense levels are based in part on expectations of future sales.
If sales  levels  in a  particular  period do not meet  expectations,  operating
results  will be adversely  affected.  A variety of factors have an influence on
the Company's  operating results in a particular  period.  These factors include
specific economic  conditions in the semiconductor  industry,  the timing of the
receipt of orders  from major  customers,  customer  cancellations  or delays of
shipments,  specific  feature  requests  by  customers,   production  delays  or
manufacturing  inefficiencies,  management  decisions to commence or discontinue
product lines,  the Company's  ability to design,  introduce and manufacture new
products on a cost-effective  and timely basis, the introduction of new products
by the  Company  or its  competition,  the  selection  of the  Company's  or its
competitors'  products by  semiconductor  manufacturers  for new  generations of
fabrication  facilities,  the timing of research and  development  expenditures,
exchange rate fluctuations,  and expenses  attendant to acquisitions,  strategic
alliances and the further development of marketing and service capabilities.

The Company markets and sells its products  worldwide with an emphasis on Europe
and  Asia  as  its  principal   international   markets.   During  fiscal  1998,
approximately  38.3%  of the  Company's  revenues  were  derived  from  sales to
customers outside the United States. The Company  anticipates that international
sales will continue to account for a significant portion of net sales,  although
the percentage of international  sales may fluctuate from period to period.  The
Company believes its sales,  service and support  organizations are important to
the long-term success of its customer relationships. The Company provides sales,
service and support worldwide,  primarily through direct employees in the United
States,  Europe,  Japan,  Korea,  Singapore,  Taiwan,  and through  distributors
elsewhere in the world.


RESULTS OF OPERATIONS

The  following  table sets forth the  Company's  results of  operations  for the
periods indicated expressed as a percentage of net sales:

<TABLE>
<CAPTION>

                                                             Year Ended September 30,
                                                 ------------------------------------------------
<S>                                              <C>              <C>               <C>

                                                      1998              1997             1996
                                                 -------------    -------------     -------------

Statement of Operations Data:
     Net sales                                           100.0%           100.0%            100.0%
     Cost of sales                                        49.6             53.0              51.4
                                                 -------------    -------------     -------------
     Gross profit                                         50.4             47.0              48.6
                                                 -------------    -------------     -------------

     Operating expenses:
         Selling, general and administrative              32.3             25.5              23.5
         Research and development                         13.6             10.9              11.2
                                                 -------------    -------------     -------------
              Total operating expenses                    45.9             36.4              34.7
                                                 -------------    -------------     -------------
     Income from operations                                4.5             10.6              13.9
     Other income (expense), net                          (0.5)            (0.1)             (0.1)
                                                 -------------    -------------     -------------
     Income before income taxes                            4.0             10.5              13.8
     Provision for income taxes                            1.4              4.0               5.1
                                                 -------------    -------------     -------------
     Net income                                            2.6%             6.5%              8.7%
                                                 =============    =============     =============
</TABLE>


YEARS ENDED SEPTEMBER 30, 1998 AND 1997

Net Sales.  Net sales consists of revenues from sales of equipment,  spare parts
and service,  and fab supervisory  systems. Net sales decreased $13.5 million or
7.0% to $180.5  million in fiscal 1998 from $194.0  million in fiscal 1997.  The
decrease in sales in Surface Preparation and Cleaning,  and Thermal products was
partially  offset by increased  sales in  Electrochemical  Deposition  products,
Spare Parts and Service,  and Fab Supervisory  Control systems.  Electrochemical
Deposition  sales for fiscal 1998,  were $24.6 million,  up from $6.4 million in
the prior fiscal year.  Essentially all of the sales increase in Electrochemical
Deposition   products  was  provided  by  sales  of  tools  for  copper  plating
applications.  The overall  sales  decrease  is  primarily  attributable  to the
reduction of capital equipment  spending by the Company's  customers in response
to the  semiconductor  industry downturn driven by excess capacity and the Asian
economic decline.

International  sales,  predominantly  to  customers  based in  Europe  and Asia,
accounted  for 38.3% of net sales in fiscal 1998  compared to 35.9% in the prior
year. The Company  anticipates that international sales will continue to account
for a significant  portion of net sales,  although the  percentage may fluctuate
from period to period.

Orders backlog decreased nearly 52% to $30.8 million at September 30, 1998, from
approximately  $63.8 million at September 30, 1997. The Company  includes in its
backlog  those  customer  orders for which it has  received  purchase  orders or
purchase  order  numbers  and for which  shipment is  scheduled  within the next
twelve months.  Orders are generally  subject to cancellation or rescheduling by
customers  with  limited or no  penalty.  As the result of systems  ordered  and
shipped in the same quarter,  possible changes in customer  delivery  schedules,
cancellations of orders and delays in product  shipments,  the Company's backlog
at any  particular  date is not  necessarily  indicative of actual sales for any
succeeding period.

The continuing market weakness and the low orders backlog level at the beginning
of fiscal 1999, limits the Company's  visibility into fiscal 1999, however,  the
Company will likely have  substantially  lower sales and possibly a net loss for
the year.

Gross Profit. Gross margin, gross profit as a percentage of sales,  increased to
50.4% in fiscal 1998 from 47.0% in the prior year.  The increase in gross margin
is attributable to a number of factors including improved  efficiencies  earlier
in the year which were  partially  offset  later in the year by excess  capacity
costs,  lower material costs and sales mix. The Company's gross margin has been,
and will continue to be, affected by a variety of factors, including the cost to
manufacture,  service, and support new and enhanced products, as well as the mix
and average  selling prices of products sold. The Company  anticipates  that the
cost to  manufacture  and support newer tool models will improve over time,  but
that it will continue to design and sell additional models of its existing tools
and additional tool types, which may offset in part the anticipated improvement.
Gross  profit  margins  declined  in the fourth  quarter of fiscal  1998 and are
expected  to be under  downward  pressure  in fiscal  1999 as a result of excess
capacity.

Selling, General and Administrative.  Selling, general and administrative (SG&A)
expenses  were $58.4  million or 32.3% of net sales in fiscal  1998  compared to
$49.5 million or 25.5% of net sales in the prior year. The $8.9 million increase
in fiscal 1998 as compared to fiscal 1997 reflects the  full-year  effect of the
Company's  1997 decision to transition to a  company-staffed  sales and customer
support organization in the Asian marketplace,  the larger domestic and european
customer  service  organization,  and a fourth  quarter  $1.3  million  bad debt
provision  for  an  international  receivable.  A  substantial  portion  of  the
Company's SG&A expense is fixed in the short-term;  however, the Company expects
it's SG&A expenses to decrease in fiscal 1999.

Research and  Development.  Research and development  (R&D) expenses  consist of
salaries,  project materials,  laboratory costs, consulting fees and other costs
associated  with the Company's  research and development  efforts.  R&D expenses
were  $24.5  million  or 13.6% of net sales in  fiscal  1998  compared  to $21.2
million or 10.9% of net sales in the prior year. Spending on R&D increased 15.9%
or $3.4  million in absolute  dollars  over the prior year due to the number and
complexity  of  projects  undertaken.  Major  projects  during the year  include
development of the LT-210C  linear copper  plating tool, the  development of the
high throughput fully automated  Spectrum,  and the Millennium platform with its
unique Capsule chamber. The HydrOzone cleaning process was also developed during
fiscal 1998.

The Company is committed to technology leadership in the semiconductor equipment
industry and expects to continue to fund research and  development  expenditures
with a multiyear  perspective.  Such funding has resulted in fluctuations in R&D
expenses  from  period  to  period  in  the  past.  The  Company   expects  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 changes
in the level of net sales.

Other Income (Expense).  Interest income on short-term investments declined from
$97,000  in fiscal  1997 to  $64,000  in 1998.  Interest  expense  increased  to
$559,000 in fiscal 1998  compared with $499,000 in fiscal 1997 due to additional
debt related to the building purchased for Rhetech. Other expense in fiscal 1998
also  includes a $483,000  write-off  of  capitalized  costs  associated  with a
canceled building project.

Provision for Income Taxes.  The  provisions  for income taxes for 1998 and 1997
were $2.5 million and $7.7  million,  respectively.  The effective tax rates for
1998 and 1997 were 34% and 38%, respectively.

YEARS ENDED SEPTEMBER 30, 1997 AND 1996

Net Sales.  Net sales consist of revenues  from sales of equipment,  spare parts
and service  contracts.  Net sales  increased  $19.7  million  (11.3%) to $194.0
million in fiscal  1997 from  $174.2  million in fiscal  1996.  Net sales of the
Company's  automated batch chemical  processing tools accounted for the majority
of the increase.

The Company  shipped a number of new tool models during 1997. The first 50 wafer
batch size  Magnum  with a newly  designed  work-in-process  (WIP)  station  was
delivered  during the fiscal year.  New  versions of Magnum also include  vision
systems to guide the robotics and an ozone injection system designed to decrease
operating expenses and enhance performance.  In addition to our own proprietary,
newly designed  model-based  temperature  controller which decreases cycle time,
the Express  furnace  received  new  robotics  and a fully  standard  mechanical
interface (SMIF) compatible WIP station.  The adoption of any of these tools for
future widespread  production use is dependent on a number of factors including,
but not limited to,  performance  and pricing  competition  from other equipment
manufacturers.

International  sales,  predominantly  to  customers  based in  Europe  and Asia,
accounted  for 35.9% of net sales in fiscal 1997  compared to 43.9% in the prior
year. The Company  anticipates that international sales will continue to account
for a significant  portion of net sales,  although the  percentage may fluctuate
from period to period.

Gross Profit.  Gross margin  decreased to 47.0% in fiscal 1997 from 48.6% in the
prior  year.  The  Company's  gross  margin has been,  and will  continue to be,
affected by a variety of factors,  including the costs to  manufacture,  service
and support new and enhanced  products,  as well as the mix and average  selling
prices of products sold. The Company  believes that the largest single factor in
the 1997 gross margin  decline is costs and  inefficiencies  related to recently
developed  products.  The Company  anticipates  that the cost to manufacture and
support the newer tool models will improve over time,  but that it will continue
to design and sell  additional  models of its existing tools and additional tool
types, which may somewhat offset the anticipated improvement in gross margins.

Selling, General and Administrative.  Selling, general and administrative (SG&A)
expenses  were $49.5  million or 25.5% of net sales in fiscal  1997  compared to
$40.9 million or 23.5% of net sales in the prior year. The $8.6 million increase
in SG&A expense in 1997 as compared to 1996  reflects  higher  costs  associated
with  increased  sales  volumes,  a broader  range of  equipment  to market  and
service,  and costs  associated  with  additional  sales and  service  personnel
supporting  the domestic and Asian  marketplaces.  A substantial  portion of the
Company's  SG&A expense is fixed in the  short-term.  While it is the  Company's
goal to reduce  SG&A  expense as a  percentage  of net sales  during  periods of
rising sales, a decline in net sales would cause the Company's selling,  general
and  administrative  expense to increase as a percentage  of net sales and could
have an adverse effect on the Company's business and results of operations.

Research and  Development.  Research and development  (R&D) expenses  consist of
salaries,  project materials,  laboratory costs, consulting fees and other costs
associated  with the Company's  research and development  efforts.  R&D expenses
were  $21.2  million  or 10.9% of net sales in  fiscal  1997  compared  to $19.5
million or 11.2% of net sales in the prior year.  Major projects during the year
include  development  of the Equinox  LT-210 linear copper  plating tool and the
completion of development of the 300mm Magnum 3000 and 300mm Express products.

Spending on R&D  increased  8.6% or $1.7  million in absolute  dollars  over the
prior year due to the number and complexity of projects undertaken.  The Company
is committed to technology  leadership in the semiconductor  equipment  industry
and expects to continue to fund  research and  development  expenditures  with a
multiyear perspective. Such funding has resulted in fluctuations in R&D expenses
from period to period in the past.  The Company  expects  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 changes in the level of
net sales.

Other Income (Expense).  Interest income on short-term investments declined from
$173,000 in fiscal 1996 to $97,000 in 1997.

Provision for Income Taxes.  The  provisions  for income taxes for 1997 and 1996
were $7.7 million and $8.9  million,  respectively.  The effective tax rates for
1997 and 1996 were 38% and 37%, respectively.

LIQUIDITY AND CAPITAL RESOURCES

The Company has  financed its growth  since its  February  1995  initial  public
offering  primarily  through  amounts raised in conjunction  with that offering,
operations  and  borrowings on its revolving  line of credit.  Cash generated by
operating  activities  in fiscal  1998 was $15.0  million  as  compared  to $8.5
million  generated by  operations  in fiscal  1997.  Substantial  reductions  in
accounts  receivable and inventory,  and increases in non-cash  expenses in 1998
offset the decline in accounts payable and net income. As of September 30, 1998,
the  Company  had $34.9  million of  accounts  receivable  and $36.4  million of
inventory, compared to $40.9 million of accounts receivable and $41.1 million of
inventory  at  September  30,  1997.  As  is  customary  in  the   semiconductor
manufacturing equipment industry,  products are generally built to fill specific
customer orders,  with typical order  fulfillment times ranging from four to six
weeks for  certain  products  to six months or more for more  complex  products.
Accordingly,  while the Company's finished goods inventory accounts for slightly
over 15% of total inventory, overall inventory levels tend to fluctuate with the
level and type of orders received. Currently, the tools with the longest average
cycle times are the  automated  batch  chemical  tools and the single  substrate
processor.  The Company  expects  future  receivable  and inventory  balances to
fluctuate with net sales.

Cash used in investing  activities  in fiscal 1998 was $12.5 million as compared
to $7.3  million in fiscal 1997.  Investing  activities  consisted  primarily of
acquisitions  of property and  equipment and  intangible  assets in fiscal 1998.
Property and  equipment  purchases  used cash of $9.8 million in fiscal 1998 and
$6.2 million in fiscal 1997.  Major  purchases of plant,  property and equipment
during the year  include the purchase of a building  site for Semy  Engineering,
the  purchase  of an  airplane,  purchase  of  land  adjacent  to the  Company's
Cambridge,  England  site,  the purchase of land and  building for Rhetech,  and
increases in lab  equipment  which  includes  the  purchase of a fixed-ion  beam
microscope. Investments in intangible assets used cash of $2.8 million in fiscal
1998  and  consisted  of $2.2  million  for  fab  supervisory  systems  software
development  costs which were  capitalized  once  technological  feasibility was
reached and $600,000 for patents and trademarks

Financing  activities  consisted  primarily  of $1.1  million  in new  financing
related to the purchase of the land and building to house Rhetech,  and $668,000
in new debt related to the land purchased in Cambridge, England.

As of September 30, 1998, the Company's principal sources of liquidity consisted
of  approximately  $7.3  million  of cash and cash  equivalents,  $22.0  million
available  under the Company's $25 million  revolving line of credit,  which was
renewed during the fourth  quarter of fiscal 1998.  The credit  facility is with
Seafirst Bank and bears interest at the bank's prime lending rate. The revolving
line of credit expires on April 1, 2001 and all principal  amounts owing are due
by April 1, 2004. The revolving line of credit agreement has various restrictive
covenants,  including a prohibition  against  pledging or in any way encumbering
current or operating assets during the term of the agreement and the maintenance
of various financial ratios.

The  Company  believes  that cash and cash  equivalents,  funds  generated  from
operations,  and funds available under its bank lines will be sufficient to meet
the  Company's  planned  capital  requirements  during  the next  twelve  months
including the spending of approximately $5.0 million to purchase property, plant
and  equipment.  The Company  believes  that  success in its  industry  requires
substantial  capital in order to maintain the  flexibility  to take advantage of
opportunities  as they arise.  The Company may, from time to time, as market and
business  conditions  warrant,  invest in or acquire  complementary  businesses,
products  or  technologies.  The Company  may effect  additional  equity or debt
financings to fund such activities or to fund greater than  anticipated  growth.
The sale of additional equity securities or the issuance of equity securities in
a business combination could result in dilution to the Company's shareholders.


LITIGATION

On July 17,  1998 an  agreement  to settle was  reached in a Montana  securities
class  action  (Case No.  DV-96-124A)  filed in the  Montana  Eleventh  Judicial
District Court. Flathead County, Kalispell, Montana. A Stipulation of Settlement
was presented to the District Court for its  preliminary  approval on August 25,
1998. In connection with the settlement,  the plaintiff class has also agreed to
dismiss  with  prejudice  their  alleged  claims  against  the  Company  and its
Chairman,  Raymon F.  Thompson.  Insurance  policies  will  fully fund the class
action  settlement.  The settlement was  conditioned  upon the District  Court's
approval and a judgment settling all claims became final on October 27, 1998.

In August,  1998, the Company filed suit against Novellus  Systems,  Inc. in the
United States District Court for the Northern  District of California  (Case No.
C-98-3089DLJ), alleging infringement of two of the Company's patents relating to
single substrate  processing tools used in electrochemical  deposition of copper
onto semiconductor  wafers.  The Company seeks damages for past infringement,  a
permanent  injunction,  treble  damages for willful  infringement,  pre-judgment
interest and  attorneys  fees.  Novellus  answered the  complaint by denying all
allegations,   counterclaiming  for  declaratory   judgment  of  invalidity  and
non-infringement. Discovery is commencing and no trial has been set.

A lawsuit brought by Mitsubishi Silicon America Corporation, successor to Siltec
Corporation  (Case No.  CV-98-826AA)  was  filed on July 7,  1998 in the  United
States  Federal  District  Court for the District of Oregon against the Company.
The lawsuit  alleges breach of warranties and seeks damages and attorney's  fees
in excess of $5 million.  The Company  believes the lawsuit to be without  merit
and  intends  to contest  the action  vigorously.  However,  given the  inherent
uncertainty  of litigation  and the early stages of  discovery,  there can be no
assurance  that the ultimate  outcome will be in the Company's  favor.  Further,
regardless  of the  outcome,  there can be no  assurance  that the  diversion of
management's attention, and any costs associated with the lawsuit, will not have
a material  adverse  effect of the  Company's  financial  condition,  results of
operations or cash flows.

The Company is subject to other legal  proceedings  and claims which have arisen
in the ordinary  course of its  business and have not been finally  adjudicated.
Although  there can be no  assurance  as to the  ultimate  disposition  of these
matters,  it is  the  opinion  of  the  Company's  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 the results of  operations,  financial  condition or cash flows of the
Company.



NEW ACCOUNTING PRONOUNCEMENTS

In June 1997,  Statement of Financial  Accounting  Standards No. 130 (SFAS 130),
"Comprehensive Income," was issued. SFAS 130 establishes standards for reporting
and  display  of  comprehensive  income  and  its  components  in a full  set of
general-purpose  financial  statements.  SFAS 130 is effective  for fiscal years
beginning  after December 15, 1997, and requires  restatement of earlier periods
presented.  The Company does not believe the  application  of this standard will
have a material effect on the presentation of its financial statements.

In June 1997,  Statement of Financial  Accounting  Standards No. 131 (SFAS 131),
"Disclosures  about  Segments of an  Enterprise  and Related  Information,"  was
issued.  SFAS 131  establishes  standards  for the way that a public  enterprise
reports information about operating segments in its financial  statements.  SFAS
131 is  effective  for fiscal years  beginning  after  December  15,  1997,  and
requires  restatement  of earlier  periods  presented.  The  Company has not yet
determined the effect this standard will have on the form of presentation of its
financial statements.

In June 1998,  Statement of Financial  Accounting  Standards No. 133 (SFAS 133),
"Accounting for Derivative  Instruments and Hedging Activities" was issued. SFAS
133 establishes  accounting and reporting standards for derivative  instruments,
including   certain   derivative   instruments   embedded  in  other  contracts,
(collectively  referred  to as  derivatives)  and  for  hedging  activities.  It
requires  that  an  entity   recognize  all  derivatives  as  either  assets  or
liabilities in the statement of financial position and measure those instruments
at fair value.  SFAS 133 is  effective  for all fiscal  quarters of fiscal years
beginning  after  June 15,  1999,  however,  earlier  application  of all of the
provisions  of this  Statement is  encouraged  as of the beginning of any fiscal
quarter.  The Company  has not yet  determined  the effect the  adoption of this
standard will have on the financial condition,  results of operations,  and cash
flows of the Company.

In March  1998,  the  AICPA  issued  Statement  of  Position  98-1  (SOP  98-1),
"Accounting  for the  Costs of  Computer  Software  Developed  or  Obtained  for
Internal  Use".  SOP 98-1  requires  companies to  capitalize  certain  costs of
computer  software  developed or obtained for internal use. The Company does not
believe the  application  of this  standard  will have a material  effect on the
results of operations, financial condition or cash flows of the Company.

YEAR 2000

The Company's Year 2000 (Y2K)  readiness  project is well underway.  The project
consists of six major phases:

     1.  Planning (completed July 1998)
     2.  Assessment (completed October 1998)
     3.  Testing  (in  progress,  scheduled  to  be  completed  March  1999)
     4.  Repairs/Reinstallations (in progress, scheduled to be completed
         March 1999)
     5.  Retesting  (in  progress,  scheduled  to be  completed  June  1999)
     6.  Contingency plans (June 1999 - October 1999).

The planning phase has been  completed and consisted of assigning  resources and
timelines to tasks with the projects  scheduled to be complete by June 1999. The
plan is updated as new information is collected.  The assessment  phase has also
been  completed  and  consisted of taking an inventory of products,  Information
Technology (IT) systems, non-IT systems, and customers/suppliers that need to be
tested and certified as to Y2K readiness.

      Products.  Other than some spare  parts,  many of the  Company's  products
      include  software both  internally  developed and purchased  from vendors.
      Some equipment also includes numerous  sub-systems with embedded software.
      Much of this software is customized to meet customers' specific needs.

      IT System.  These systems include the Company's business and manufacturing
      systems,  computer-aided  design, e-mail and others. The majority of these
      systems were developed by software vendors, are not highly customized, and
      are either  under a software  maintenance  agreement  which  requires  the
      vendor to make the systems Y2K ready or have been updated to Y2K compliant
      revisions.  Many of the systems have been certified by the manufacturer to
      be Y2K ready.

      Non-IT  Systems.  These systems include but are not limited to controllers
      on machinery used in production, the heating and air conditioning systems,
      communication  systems,  and electronic  security devices.  We are working
      closely  with  suppliers of such  systems to ensure  their  products  work
      properly.

      Customers/Suppliers.  The  Company  is  working  with  its  customers  and
      suppliers  to  determine  Y2K  readiness to insure that goods and services
      will be delivered  timely and that transaction  processing is proper.  The
      Company does have electronic data interface (EDI)  transactions  with some
      customers;  however,  these EDI transactions are provided by third parties
      who have certified  their Y2K  readiness.  The Company is working with key
      vendors who supply Y2K sensitive products.

The assessment  phase consisted of identifying  which systems have potential Y2K
problems  and the possible  affects of those  problems.  The problems  were then
prioritized  and those with the  largest  potential  impact on  operations  were
scheduled for early testing.

The  Company is  currently  in the  testing  phase with its IT  systems,  non-IT
systems,  and its customers and suppliers.  The Company is using test procedures
developed  by  Sematech,   a  consortium  of  semiconductor   and  semiconductor
manufactures  for its IT systems.  This work is  performed  by the  Company's IT
personnel. The non-IT systems and customers and suppliers testing is either done
jointly   or   completely   by  the   supplier.   As   testing   is   completed,
repairs/reinstallations, and retesting will occur.

Some of the Company's  equipment and the fab  supervisory  systems that it sells
contain  hardware and software  components that are subject to the Y2K problems.
The Company is currently in the testing,  repairs/reinstallation  and  retesting
phases with its  products.  All  products  shipped  since April 11, 1998 are Y2K
ready  and  most of the  products  shipped  prior  to that  date  have  upgrades
available or installed. The installed upgrades have been retested.

The Company will formulate  contingency plans for those systems not Y2K ready by
June of 1999. It is not anticipated the contingency plans will be needed for the
mission  critical  IT and  non-IT  systems,  nor does the  Company  expect  that
contingency plans will be needed for its internally developed software products.
It is not  known  at  this  point  if  contingency  plans  will  be  needed  for
customers/suppliers and for outsourced components.

The cost  incurred  thus far with regard to Y2K consists  mainly of IT personnel
payroll  expenses  for  IT,  non-IT  and  customers/suppliers  issues.  Software
engineering  payroll cost has been the primary  expense  related to Y2K products
related issues.  The Company does not track Y2K costs as a separate cost.  Total
estimated costs are not anticipated to exceed $250,000.

Due to the inherent  uncertainty  surrounding the Y2K issue,  the Company cannot
anticipate  all of the possible  problems that may occur.  Adverse  consequences
from Y2K issues may  materially  affect the Company's  warranty  liability,  the
value of its  capitalized  software and the carrying  value of its  inventory as
well as the Company's financial condition, results of operations and cash flows.
The Y2K problems could also subject the Company to litigation  which may include
consequential damages.

Item 7a. Quantitative and Qualitative Disclosures About Market Risk

Market Risks

Market risks relating to the Company's  operations result primarily from changes
in interest rates and changes in foreign currency exchange rates.

Interest Rate Sensitivity

The Company as of September 30, 1998 has approximately $4.4 million in long term
debt and approximately $3.0 million in short-term debt. The Company's  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 its  fixed  rate
long-term debt. The Company believes that a 10% change in the long term interest
rate would not have a material  effect on the Company's  financial  condition or
result of operations. The Company's short-term debt bears interest at a variable
rate.  Based on the $3.0 million of short-term debt  outstanding as of September
30, 1998, a 10% change in interest  rates would affect on the Company's  results
of operations.

Foreign Currency Exchange Rate Sensitivity

The Company  conducts its Japanese  business in Japanese yen. The Company enters
into forward foreign exchange  contracts  primarily as an economic hedge against
the  short-term  impact  of  foreign  currency   fluctuations  of  its  Japanese
subsidiary.  These contracts are denominated in the Japanese yen. The maturities
of the forward foreign  exchange  contracts are generally  short-term in nature.
The  Company's  forward  exchange  contracts  are  marked  to  market as are the
underlying  transactions  being  hedged.  The impact of  movements  in  currency
exchange  rates on forward  foreign  exchange  contracts  generally  offsets the
related impact on anticipated  transactions  denominated in yen. The effect of a
ten  percent  change in  foreign  exchange  rates on the  Japanese  Yen  forward
exchange contracts and the underlying  transactions would not be material to the
Company's  financial  condition,  results of  operations  or the cash flows.  In
general, net foreign currency gains and losses have not been material.

Item 8.  Financial Statements and Supplementary Data

The  financial  statements  and  supplementary data listed in Item 14(a)(1)  and
14(a)(2) of this Form 10-K are incorporated into this Item 8 of Part II of this
Form 10-K.

<TABLE>
<CAPTION>

Unaudited Quarterly Consolidated Financial Data
Amounts In Thousands, Except Per Share Data
                                                                         Quarter
<S>                                             <C>            <C>            <C>             <C>

                                                      First         Second          Third          Fourth
1998
Net sales                                       $    47,002    $    45,241    $    46,572     $    41,686
Gross profit                                         23,904         23,842         24,109          19,124
Net income (loss)                                     2,604          1,415          1,489            (703)
Basic and diluted earnings (loss) per share            0.19           0.10           0.11           (0.05)

1997
Net sales                                       $    42,508    $    45,227    $    49,480     $    56,737
Gross profit                                         19,083         20,907         23,161          27,939
Net income                                            2,206          2,626          3,270           4,421
Basic and diluted earnings per share                   0.16           0.19           0.24            0.32
</TABLE>


The fourth  quarter  fiscal year 1998  results  were  significantly  impacted by
pretax charges  totaling $2.8 million,  or $0.13 per diluted share relating to a
provision  for the loss on an  international  customer  receivable,  a  customer
return,  costs associated with a canceled building project, and severance costs.
The negative effect of these charges was partially  offset by a reduction of the
Company's  effective  income tax rate that increased net income by $263,000,  or
$0.02 per diluted share.

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

None.



<PAGE>



                                                     PART III


Item 10. Executive Officers and Directors

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

                Name           Age                   Position
   Raymon F. Thompson           57   Chairman of the Board
   Fabio Gualandris             39   President and Chief Executive Officer
   Timothy C. Dodkin            49   Senior Vice President
                                     Managing Director, Semitool Europe, Ltd.
   William A. Freeman           55   Senior Vice President, Finance and
                                     Chief Financial Officer
   Thomas Sulzbacher            30   Vice President, Sales
   Gregory L. Perkins           55   Vice President, Operations
   Larry A. Viano               44   Treasurer, Principal Accounting Officer
                                     and Controller
   Howard E. Bateman (1)        64   Director
   Richard A. Dasen (2)         56   Director
   Daniel J. Eigeman (2)        64   Director
   John F. Osborne (1)          54   Director
   Calvin S. Robinson (1)(2)    78   Director and Secretary
-----------

(1)      Member of the Compensation and Stock Option Committee.
(2)      Member of the Audit Committee.

The  following  sets forth the  background  of each of the  Company's  executive
officers and directors,  including the principal occupation of those individuals
for the past five years:

Raymon F. Thompson  founded the Company in 1979 and has served as Chairman since
the Company's  inception.  Mr.  Thompson  previously  served as Chief  Executive
Officer and President.  In 1979, Mr. Thompson designed,  patented and introduced
the first on-axis rinser/dryer for the semiconductor industry.

Fabio  Gualandris  has served as the  Company's  President  and Chief  Executive
Officer since joining the Company in 1998. Since 1984, Mr. Gualandris has served
in various  positions  with SGS  Thompson  and  STMicroelectronics,  the world's
leading supplier of analog integrated  circuits and one of the top ten worldwide
semiconductor  suppliers.  Most recently,  from 1996 to 1998, he was Director of
the Automotive Business Unit of the Dedicated Products Group. From 1991 to 1996,
he served as Director of Operations for a  submicron  semiconductor  fabrication
facility.  Mr.  Gualandris  has a doctorate  in physics  from Milan  University,
Milan,  Italy, and has authored  several papers on semiconductor  technology and
research and development and production management. He also holds four patents.

Timothy  C.  Dodkin  joined  the  Company  in 1985 and  served as the  Company's
European  Sales Manager from 1985 to 1986.  Since 1986, Mr. Dodkin has served as
Managing  Director of Semitool  Europe,  Ltd. Prior to joining the Company,  Mr.
Dodkin worked at Cambridge Instruments,  a semiconductor equipment manufacturer,
for ten years in national and international sales.

William A.  Freeman  joined the Company in 1998,  and is Senior Vice  President,
Finance  and Chief  Financial  Officer.  Prior to joining  the Company and since
1995, Mr. Freeman was an independent  management  consultant.  Prior to 1995, he
worked  for 22 years at Zurn  Industries,  Inc.,  a  diversified  manufacturing,
engineering,  and construction  company. At Zurn, Mr. Freeman served in division
management  positions  before  being  appointed  Senior  Vice  President - Chief
Financial Officer in 1986, and President in 1991. Mr. Freeman also serves on the
Board of Directors of NPC International, Inc., a Nasdaq-listed company.

Thomas  Sulzbacher  has served as the  Company's  Vice  President of Sales since
February  1997.  Mr.  Sulzbacher  has been with  Semitool  for nine  years.  Mr.
Sulzbacher's  experience in the  semiconductor  industry was  developed  through
Service and Sales positions in Semitool's Bad Reichenhall,  Germany office. Upon
relocating to the United States in 1994, Mr. Sulzbacher managed the Magnum sales
force prior to his current  position.  Mr.  Sulzbacher  is Raymon F.  Thompson's
son-in-law.

Gregory L. Perkins joined the Company in 1990 as Vice  President,  Manufacturing
and, since 1994, has served as the Company's Vice President,  Operations.  Prior
to joining the Company,  Mr.  Perkins  served as General  Manager for  Modulair,
Inc., a manufacturer of clean rooms, from 1987 to 1990.

Larry A. Viano joined the Company in 1985 and serves as the Company's treasurer,
principal  accounting  officer and controller.  Mr. Viano serves on the Board of
Directors of Semitool  Europe,  Ltd. Mr. Viano, a Certified  Public  Accountant,
also serves on the Accounting Advisory Board of the University of Montana.

Howard E. Bateman has served on the Company's Board of Directors since 1990. Mr.
Bateman formerly owned and operated  Entech, a Pennsylvania  company that was an
independent sales representative for the Company's products from 1979 to 1996.

Richard A. Dasen has served on the Company's Board of Directors since 1984. From
1974 to 1992, Mr. Dasen owned and managed Evergreen Bancorporation, a multi-bank
holding company. Since 1992, Mr. Dasen has been an independent businessman.

Daniel J. Eigeman has served on the  Company's  Board of  Directors  since 1985.
From 1971 to 1993, Mr. Eigeman was President of Eigeman,  Hanson & Co., P.C., an
accounting  firm, and since 1993 has been a shareholder  of  Junkermier,  Clark,
Campanella,  Stevens, P.C., CPAs. Mr. Eigeman served as President of the Montana
Society of Certified Public Accountants in 1993 and currently serves as director
of CPA Mutual Insurance of America, Inc.

John F. Osborne has served on the Company's  Board of Directors  since July 1997
and has thirty years of experience in the semiconductor  industry,  including 20
years  in  microchip  manufacturing  and  ten  years  in the  capital  equipment
industry.  During  the  past ten  years,  Mr.  Osborne  held  senior  management
positions  at Lam  Research  in  Fremont,  CA.  These  positions  included  Vice
President of Lam's Worldwide Customer Support.  Mr. Osborne holds seven patents,
has numerous technical and business publications, and has served on the Board of
Directors of four companies.

Calvin S.  Robinson has served as a director of the Company since 1982 and since
February of 1996 has served as the Company's Secretary. Mr. Robinson has been of
counsel to Crowley, Haughey, Hanson, Toole & Dietrich, P.L.L.P. since 1989. This
firm has provided legal services to the Company since 1979. Mr. Robinson is also
a director of Winter Sports, Inc.

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

The information  concerning  compliance with Section 16(a) of the Securities and
Exchange Act of 1934, as amended,  required  under this item is contained in the
Company's Proxy Statement to be filed in connection with its 1998 Annual Meeting
of Shareholders under the caption "Section 16(a) Beneficial  Ownership Reporting
Compliance" and is incorporated herein by reference.

Item 11.  Executive Compensation

The  information  concerning  compensation  of executive  officers and directors
required  under this item is contained in the  Company's  Proxy  Statement to be
filed in  connection  with its 1999  Annual  Meeting of  Shareholders  under the
caption "Executive Compensation," and is incorporated herein by reference.

Item 12.  Security Ownership of Certain Beneficial Owners and Management

The information  concerning certain principal holders of securities and security
ownership  of  executive  officers  and  directors  required  under this item is
contained in the Company's  Proxy  Statement to be filed in connection  with its
1999 Annual Meeting of  Shareholders  under the caption  "Security  Ownership of
Certain  Beneficial  Owners  and  Management"  and  is  incorporated  herein  by
reference.

Item 13.  Certain Relationships and Related Transactions

The  information  concerning  certain  relationships  and  related  transactions
required  under this item is contained in the  Company's  Proxy  Statement to be
filed in  connection  with its 1999  Annual  Meeting of  Shareholders  under the
caption "Certain Transactions," and is incorporated herein by reference.


<PAGE>



                                     PART IV

Item 14.  Exhibits, Financial Statement Schedules and Reports on Form 8-K

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

1.    Financial Statements:

         Report of Independent Accountants

         Consolidated Balance Sheets at September 30, 1998 and
                  September 30, 1997

         Consolidated Statements of Income for the Years Ended
                  September 30, 1998, September 30, 1997, and
                  September 30, 1996

         Consolidated  Statements  of  Changes in  Shareholders'  Equity for the
                  Years  Ended  September  30,  1998,  September  30,  1997  and
                  September 30, 1996

         Consolidated Statements of Cash Flows for the Years Ended September 30,
                  1998, September 30, 1997 and September 30, 1996

         Notes to Consolidated Financial Statements

2.   Financial Statement Schedules:

         Report of Independent Accountants on 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     Restated Articles of Incorporation of the Company (1)
3.2     By-laws of the Company dated August 1, 1979 and related amendments to
        these By-laws (1)
3.3     Amended Bylaws of Semitool, Inc. (4)
3.4     Amended Bylaws of Semitool, Inc. (5)
3.5     Amended Bylaws of Semitool, Inc. (6)
3.6     Amended Bylaws of Semitool, Inc. (7)
10.3    Form of Semitool, Inc. 1994 Stock Option Plan (1)
10.5    Aircraft Lease Agreement, dated September 9, 1994, between the Company
        and Mr. Thompson (1)
10.6    Aircraft Lease Agreement, dated November 1, 1994, between the Company
        and Mr. Thompson (1)
10.12   Agreement  between the Company and the Semitool European Companies (1)
10.13   Aircraft Lease Agreement, dated April 1, 1996, between the Company  and
        Mr. Thompson (2)
10.16   Business Loan  Agreement,  dated  September 30, 1997,  between the
        Company and the Bank of America NT & SA doing business as Seafirst 
        Bank (5)
10.17   Promissory Note, dated September 29, 1997,  between the Company and the
        Bank of America  National Trust and Savings  Association  doing business
        as Seafirst Bank (5)
10.18   Loan Modification Agreement, dated September 29, 1997 between the 
        Company and The Bank of America National Trust And Savings Association
        doing business as Seafirst Bank (5)
10.19   Loan Modification Agreement, dated October 2, 1997 between the Company 
        and the Bank of America National Trust And Savings Association doing 
        business as Seafirst Bank (5)
10.20   Loan Modification Agreement, dated October 2, 1997 between the Company 
        and the Bank of America National Trust And Savings Association doing 
        business as Seafirst Bank (5)
10.21   Promissory Note, dated March 26, 1998 between Rhetech, Inc. and
        CoreStates Bank, N.A. (6)
10.22   Mortgage, Assignment of Leases and Security Agreement, dated  March 26,
        1998 between Rhetech, Inc. and CoreStates Bank, N.A. (6)
10.23   Promissory Note, dated March 26, 1998 between Rhetech, Inc. and
        CoreStates Bank, N.A. (6)
10.24   Mortgage, Assignment of Leases and Security Agreement, dated  March 26,
        1998 between Rhetech, Inc. and CoreStates Bank, N.A. (6)
10.25   Employment Agreement between William A. Freeman and Semitool, Inc. dated
        February 20, 1998. (6)
10.26   Employment Agreement between Fabio Gualandris and Semitool, Inc. dated
        April 21, 1998. (8)
10.27   Business Loan  Agreement,  dated  September 30, 1998,  between the
        Company and the Bank of America NT & SA doing business as Seafirst
        Bank (8)
10.28   Promissory Note, dated September 30, 1998, between the Company and the
        Bank of America National Trust and Savings  Association  doing  business
        as Seafirst Bank (8)
21.1    Subsidiaries of Registrant (8)
27      Financial data schedule (8)
99.1    Amended and Restated Semitool, Inc. 1994 Stock Option Plan (3)
99.2    Amended and Restated Semitool, Inc. 1994 Stock Option Plan (6)


(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 exhibits to the
Company's Annual Report on Form 10-K, date of report September 30, 1996.

(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, 1997.

(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, 1997.

(5) Incorporated herein by reference to the identically numbered exhibits to the
Company's Annual Report on Form 10-K, date of report September 30, 1997.

(6) Incorporated herein by reference to the identically  numbered exhibit to the
Company's Quarterly Report on form 10-Q, date of report March 31, 1998.

(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, 1998.

(8) Filed herewith.

(b)   Reports on Form 8-K. During the fourth quarter of fiscal 1998,  there were
      no Form 8-K's filed by the Company.

(c)   Exhibits. The Exhibits listed in Item 14(a)(3)(a) hereof are filed as part
      of this Annual Report on Form 10-K or incorporated herein by reference.

(d)   Financial Statement Schedules. See Item 14(a)(2) above.






<PAGE>


                                   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 17, 1998              SEMITOOL, INC.





                                       By: /s/Fabio Gualandris
                                           ---------------------------------
                                           Fabio Gualandris
                                           President and Chief Executive Officer




<PAGE>


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/Fabio Gualandris
------------------------                                            
Fabio Gualandris             President and Chief Executive     December 17, 1998
                             Officer
                             (Principal Executive Officer)




/s/William A. Freeman
------------------------
William A. Freeman           Senior Vice President - Finance,  December 17, 1998
                             and Chief Financial Officer




/s/Larry A. Viano            
------------------------
Larry A. Viano               Controller, Treasurer and         December 17, 1998
                             Chief Accounting Officer




/s/Raymon F. Thompson        
------------------------
Raymon F. Thompson           Chairman of the Board             December 17, 1998




/s/Howard E. Bateman
------------------------
Howard E. Bateman                       Director               December 17, 1998




/s/Richard A. Dasen
------------------------
Richard A. Dasen                        Director               December 17, 1998




/s/Timothy C. Dodkin         
------------------------
Timothy C. Dodkin            Director and                      December 17, 1998
                             Senior Vice President




/s/Daniel J. Eigman
------------------------
Daniel J. Eigeman                       Director               December 17, 1998




/s/John F. Osborne
------------------------
John F. Osborne                         Director               December 17, 1998




/s/Calvin S. Robinson
------------------------
Calvin S. Robinson               Director and Secretary        December 17, 1998

<PAGE>

                        REPORT OF INDEPENDENT ACCOUNTANTS



Board of Directors and Shareholders
Semitool, Inc.


In our opinion,  the  accompanying  consolidated  balance sheets and the related
consolidated  statements of income,  changes in shareholders' equity and of cash
flows  present  fairly,  in all material  respects,  the  financial  position of
Semitool,  Inc. and subsidiaries at September 30, 1998 and 1997, and the results
of their  operations  and their  cash  flows for each of the three  years in the
period  ended  September  30,  1998,  in  conformity  with  generally   accepted
accounting principles.  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 of these
statements  in accordance  with  generally  accepted  auditing  standards  which
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 the opinion expressed above.


                                           PricewaterhouseCoopers LLP


Boise, Idaho
October 29, 1998


<PAGE>

<TABLE>
<CAPTION>

                                 SEMITOOL, INC.
                           CONSOLIDATED BALANCE SHEETS
                           September 30, 1998 and 1997
                             (Amounts in Thousands)
<S>                                                                        <C>             <C>

                                     ASSETS
                                                                                1998           1997
                                                                           -----------     -----------
Current assets:
   Cash and cash equivalents                                               $     7,287     $     5,060
   Trade receivables, less allowance for doubtful accounts
      of $1,542 and $224                                                        34,855          40,896
   Inventories                                                                  36,435          41,124
   Prepaid expenses and other current assets                                     2,052           1,771
   Deferred income taxes                                                         6,379           5,902
                                                                           -----------     -----------
         Total current assets                                                   87,008          94,753
Property, plant and equipment, net                                              36,302          33,685
Intangibles, less accumulated amortization of $2,399 and $1,460                  3,965           2,142
Other assets, net                                                                  715           1,145
                                                                           -----------     -----------
         Total assets                                                      $   127,990     $   131,725
                                                                           ===========     ===========

                      LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
   Note payable to bank                                                    $     3,000     $     4,000
   Accounts payable                                                              8,987          16,735
   Accrued commissions                                                             935           1,850
   Accrued warranty and installation                                            11,970           9,820
   Accrued payroll and related benefits                                          4,240           6,164
   Other accrued liabilities                                                     2,414           1,029
   Customer advances                                                             2,380           1,722
   Income taxes payable                                                             --           2,986
   Long-term debt, current                                                         596             393
   Payable to shareholders                                                          78               7
                                                                           -----------     -----------
         Total current liabilities                                              34,600          44,706
Long-term debt, noncurrent                                                       3,836           3,364
Deferred income taxes                                                            2,860           2,075
                                                                           -----------     -----------
         Total liabilities                                                      41,296          50,145
                                                                           -----------     -----------

Commitments and contingencies (Note 9)

Shareholders' equity:
   Preferred stock, no par value, 5,000 shares authorized, no
      shares issued and outstanding                                                 --              --
   Common stock, no par value, 30,000 shares authorized,
      13,792 and 13,756 shares issued and outstanding
      in 1998 and 1997                                                          41,248          40,590
   Retained earnings                                                            45,754          40,949
   Foreign currency translation adjustment                                        (308)             41
                                                                           -----------     -----------
         Total shareholders' equity                                             86,694          81,580
                                                                           -----------     -----------
         Total liabilities and shareholders' equity                        $   127,990     $   131,725
                                                                           ===========     ===========

The  accompanying  notes  are an  integral  part of the  consolidated  financial statements.
</TABLE>


<PAGE>

<TABLE>
<CAPTION>

                                 SEMITOOL, INC.
                        CONSOLIDATED STATEMENTS OF INCOME
              For the years ended September 30, 1998, 1997 and 1996
              (Amounts in Thousands, Except for Per Share Amounts)
<S>                                               <C>             <C>            <C>

                                                     1998            1997           1996
                                                   ----------     ----------     ----------

Net sales                                          $  180,501     $  193,952     $  174,204
Cost of sales                                          89,522        102,862         89,573
                                                   ----------     ----------     ----------
Gross profit                                           90,979         91,090         84,631
                                                   ----------     ----------     ----------

Operating expenses:
    Selling, general and administrative                58,356         49,479         40,946
    Research and development                           24,536         21,179         19,503
                                                   ----------     ----------     ----------
       Total operating expenses                        82,892         70,658         60,449
                                                   ----------     ----------     ----------

Income from operations                                  8,087         20,432         24,182
                                                   ----------     ----------     ----------

Other income (expense):
    Interest income                                        64             97            173
    Interest expense                                     (559)          (499)          (540)
    Other, net                                           (312)           168            211
                                                   ----------     ----------     ----------
                                                         (807)          (234)          (156)
                                                   ----------     ----------     ----------
Income before income taxes                              7,280         20,198         24,026
Provision for income taxes                              2,475          7,675          8,890
                                                   ----------     ----------     ----------

Net income                                         $    4,805     $   12,523     $   15,136
                                                   ==========     ==========     ==========

Earnings per share:
Basic                                              $     0.35     $     0.92     $     1.11
Diluted                                            $     0.35     $     0.91     $     1.09

Average common shares:
Basic                                                  13,783         13,676         13,651
Diluted                                                13,904         13,833         13,858


The  accompanying  notes  are an  integral  part of the  consolidated  financial statements.
</TABLE>


<PAGE>

<TABLE>
<CAPTION>

                                 SEMITOOL, INC.
               CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS'
          EQUITY For the years ended September 30, 1998, 1997 and 1996
                             (Amounts in Thousands)
<S>                                                            <C>         <C>          <C>          <C>           <C>

                                                                    Common Stock
                                                               ---------------------
                                                                  Number                                 Foreign
                                                                    of                    Retained      Currency
                                                                  Shares      Amount      Earnings     Translation     Total
                                                               --------------------------------------------------------------
Balance October 1, 1995                                          13,650    $  39,523    $  13,290           --     $   52,813
     Net income                                                      --           --       15,136           --         15,136
     Exercise of stock options                                        6           54           --           --             54
                                                               --------    ---------    ---------    ---------     ----------

Balance September 30, 1996                                       13,656       39,577       28,426           --         68,003
     Net income                                                      --           --       12,523           --         12,523
     Exercise of stock options                                      100        1,013           --           --          1,013
     Translation adjustment                                          --           --           --           41             41
                                                               --------    ---------    ---------    ---------     ----------

Balance September 30, 1997                                       13,756       40,590       40,949           41         81,580
     Net income                                                      --           --        4,805           --          4,805
     Exercise of stock options                                       36          342           --           --            342
     Income tax effect of nonqualified stock
         options                                                     --          316           --           --            316
     Translation adjustment                                          --           --           --         (349)          (349)
                                                               --------    ---------    ---------    ---------     ----------

Balance September 30, 1998                                       13,792    $  41,248    $  45,754         (308)    $   86,694
                                                               ========    =========    =========    =========     ==========


The  accompanying  notes  are an  integral  part of the  consolidated  financial statements.
</TABLE>



<PAGE>

<TABLE>
<CAPTION>

                                 SEMITOOL, INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
              For the years ended September 30, 1998, 1997 and 1996
                             (Amounts in Thousands)
<S>                                                                <C>          <C>           <C>

                                                                      1998         1997         1996
                                                                   ---------    ---------    ---------

Operating activities:
  Net income                                                       $   4,805    $  12,523    $  15,136
  Adjustments to reconcile net income to net cash
     provided by (used in) operating activities:
        Loss on disposition of assets                                    623            6           59
        Depreciation and amortization                                 10,423        6,077        4,002
        Provisions for losses on accounts receivable                   1,318           (9)          20
        Deferred income tax provision (benefit)                          308         (719)      (1,093)
        Change in:
          Trade receivables, net                                       3,993       (1,653)     (10,720)
          Inventories                                                  2,593      (10,649)     (18,837)
          Prepaid expenses and other current assets                     (282)         552         (989)
          Shareholders receivable/payable                                 71          (26)         (44)
          Other assets, net                                              113         (262)         134
          Accounts payable                                            (7,234)        (442)      11,115
          Accrued commissions                                           (915)          99         (341)
          Accrued warranty and installation                            2,150        1,823        3,746
          Accrued payroll and related benefits                        (1,924)       1,132       (4,149)
          Other accrued liabilities                                      972          435       (1,427)
          Customer advances                                              660       (2,035)         808
          Income taxes payable                                        (2,670)       1,652       (1,648)
                                                                   ---------    ---------    ---------
             Net cash provided by (used in) operating
             activities                                               15,004        8,504       (4,228)
                                                                   ---------    ---------    ---------
Investing activities:
  Proceeds from the sale of marketable securities                         --           --        4,010
  Purchases of property, plant and equipment                          (9,759)      (6,174)     (10,194)
  Increase in intangible assets                                       (2,826)      (1,122)        (796)
  Increase in covenant not to compete                                     --           --       (1,200)
  Proceeds from sale of equipment                                         63           42          397
                                                                   ---------    ---------    ---------
             Net cash used in investing activities                   (12,522)      (7,254)      (7,783)
                                                                   ---------    ---------    ---------

Financing activities:
  Proceeds from exercise of stock options                                342        1,013           54
  Borrowings under line of credit                                     75,440       61,835       49,170
  Repayments under line of credit                                    (76,440)     (61,835)     (45,170)
  Proceeds from long-term debt                                         1,100          131           --
  Repayments of long-term debt                                          (410)        (385)        (924)
  Repayments of short-term debt                                         (255)          --           --
                                                                   ---------    ---------    ---------
             Net cash provided by (used in) financing activities        (223)         759        3,130
                                                                   ---------    ---------    ---------

Effect of exchange rate changes on cash and cash equivalents             (32)          (7)          --
                                                                   ---------    ---------    ---------
Net increase (decrease) in cash and cash equivalents                   2,227        2,002       (8,881)
Cash and cash equivalents at beginning of year                         5,060        3,058       11,939
                                                                   ---------    ---------    ---------
Cash and cash equivalents at end of year                           $   7,287    $   5,060    $   3,058
                                                                   =========    =========    =========
</TABLE>


<PAGE>

<TABLE>
<CAPTION>

                                 SEMITOOL, INC.
                CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
              For the years ended September 30, 1998, 1997 and 1996
                             (Amounts in Thousands)

<S>                                                                          <C>          <C>           <C>

                                                                                1998         1997         1996
                                                                             ---------    ---------     --------
Supplemental  disclosures  of cash flow  information:  
 Cash paid during the year for:
     Interest                                                                $     569    $     497     $    582
     Income taxes                                                                5,263        6,748       10,699

Supplemental disclosures of non-cash financing and
 investing activity:
     Inventory transferred to equipment                                      $   2,033    $   6,434     $  1,191
     Assets acquired by incurring debt                                             668           --           --
     Income tax effect of nonqualified stock options                               316           --           --


The  accompanying  notes  are an  integral  part of the  consolidated  financial statements.
</TABLE>



<PAGE>


                                 SEMITOOL, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1.    Company Organization and Summary of Significant Accounting Policies:

      Semitool,   Inc.   (Semitool)  and  subsidiaries  (the  Company)  designs,
      manufactures,  markets and services  equipment used in the  manufacture of
      semiconductors  as well as  other  products  requiring  similar  processes
      including thin film heads,  compact disc masters,  flat panel displays and
      hard disk media.  Semitool has various subsidiaries which operate as sales
      and service offices in their respective geographic areas.

      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  Europe  Ltd.,  (United
         Kingdom);   Semitool   Halbleitertechnik   Vertriebs  GmbH,  (Germany);
         Semitool France SARL;  Semitool Italia SRL; Semitool Japan KK; Semitool
         Korea, Inc.; Semitool (Asia) Pte Ltd., (Singapore); Semitool FSC, Inc.;
         Semy Engineering, Inc. (Semy) and Rhetech, Inc.
         (Rhetech).


         All significant  intercompany  accounts and transactions are eliminated
         in consolidation.

         Estimates

         The  preparation of financial  statements in conformity  with generally
         accepted  accounting  principles  requires management to make estimates
         and  assumptions  that  affect  the  reported  amounts  of  assets  and
         liabilities and disclosure of contingent  assets and liabilities at the
         dates of the financial  statements and the reported amounts of revenues
         and expenses during the reporting  periods.  Actual results  inevitably
         will differ from those estimates,  and such differences may be material
         to the consolidated financial statements.

         Cash Equivalents

         The Company considers cash equivalents to consist of short-term, highly
         liquid  investments  with  remaining  maturities at time of purchase of
         three  months  or  less.   Substantially  all  of  its  cash  and  cash
         equivalents  are held by major  financial  institutions.  At times such
         balances may be in excess of the federal insurance limit.

         Inventories

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

         Property, Plant and Equipment

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

            Buildings and improvements                               10-40 years
            Machinery and equipment                                    2-5 years
            Furniture, fixtures and leasehold improvements             3-7 years
            Vehicles and aircraft                                     5-10 years

         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 currently.  When items are disposed of, the related
         costs and  accumulated  depreciation  are removed from the accounts and
         any gain or loss is recognized in operations.

         Intangible Assets

         Intangible assets include,  among other things,  the cost of internally
         developed software and legal costs associated with obtaining patents.

         Costs  incurred  for  internally   developed   software   products  and
         enhancements  after  technological  feasibility and marketability  have
         been established for the related product are capitalized and are stated
         at the lower of cost or net realizable value.  Amortization is provided
         based on the  greater of the amount  computed  using (a) the ratio that
         current gross  revenues for a product bears to the total of current and
         anticipated  future  gross  revenues  for  that  product,  or  (b)  the
         straight-line  method over the remaining  economic life of the product,
         estimated  at  three  years.   Net  capitalized   software  costs  were
         $2,409,000  and  $1,019,000  as of  September  30,  1998  and  1997 and
         amortization of such costs was $877,000,  $491,000 and $365,000 for the
         years ended September 30, 1998, 1997 and 1996, respectively.

         The cost of  patents is  amortized  on a  straight-line  basis over the
         lesser of 17 years or the estimated product life.

         It is reasonably  possible that  estimates of future gross revenues for
         software products,  the estimated remaining product life, or both could
         change in the near term due to  technological  and other  changes which
         would  result  in a  reduction  in the  carrying  value of  capitalized
         software development costs and patents.

         Revenue Recognition

         Revenue from sales of products is generally  recognized at the time the
         product is shipped.  Service  revenue is generally  recognized  ratably
         over the period of the related contract.

         Accrued Warranty and Installation

         The   Company's   remaining   obligations   at  time  of  shipment  for
         installation  and  warranty are accrued  concurrently  with the revenue
         recognized.  The  Company  has made a provision  for its  warranty  and
         installation  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  and  installation   obligations,
         including  changing  product designs and  specifications,  the ultimate
         amount incurred for warranty and installation costs could change in the
         near term from the Company's current estimate.

         Foreign Currency

         Except for Semitool Japan KK, where the functional currency was changed
         to the yen during the fourth quarter of 1997,  the functional  currency
         for the Company's foreign  operations is the U.S. dollar, in which most
         of  the  sales  and  purchases  are  denominated.   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.

         In July 1997,  Semitool Japan KK, commenced  invoicing its customers in
         yen, and therefore,  the Company  changed the functional  currency from
         the U.S.  dollar to the yen. The change in the functional  currency has
         been  accounted for  prospectively  commencing in the fourth quarter of
         1997.  Realized  gains and  losses  are  included  in the  consolidated
         statements   of  income   and   unrealized   gains  and   losses   from
         re-measurement of the financial statements are reflected as a component
         of shareholders' equity.

         Foreign Currency Exchange Contracts

         The Company uses foreign currency exchange  contracts,  which typically
         mature within one year, as part of an overall risk-management strategy.
         These  instruments  are  used  as  an  economic  hedge  of  receivables
         denominated in yen. Transaction gains and losses on these contracts and
         the related  receivables are recognized in the consolidated  statements
         of income.  In entering into these  contracts,  the Company has assumed
         the risk that might arise from the possible inability of counterparties
         to meet the terms of their  contracts.  The Company does not expect any
         losses as a result of  counterparty  defaults.  Because  the  impact of
         movements  in  currency  exchange  rates on  forward  foreign  exchange
         contracts  generally offsets the related impact on the underlying items
         being  hedged,   net  foreign   currency  gains  and  losses  on  these
         transactions have not been material. The Company does not hold or issue
         derivative financial instruments for trading or speculative purposes.

         As of  September  30, 1998 and 1997,  the Company had foreign  currency
         exchange  contracts  maturing at various dates in 1998 and 1999 to sell
         570,520,250  and  304,300,265  yen at  contracted  forward  rates.  The
         Company had no  outstanding  foreign  currency  exchange  contracts  at
         September 30, 1996.

         Research and Development Costs

         Costs of research and development are expensed as incurred.

         Earnings Per Share

         The Company adopted Statements of Financial Accounting Standard No. 128
         (SFAS 128),  "Earnings  per Share" in fiscal 1998.  Basic  earnings per
         share is computed  using the weighted  average  number of common shares
         outstanding.  Diluted earnings per share is computed using the weighted
         average   number  of  common  shares   outstanding   and  common  share
         equivalents.  Common equivalent shares result from the assumed exercise
         of outstanding  stock options.  Diluted earnings per share excludes the
         effects of  antidilutive  stock  options.  Historical per share amounts
         have been restated in accordance with SFAS No. 128.

         The  following  table sets forth the  computation  of basic and diluted
         earnings per common share for the years ended  September 30, 1998, 1997
         and 1996 (in thousands):

<TABLE>
<CAPTION>
<S>                                                                     <C>        <C>        <C>
                                                                          1998       1997       1996
         Numerator:
           Net income used for basic and diluted earnings per share     $   4,805  $  12,523  $  15,136
                                                                        =========  =========  =========

         Denominator:
           Average common shares used for basic earnings per share         13,783     13,676     13,651
           Effects of dilutive stock options                                  121        157        207
                                                                        ---------  ---------  ---------

         Denominator for diluted earnings per share                        13,904     13,833     13,858
                                                                        =========  =========  =========
</TABLE>

         New Accounting Pronouncements

         In June 1997, Statement of Financial Accounting Standards No. 130 (SFAS
         130),   "Comprehensive   Income,"  was  issued.  SFAS  130  establishes
         standards  for reporting  and display of  comprehensive  income and its
         components in a full set of general-purpose financial statements.  SFAS
         130 is effective for fiscal years  beginning  after  December 15, 1997,
         and requires restatement of earlier periods presented. The Company does
         not  believe  the  application  of this  standard  will have a material
         effect on the presentation of its financial statements.

         In June 1997, Statement of Financial Accounting Standards No. 131 (SFAS
         131),   "Disclosures  about  Segments  of  an  Enterprise  and  Related
         Information,"  was issued.  SFAS 131 establishes  standards for the way
         that a public enterprise  reports  information about operating segments
         in its  financial  statements.  SFAS 131 is effective  for fiscal years
         beginning after December 15, 1997, and requires  restatement of earlier
         periods  presented.  The Company has not yet determined the effect this
         standard  will  have  on the  form  of  presentation  of its  financial
         statements.

         In June 1998, Statement of Financial Accounting Standards No. 133 (SFAS
         133),  "Accounting for Derivative  Instruments and Hedging  Activities"
         was issued. SFAS 133 establishes accounting and reporting standards for
         derivative   instruments,   including  certain  derivative  instruments
         embedded in other contracts,  (collectively referred to as derivatives)
         and for hedging  activities.  It requires that an entity  recognize all
         derivatives  as  either  assets  or  liabilities  in the  statement  of
         financial  position and measure those  instruments at fair value.  SFAS
         133 is  effective  for all fiscal  quarters of fiscal  years  beginning
         after  June  15,  1999,  however,  earlier  application  of  all of the
         provisions  of this  Statement is encouraged as of the beginning of any
         fiscal  quarter.  The  Company  has not yet  determined  the effect the
         adoption of this standard will have on the financial condition, results
         of operations, and cash flows of the Company.

         In March 1998, the AICPA issued  Statement of Position 98-1 (SOP 98-1),
         "Accounting  for the Costs of Computer  Software  Developed or Obtained
         for Internal  Use". SOP 98-1 requires  companies to capitalize  certain
         costs of computer software  developed or obtained for internal use. The
         Company does not believe the  application  of this standard will have a
         material  effect on the results of operations,  financial  condition or
         cash flows of the Company.


2.    Inventories:

      Inventories  at September 30, 1998 and 1997 are  summarized as follows (in
      thousands):

                                                           1998           1997

         Parts and raw materials                        $   22,334    $   22,028
         Work-in-process                                     8,344        14,869
         Finished goods                                      5,757         4,227
                                                        ----------    ----------

                                                        $   36,435    $   41,124
                                                        ==========    ==========


3.    Property, Plant and Equipment:

      Property, plant and equipment at September 30, 1998 and 1997 is summarized
      as follows (in thousands):
                                                            1998         1997

        Buildings and improvements                       $  15,337   $   13,892
        Machinery and equipment                             20,955       16,638
        Furniture, fixtures and leasehold improvements      11,534       10,206
        Vehicles and aircraft                                6,702        5,577
                                                         ---------   ----------
                                                            54,528       46,313
        Less accumulated depreciation and amortization     (24,240)     (15,460)
                                                           -------   ----------
                                                            30,288       30,853
        Land and land improvements                           6,014        2,832
                                                         ---------   ----------

                                                         $  36,302   $   33,685
                                                         =========   ==========


4.    Note Payable to Bank:

      The Company has an  uncollateralized  line of credit  totaling $25 million
      under an agreement  with Seafirst Bank  (Seafirst).  Borrowings  under the
      line of credit bear  interest at the bank's  prime  lending rate (8.25% at
      September 30, 1998) with the line of credit expiring on April 1, 2001. The
      line of credit requires  monthly  interest  payments only,  until April 1,
      2001 with the then outstanding  balance repayable in monthly principal and
      interest  payments  over a  three-year  period  ending  April 1, 2004.  At
      September 30, 1998,  there were $3 million of advances  outstanding on the
      line of credit.  The line of credit  agreement  provides  for a  quarterly
      commitment  fee on any unused  portion.  Additionally,  the  agreement has
      various restrictive covenants, including a prohibition against pledging or
      in any way encumbering  current or operating assets during the term of the
      agreement and the maintenance of various financial ratios.


5.    Long-Term Debt:

      Long-term  debt  at  September  30,  1998 is  summarized  as  follows  (in
      thousands):
<TABLE>
<CAPTION>
<S>                                                                           <C>
         Mortgage term note  payable in monthly  installments  of 
            $23  including interest at a blended rate of 5.5%, maturing on
            September 1, 2014 (A)                                             $    2,880
         Mortgage term note payable in monthly installments of
            $25 including interest at a blended rate of 4.7%, maturing on
            December 1, 1999 (A)                                                     364
         Japanese yen term note payable in a single payment of
            14,471 Japanese yen due on April 5, 1999.  Interest accrues
            at a fixed rate of 2.9% per annum and is payable in arrears, on
            various dates, until repaid in full                                      106
         Mortgage term note payable to CoreStates Bank, N.A. in monthly
            installments of $6, including interest at 7.5% until
            March 30, 2005 and thereafter at the Bank's national commercial
            rate plus 1.0% per annum, maturing on March 30, 2008. (B)                522
         Mortgage term note payable to CoreStates Bank, N.A. in a single
            payment of $560 on November 30, 1998.  Interest at the Bank's
            national commercial rate (8.5% at September 30, 1998)
            plus 0.5% per annum is payable monthly. (B)                              560
                                                                              ----------
                                                                                   4,432
         Less current portion                                                        596
                                                                              ----------
                                                                              $    3,836
                                                                              ==========
</TABLE>

      (A)   The mortgage term  notes payable are  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  Seafirst  providing
            the remaining 20%. The notes are  personally guaranteed by Raymon F.
            Thompson, the Company's chairman, and are subject to the restrictive
            covenants described in Note 4.

      (B)   The mortgage   term  notes   payable  to  CoreStates  Bank  N.A. are
            collateralized  by a first  lien  deed of trust on the  Coopersburg,
            Pennsylvania  office and manufacturing  facility and by all fixtures
            and personal property of Rhetech,  Inc.  necessary for the operation
            of the facility.  The Company has received  final  approval from the
            Pennsylvania  Industrial Development Authority (PIDA) for a $560,000
            ten-year term loan bearing  interest at 4.25% per annum,  which will
            pay in full the $560,000 term note payable on or before November 30,
            1998.   Accordingly,   the  $560,000  term  note  payable  has  been
            classified as long-term as of September 30, 1998.

      Principal maturities for long-term debt outstanding at September 30, 1998,
      are summarized as follows (in thousands):

                         Year Ending
                        September 30,

                            1999                                 $    596
                            2000                                      282
                            2001                                      224
                            2002                                      239
                            2003                                      255
                         Thereafter                                 2,836
                                                                 --------
                                                                 $  4,432
                                                                 ========





6.    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 up to 5% of
      the  employee's   compensation.   Semitool  may  also  make   non-matching
      contributions to the plan,  which are determined  annually by the Board of
      Directors.  Total  profit  sharing  contribution  cost for  this  plan was
      approximately  $1,080,000,  $1,115,000  and  $639,000  for the years ended
      September 30, 1998, 1997 and 1996, respectively.

      Semitool Europe Ltd. maintains a defined  contribution  pension agreement.
      This  pension  agreement  is open to all  employees  with more than  three
      months of service. The employer and employee contributions are invested in
      each  individual  member's  personal  pension  plan with a United  Kingdom
      insurance company. 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,  1998,  1997  and  1996
      approximated $59,000, $37,000 and $23,000, 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 December  1994,  the Board of  Directors  adopted and the  shareholders
      approved the Semitool,  Inc.  1994 Stock Option Plan (the Option Plan).  A
      total of 900,000  shares of common stock were reserved for issuance  under
      the Option Plan. In February  1997 and again in 1998,  the Option Plan was
      amended to increase  the number of shares of common  stock  available  for
      issuance  thereunder by 200,000  shares per amendment for a total increase
      of 400,000.  The total shares reserved for the Option Plan is 1,300,000 at
      September 30, 1998. Options granted under the Option Plan generally become
      exercisable at a rate of 5% per quarter  commencing three months after the
      grant date.  Semitool may grant  options  that qualify as incentive  stock
      options  to  employees  and  nonqualified   stock  options  to  employees,
      officers,  directors,  independent contractors and consultants. The Option
      Plan also provides for automatic  grants of nonqualified  stock options to
      independent  directors.  The Option Plan will  terminate in December  2004
      unless terminated earlier at the discretion of the Board of Directors.  At
      September 30, 1998,  233,490  shares were  available  for future  issuance
      under the Option Plan.  No  compensation  expense has been  recognized  in
      1998, 1997 or 1996 under the Option Plan.

      The  following  summary  shows stock  option  activity for the three years
ended September 30, 1998:

                                                                      Weighted-
                                                                        Average
                                          Number of              Exercise Price
     Stock Option Activity                   Shares                   per Share
     ----------------------     -------------------           -----------------
     October 1, 1995                        512,485                       $8.73
     Granted                                179,000                      $14.26
     Exercised                               (5,675)                      $8.93
     Forfeited                              (50,000)                     $10.90
                                -------------------           -----------------

     September 30, 1996                     635,810                      $10.12
     Granted                                163,000                      $10.54
     Exercised                              (99,937)                     $10.14
     Forfeited                             (100,550)                     $10.66
                                -------------------           -----------------

     September 30, 1997                     598,323                      $10.14
     Granted                                429,500                      $11.28
     Exercised                              (36,509)                      $9.36
     Forfeited                             (125,640)                     $11.73
                                -------------------           -----------------

     September 30, 1998                     865,674                      $10.51
                                ===================           =================


     The following tables summarize  information about stock options outstanding
     at September 30, 1998:

                                             Options Outstanding
                        --------------------------------------------------------
                                                        Weighted-
                                                          Average      Weighted-
                                                        Remaining        Average
                                         Number       Contractual       Exercise
Range of                         Outstanding at              Life          Price
Exercise Prices              September 30, 1998        (in years)      per Share
---------------------   -----------------------   ---------------   ------------

  $6.38 -     $9.25                     388,074               7.1          $8.63
  $9.75 -    $14.63                     452,200               8.9         $11.85
 $15.00 -    $16.25                      25,400               8.1         $15.23
                        -----------------------   ---------------   ------------

                                        865,674               8.1         $10.51
                        =======================   ===============   ============



                                             Options Exercisable
                        --------------------------------------------------------
                                                                       Weighted-
                                                                         Average
                                         Number                         Exercise
Range of                         Exercisable at                            Price
Exercise Prices              September 30, 1998                        per Share
------------------      -----------------------                    -------------
 $6.38 -     $9.25                      192,542                            $8.67
 $9.75 -    $14.63                       91,675                           $12.16
$15.00 -    $16.25                       15,250                           $15.27
                        -----------------------                    -------------

                                        299,467                           $10.07
                        =======================                    =============


The number  and  weighted-average  exercise  prices of  options  exercisable  at
September 30, 1998, 1997 and 1996 are summarized as follows:

                                                    1998       1997       1996

Number exercisable                                 299,467    196,637    161,898

Weighted-average exercise price per share           $10.07      $9.72      $9.53

      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 a tax benefit  associated with those options
      of $316,000 in 1998 which has been recorded as additional capital.

      The Company has adopted the  disclosure-only  provisions  of  Statement of
      Financial  Accounting  Standards  No. 123 (SFAS No. 123)  "Accounting  for
      Stock-Based  Compensation." Had compensation cost for the Option Plan been
      determined based on the fair value of awards in fiscal 1998, 1997 and 1996
      consistent  with the  provisions of SFAS No. 123, the Company's net income
      and earnings  per share would have been  reduced to the pro forma  amounts
      shown below (in thousands, except for per share amounts):


                                                1998         1997         1996

Net income:
   As reported                              $    4,805   $   12,523   $   15,136
   Pro forma                                $    4,526   $   12,275   $   15,021

Diluted earnings per share:
   As reported                              $     0.35   $     0.91   $     1.09
   Pro forma                                $     0.33   $     0.89   $     1.08


      The fair  value of each  option  grant is  estimated  on the date of grant
      using  the   Black-Scholes   option-pricing   model  with  the   following
      weighted-average  assumptions  used for  grants  in 1998,  1997 and  1996,
      respectively:  dividend yield of 0% for all years;  expected volatility of
      66.0%,  67.8% and  67.8%;  risk-free  interest  rates of 5.49%,  6.31% and
      6.07%; and expected lives of 4.9, 4.6 and 4.5 years. The  weighted-average
      fair value of stock options  granted during the years ended  September 30,
      1998, 1997 and 1996, was $6.69, $6.31 and $8.46, respectively.


7.    Income Taxes:

      The  provision  for income  taxes for the years ended  September 30, 1998,
      1997 and 1996  consists of the following (in thousands):

                                             1998           1997         1996
         Federal:
              Current                     $   1,487     $    7,643    $   7,882
              Deferred                          231           (643)        (551)
         State:
              Current                           489            899        1,776
              Deferred                           77            (76)         (67)
         Foreign:
              Current                           191           (148)         325
              Deferred                           --             --         (475)
                                          ---------     ----------    ---------

                                          $   2,475     $    7,675    $   8,890
                                          =========     ==========    =========


      Domestic and foreign  components  of income (loss) before income taxes for
      the years  ended  September  30,  1998,  1997 and 1996 are as follows  (in
      thousands):


                                              1998          1997         1996

         Domestic                         $   6,897     $   22,245    $  24,277
         Foreign                                383         (2,047)        (251)
                                          ---------     ----------    ---------
                                          $   7,280     $   20,198    $  24,026
                                          =========     ==========    =========


      The  components of the deferred tax assets and liabilities as of September
      30, 1998 and 1997 are as follows (in thousands):


                                                       1998             1997
       Deferred tax assets:
            Accrued warranty and installation       $   3,900         $   3,204
            Other accrued liabilities                     700             1,127
            Inventory                                     939               816
            Foreign net operating loss carryovers         708               475
            Covenant not to compete                       216               132
            Other                                         149               148
                                                    ---------------------------
       Total deferred tax assets                        6,612             5,902
       Less valuation allowance                          (233)               --
                                                    ---------------------------
       Net deferred tax assets                          6,379             5,902
                                                    ---------------------------

       Deferred tax liabilities:
            Depreciation and amortization              (2,820)           (2,075)
            Other                                         (40)               --
                                                    ---------------------------
       Total deferred tax liabilities                  (2,860)           (2,075)
                                                    ---------------------------
       Net deferred tax asset                       $   3,519         $   3,827
                                                    ===========================


      The Company has established a valuation allowance of $233,000 at September
      30, 1998 to reduce the  deferred  tax asset  related to the net  operating
      loss carryforwards in its Korean and Singapore  subsidiaries.  The Company
      does not believe a valuation  allowance is necessary at September 30, 1997
      to reduce the  deferred  tax asset as this asset will more likely than not
      be realized  through the ability to recover prior income taxes paid or the
      generation of future taxable income.

      The differences  between the  consolidated  provision for income taxes and
      income  taxes  computed  using  income  before  income  taxes and the U.S.
      federal income tax rate for the years ended  September 30, 1998,  1997 and
      1996 are as follows (in thousands):

<TABLE>
<CAPTION>
<S>                                                      <C>         <C>         <C>
                                                           1998        1997        1996

         Amount computed using the statutory rate        $  2,475    $  7,069    $  8,409
         Increase (decrease) in taxes resulting from:
            State taxes, net of federal benefit               374         959       1,155
            Effect of foreign taxes                            73         569         (62)
            Research and experimentation credit              (790)       (863)       (355)
            Foreign sales corporation benefit                (272)       (822)       (695)
            Valuation allowance                               233          --          --
            Other, net                                        382         763         438
                                                         --------    --------    --------
                                                         $  2,475    $  7,675    $  8,890
                                                         ========    ========    ========
</TABLE>



8.    Related Party Transactions:

      Semitool  has  agreements  with Mr.  Raymon  F.  Thompson,  the  Company's
      chairman and a shareholder,  to lease  aircraft.  Under these  agreements,
      rent expense was approximately  $1,273,200,  $1,276,600 and $1,158,000 for
      the years ended  September  30,  1998,  1997 and 1996,  respectively.  The
      rental rate for fiscal 1999 will be $22,000 per month.

      Periodically,  Semitool  advances  funds to Mr.  Thompson and pays certain
      expenses  for the benefit of Mr.  Thompson.  These  advances are offset by
      amounts  payable to Mr.  Thompson  under the  agreements  described in the
      preceding  paragraph.  Net  advances  to (from) Mr.  Thompson  are charged
      interest at the  federal  funds  short-term  rate.  Associated  with these
      advances,  Mr.  Thompson  paid the Company  interest of $3,932 in 1998 and
      received approximately $2,000 of interest income in 1996.

      Semitool  purchased  raw  materials  approximating  $441,000,  $720,000,  
      and  $651,000  for the years  ended September  30, 1998,  1997 and 1996,  
      respectively,  from a company  previously  owned by Mr.  Thompson.  Mr.
      Thompson sold his holdings of this company in January of 1998.


9.    Commitments and Contingencies:

      The Company has various  operating  lease  agreements  for  equipment  and
      office space that expire through the year 2003. Total rent expense for the
      years ended September 30, 1998,  1997 and 1996,  exclusive of amounts paid
      to a related party as described in Note 8, was  approximately  $1,085,000,
      $1,305,000,  and $950,000,  respectively.  At September  30, 1998,  future
      rental payments under these  agreements and the aircraft leases  described
      in Note 8 are as follows (in thousands):



                                   Year Ending
                                  September 30,                Total

                                    1999                      $  1,152
                                    2000                           794
                                    2001                           436
                                    2002                           308
                                    2003                           139
                                 Thereafter                         19
                                                              --------
                                                              $  2,848
                                                              ========

      On July  17,  1998  an  agreement  to  settle  was  reached  in a  Montana
      securities  class  action  (Case  No.  DV-96-124A)  filed  in the  Montana
      Eleventh Judicial District Court. Flathead County,  Kalispell,  Montana. A
      Stipulation  of  Settlement  was  presented to the District  Court for its
      preliminary   approval  on  August  25,  1998.  In  connection   with  the
      settlement,  the plaintiff class has also agreed to dismiss with prejudice
      their  alleged  claims  against the Company  and its  Chairman,  Raymon F.
      Thompson.  Insurance policies will fully fund the class action settlement.
      The settlement was conditioned  upon the District  Court's  approval and a
      judgment settling all claims became final on October 27, 1998.

      A lawsuit brought by Mitsubishi Silicon America Corporation,  successor to
      Siltec Corporation (Case No. CV-98-826AA) was filed on July 7, 1998 in the
      United States  Federal  District  Court for the District of Oregon against
      the Company.  The lawsuit  alleges  breach of warranties and seeks damages
      and  attorney's  fees in excess of $5 million.  The Company  believes  the
      lawsuit to be without merit and intends to contest the action  vigorously.
      However, given the inherent uncertainty of litigation and the early stages
      of discovery,  there can be no assurance that the ultimate outcome will be
      in the  Company's  favor,  or that if the  ultimate  outcome is not in the
      Company's  favor,  that such an outcome,  the  diversion  of  management's
      attention,  and any costs  associated  with the  lawsuit,  will not have a
      material adverse effect on the Company's financial  condition,  results of
      operations or cash flows.

      The Company is subject to other legal  proceedings  and claims  which have
      arisen in the  ordinary  course of its  business and have not been finally
      adjudicated.  Although  there  can  be no  assurance  as to  the  ultimate
      disposition  of  these  matters,  it  is  the  opinion  of  the  Company's
      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 the  results  of
      operations, financial condition or cash flows of the Company.

      10. Concentration of Credit Risk and Foreign Operations:

      At  September  30, 1998 and 1997,  trade  receivables  of the Company were
      primarily  from  companies  in the  semiconductor  industry,  and included
      approximately  $15.9 million and $11.7 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.

      Consolidated  sales  to one  major  customer,  represented  10.9% of total
      consolidated  sales  for the  year  ended  September  30,  1997.  No other
      customer  represented  more than 10% of total  consolidated  sales for any
      period presented.


      Summarized  data for the Company's foreign  operations for the years ended
      September 30, 1998, 1997 and 1996 are as follows (in thousands):

<TABLE>
<CAPTION>
<S>                                             <C>

                                                                Income (loss)
                                                                    from           Total
                                                  Net Sales      operations       assets
                                                --------------------------------------------
      1998:
              United States                     $     117,962  $       7,297  $      101,485
              Europe                                   46,765            327          17,267
              Other foreign operations                 15,774           (167)          9,238
                                                --------------------------------------------
                                                $     180,501  $       8,087  $      127,990
                                                ============================================

      1997:
              United States                     $     152,940  $      22,478  $      110,581
              Europe                                   38,021         (1,146)         18,711
              Other foreign operations                  2,991           (900)          2,433
                                                --------------------------------------------
                                                $     193,952  $      20,432  $      131,725
                                                ============================================

      1996:
              United States                     $     124,918  $      24,898  $       90,168
              Europe                                   49,197            332          23,472
              Other foreign operations                     89         (1,048)          1,314
                                                --------------------------------------------
                                                $     174,204  $      24,182  $      114,954
                                                ============================================
</TABLE>


      Export sales to  unaffiliated  customers from the Company's  United States
      operations  were  approximately  $6.7  million,  $27.9  million  and $27.2
      million  for  the  years  ended   September  30,  1998,   1997  and  1996,
      respectively.


11.   Preferred Stock:

      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.


12.   Financial Instruments and Fair Values:

      The  Company has  estimated  the fair value of its  financial  instruments
      including cash and cash equivalents,  payable to shareholder, note payable
      to bank  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  instruments at September 30, 1998 and 1997 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.

         Payable to Shareholder - The carrying value of the shareholder  payable
         approximates  fair  value  due to the  fact  that the  note  carries  a
         variable interest rate.

         Note Payable to Bank - The  carrying  value of the note payable to bank
         approximates  fair  value  due  to the  fact  that  the  note  bears  a
         negotiated variable interest rate.

         Long-Term  Debt - The  fair  value  of  notes  payable  is based on the
         discounted value of contractual cash flows using an estimated  discount
         rate of 8.25% which the Company  could  currently  obtain for debt with
         similar remaining maturities.

      The estimated  fair value of financial  instruments  at September 30, 1998
      and 1997, consisted of the following (in thousands):

<TABLE>
<CAPTION>
<S>                                    <C>          <C>            <C>          <C>
                                                 1998                        1997
                                        Carrying       Fair          Carrying       Fair
                                         Amount        Value          Amount        Value
                                       ----------------------      ----------------------
         Cash and cash equivalents     $  7,287     $   7,287      $   5,060    $   5,060
         Payable to shareholder              78            78              7            7
         Note payable to bank             3,000         3,000          4,000        4,000
         Long-term debt                   4,432         3,927          3,757        3,182
</TABLE>





                                  Exhibit Index


Exhibit No.                                 Description

3.1     Restated Articles of Incorporation of the Company (1)
3.2     By-laws of the Company dated August 1, 1979 and related  amendments to
        these By-laws (1)
3.3     Amended Bylaws of Semitool, Inc. (4)
3.4     Amended Bylaws of Semitool, Inc. (5)
3.5     Amended Bylaws of Semitool, Inc. (6)
3.6     Amended Bylaws of Semitool, Inc. (7)
10.3    Form of Semitool, Inc. 1994 Stock Option Plan (1)
10.5    Aircraft Lease Agreement, dated September 9, 1994, between the Company
        and Mr. Thompson (1)
10.6    Aircraft Lease Agreement, dated November 1, 1994, between the Company 
        and Mr. Thompson (1)
10.12   Agreement  between the Company and the Semitool European Companies (1)
10.13   Aircraft Lease Agreement, dated April, 1996, between the Company and
        Mr. Thompson (2)
10.16   Business Loan Agreement, dated September 30, 1997, between the Company
        and the Bank of America NT & SA doing business as Seafirst Bank (5)
10.17   Promissory Note, dated September 29, 1997, between the Company and the
        Bank of America National Trust and Savings Association doing business as
        Seafirst Bank (5)
10.18   Loan Modification Agreement, dated September 29, 1997 between the 
        Company and the Bank of America National Trust And Savings Association
        doing business as Seafirst Bank (5)
10.19   Loan Modification Agreement, dated October 2, 1997 between the Company
        and the Bank of America National Trust And Savings Association doing
        business as Seafirst Bank (5)
10.20   Loan Modification Agreement, dated October 2, 1997 between the Company
        and the Bank of America National Trust And Savings Association doing
        business as Seafirst Bank (5)
10.21   Promissory Note, dated March 26, 1998 between Rhetech, Inc. and
        CoreStates Bank, N.A. (6)
10.22   Mortgage Assignment of Leases and Security Agreement, dated March 26,
        1998 between Rhetech, Inc. and CoreStates Bank, N.A(6)
10.23   Promissory Note, dated March 26, 1998 between Rhetech, Inc. and
        CoreStates Bank, N.A. (6)
10.24   Mortgage Assignment of Leases and Securities Agreement, dated March 26, 
        1998 between Rhetech, Inc. and CoreStates Bank, N.A.(6)
10.25   Employment Agreement between William A. Freeman and Semitool, Inc. dated
        February 20, 1998. (6)
10.26   Employment Agreement between Fabio Gualandris and Semitool, Inc. dated
        April 21, 1998. (8)
10.27   Business Loan Agreement,  dated September 30, 1998,  between the
        Company  and the  Bank of  America  NT & SA  doing  business  as
        Seafirst Bank (8)
10.28   Promissory Note, dated September 30, 1998, between the Company and the
        Bank of America National Trust and Savings Association doing business as
        Seafirst Bank (8)
21.1    Subsidiaries of Registrant (8)
27      Financial data schedule (8)
99.1    Amended and Restated Semitool, Inc. 1994 Stock Option Plan (3)
99.2    Amended and Restated Semitool, Inc. 1994 Stock Option Plan (6)


          (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 exhibits to the Company's Annual Report on Form 10-K,
          date of report September 30, 1996.

          (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, 1997.

          (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, 1997.

          (5)  Incorporated  herein  by  reference  to  the  identically
          numbered exhibits to the Company's Annual Report on Form 10-K,
          date of report September 30, 1997.

          (6)  Incorporated  herein  by  reference  to  the  identically
          numbered  exhibit to the  Company's  Quarterly  Report on Form
          10-Q, dated of report March 31, 1998.

          (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, 1998.

          (8) Filed herewith.





                      REPORT OF INDEPENDENT ACCOUNTANTS ON
                          FINANCIAL STATEMENT SCHEDULE



Board of Directors and Shareholders
Semitool, Inc.

Our audits of the consolidated  financial  statements  referred to in our report
dated  October 29, 1998 of Semitool,  Inc. and  subsidiaries  (which  report and
consolidated  financial  statements are included elsewhere in this Annual Report
on Form 10-K) also included an audit of the financial  statement schedule listed
in Item 14(a)(2) of this Form 10-K.  In our opinion,  this  financial  statement
schedule  presents fairly, in all material  respects,  the information set forth
therein  when  read in  conjunction  with  the  related  consolidated  financial
statements.



                                                PricewaterhouseCoopers LLP

Boise, Idaho
October 29, 1998