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

# FORM 10-K

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

# For the Fiscal Year
Ended September 30, 2005

# OR

# [   ] TRANSITION REPORT PURSUANT
TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934For the Transition Period From ___ to ___

# Commission File Number
0-25424

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

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

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

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

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

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

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

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

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

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

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

The approximate aggregate market value
of the voting stock held by non-affiliates of the registrant on March 31, 2005 (based on
the last reported sale price on the Nasdaq National Market as of such date) was
$171,359,888.

The number of shares of the
registrants Common Stock, no par value, outstanding as of December 1, 2005 was
28,738,527.

# 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 3, 2006.

---

# SEMITOOL, INC.

# Index to Annual Report
on Form 10-KYear Ended September 30, 2005

PART I

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

PART II

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

PART III

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

PART IV

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

---

# PART I

Introduction -
Forward-Looking Statements

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

- trends in the semiconductor industry that are driving growth, including the adoption of copper as an
interconnect material, spray processing supplanting immersion technologies and the continued expansion of the
wafer level packaging market,
- Semitool's solutions and strategies for electrochemical deposition, wafer surface preparation and wafer level
packaging, including our intent to continue investing in research and development to maintain and expand our
position as a technology leader in those markets,
- our plan to develop new technologies such as wafer thinning to enable us to enter emerging markets and provide
innovate solutions,
- our plan to leverage our Raider platform with both our current and potential new customers,
- our plan to enhance our relationships with our major customers and identify opportunities to develop similar
relationships with other semiconductor device manufacturers,
- our intent to expand our sales and support organization to broaden customer reach, particularly in Taiwan and
China, and the potential for growth in those markets,
- our anticipation of continued strong sales in the Asian market in fiscal 2006,
- the performance and acceptance of our products, including the continued technological improvement of our tools
and the success of our Raider platform,
- manufacturing strategy, including our vertical manufacturing structure and manufacturing strategies for
increasing performance reliability and yields while reducing the cost of ownership of our tools,
- competition, including our ability to compete favorably with companies significantly larger than we are,
- our efforts to protect our intellectual property portfolio and continue to file patent applications to protect
that intellectual property,
- the adequacy of our existing manufacturing facilities and anticipated
expansion of facilities in Salzburg, Austria and Kalispell, Montana,
- the ability to maintain our worldwide sales, service and customer support organizations, and
- the impact of litigation on our business.

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

- accounting policies and estimates and the effects of new accounting standards,
- research and development expenses, including expected fluctuations in such expenses in absolute dollar amounts
and as a percentage of net sales, and our expectation of continued funding of research and development to
attain technology leadership in our industry,
- the expected geographic sales mix of our products, including our anticipation of larger contributions to sales
from Asia in fiscal 2006,
- estimates of capital expenditures and the sufficiency of funds and sources of financing to make expected
capital expenditures through fiscal 2006,
- the impact of various factors on gross margin,
- inventory management,
- the sufficiency of funds and the ability to finance activities, including sources of liquidity,
- our expectation that existing debt financing arrangements and cash flows generated from operating
activities will be sufficient to fund operations at the current and projected levels,
- the expected level of long-term debt and interest rates for our new facility in Salzburg, Austria and our plan to
negotiate a financing of the acquisition of a new Kalispell, Montana manufacturing facility, and
- our expectation that, if additional financial resources are required, our ability to issue securities from our
shelf registration statement or issue other financial instruments.

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

---

# Item 1.  Business

# Overview

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

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

# Industry Background

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

# Semiconductor
Manufacturing Process Overview

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

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

---

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

# Trends in Semiconductor
Manufacturing

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

Smaller
Device Features for Lower Cost and Higher Performance. The increasing trend towards
more advanced electronics applications has spurred the industrys transition to
smaller device features, enabling lower cost per IC, as more ICs can be fabricated on each
wafer. Additionally, smaller device features operate at higher speeds and require less
power. As the industry moves to 90 nanometer features sizes and below, the IC fabrication
process becomes significantly more complex, requiring more stringent manufacturing
specifications and lower acceptable margins of error. In particular, the fabrication
process becomes more susceptible to ever smaller particles, requiring the use of more
advanced surface preparation equipment. Also, manufacturing with smaller IC interconnects
often requires the use of plating equipment to plate copper that can form these
smaller interconnects.

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

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

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

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

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

---

# Semitools Solution

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

Technology
Leadership. We are able to leverage our extensive expertise in wet chemical processing
and over 26 years of experience building and supporting production-proven semiconductor
manufacturing equipment. We utilize our advanced modeling techniques in the design of our
reactors to address an increasingly complex manufacturing process. We have a strong
intellectual property portfolio with 295 U.S. patents issued and approximately 188 U.S.
patents pending.

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

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

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

# Strategy

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

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

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

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

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

Leverage
Strategic Relationships. For over 26 years, we have focused on satisfying the needs of
worldwide semiconductor device manufacturers and establishing long-term relationships with
our customers. We work with select customers at the concept and design stages to identify
and respond to their requests for current and future generations of products. These close
working relationships allow us to understand and address the performance and cost
expectations of our customers. We plan to enhance our relationships with our major
customers and identify opportunities to develop similar relationships with additional
semiconductor device manufacturers.

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

---

# Technology

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

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

For
electroplating applications, we leverage our advanced techniques in the design of our
proprietary multiple anode assemblies and membrane technology. Our multiple anode
assemblies enable radially controlled current density during the electroplating process,
leading to a more controllable process for depositing copper film on the surface of a
wafer, while membrane technology lowers cost of ownership by reducing chemical
consumption.

# Products

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

# Surface Preparation
Products

Our
multi-chamber, single-wafer processing systems for wet cleaning, stripping and etching are
designed with a linear arrangement of the processing chambers for high volume production
and share the Raider platform with our ECD equipment. The platform modularity reduces
downtime and increases wafer throughput providing the customer with an overall lower cost
of ownership. Our proprietary Capsule II process chamber also provides selectable
processing for each side of the wafer. These systems are available to accommodate 200mm
and 300mm wafer sizes. During the year, we shipped Raider SP units with our Nano-Megs
technology, which allows the use of a megasonic device to clean the wafer surface without
damage to the nano-sized features of the ICs. We also shipped single-wafer tools capable
of providing our HydrOzone process for more cost effective cleans of the wafer surface.
Selling prices for these systems range from $400,000 to $2.8 million.

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

# RAIDER SP

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

# SIRIUS

The
Sirius was designed specifically to deliver our proprietary HydrOzone process. HydrOzone,
using a minimal amount of deionized water and ozone, is a low cost, low environmental
impact process option in comparison to the typical processes used for photoresist
stripping, photolithography rework and organic cleans as it does not require the use of
sulfuric acid with its related delivery and disposal costs. The Sirius is a manually
loaded semi-automated system with a 50 wafer capacity spray processing chamber. The system
is available to accommodate both 200mm and 300mm wafer sizes.

---

# SPECTRUM & SPECTRUM HO

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

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

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

# Electrochemical
Deposition Systems

Our
single-wafer ECD systems incorporate proprietary electroplating technology on a
multi-chamber platform that processes one wafer per chamber. ECD applications include
copper interconnect for logic and memory ICs, gold bumps for high speed communication ICs,
lead and lead-free solder bumps for advanced wafer level packaging and deep via plating
for 3-D chip stacking applications. Our leading single-wafer design is modular, with
process chambers arranged in a linear orientation, providing flexibility in system
configuration. These systems generally include a combination of ECD and surface
preparation process chambers to address a customers specific application. These
systems are available to accommodate wafer diameters from 100mm to 300mm and can be scaled
for customers capacity requirements. Selling prices of these systems typically range
from approximately $800,000 to $3.0 million.

# RAIDER ECD

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

# Customers, Sales and
Marketing

Our
customers include leading global semiconductor manufacturers. The following is a
representative list of our largest customers in fiscal 2005:

|                                                                                                                                                                                                                                          |                                                                                                                                                                                                                                        |                                                                                                                                              
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------
|Advanced Micro Devices            
Advanced Semiconductor Engineering
Agilent Technologies              
Amkor                             
DENSO                             
ELMOS Semiconductor               
Freescale Semiconductor | Hitachi                         
IBM                             
Infineon                        
Intel                           
RF Micro Devices                
Semiconductor Mfg. Intl. Corp   
Siliconware Precision Industries | Sony
STATS ChipPAC
STMicroelectronics
Taiwan Semiconductor Mfg. Co.
Texas Instruments
Tower Semiconductor
United Microelectronics Corporation

Our
top ten customers accounted for 58.2%, 56.9% and 58.4% of net sales in fiscal 2005, 2004
and 2003, respectively. Advanced Micro Devices accounted for 16.7% and 19.4% of our net
sales in fiscal 2005 and fiscal 2003, respectively. No customer accounted for over 10% of
net sales in fiscal 2004.

---

International
sales, primarily in Europe, Asia and Japan, accounted for approximately 72.7%, 51.8% and
61.4% of net sales for fiscal 2005, 2004 and 2003, respectively. The relative proportion
of international sales to total net sales increased in fiscal 2005 primarily due to
increasing shipments of our Raider systems as we focused our marketing efforts in Asia
after declining in fiscal 2004 because initial marketing efforts and shipments of the
Raider systems, and our licensing fees, were in North America. We have direct sales and
customer support organizations located in the United States, Europe, Japan, Singapore,
Korea, Taiwan and China, and for some products, an independent distributor serves Japan.
We are currently expanding our direct sales and service organizations in Taiwan and China.
Additionally, we also utilize independent commissioned sales and service representatives
in Taiwan and China and selectively in other markets.

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

# Backlog and Deferred
Revenue

Consolidated
orders backlog was $61.3 million as of September 30, 2005. We include in backlog those
customer orders for which we have written customer authorization and for which shipment is
scheduled within the next 12 months. Orders are subject to cancellation or rescheduling by
customers with limited or no cancellation fees. During periods of downturns in the
semiconductor industry, we have experienced significant cancellations and delays.

Our
deferred revenue primarily relates to equipment shipped to customers that has not been accepted by
the customer. Revenue on those shipments is recognized as sales when acceptance is
received. As of September 30, 2005, deferred revenue was $23.5 million.

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

# Manufacturing

Most
of our manufacturing is conducted at our facility located in Kalispell, Montana. Our
manufacturing operations are selectively vertically integrated to include metals and
plastics fabrication and finishing capabilities, component parts and final product
assembly, and extensive product development capabilities. Manufacturing personnel work
closely with product development engineers to enhance manufacturability and facilitate the
transition from prototype to full-scale production. Our high-volume manufacturing line
provides responsive lead time delivery of our products. Component and product prototyping
typically is performed internally, reducing the time to market for new products and
product enhancements.

# Research and Development

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

Expenditures
for research and development, which are expensed as incurred, were approximately $19.7
million, $15.1 million and $18.1 million in fiscal 2005, 2004 and 2003, respectively.
These expenditures, as a percentage of our net sales, represented approximately 10.4%,
10.8% and 15.5% in each of these fiscal years, respectively. These expenditures were for a
number of surface preparation projects which include FEOL cleaning applications, immersion
processes, single-wafer megasonic cleans, single-wafer ozone cleans and hydrofluoric vapor
cleans. Plating R&D focused on the development of a lead-free solder application and
hardware, membrane technology to control the cost of chemicals used in plating, work on
deep via plating to be used in 3-D chipstacking applications and seed layer enhancement.
Batch process R&D projects include wafer thinning processes and automated FOUP (Front
Opening Unified Pod) cleaning processes and hardware.

# Competition

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

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

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

---

# Patents and Other
Intellectual Property

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

We
place a strong emphasis on the innovative features of our products and, where available,
we generally seek patent protection for those features. We currently hold 295 U.S.
patents, some with pending foreign counterparts, have approximately 188 U.S. patent
applications pending and intend to file additional patent applications, as we deem
appropriate. We have had an active patent program since the Companys inception;
consequently, the duration of our patent portfolio is staggered due to various initial filing
dates for individual patents. Our patent portfolio is not dominated by any particular
patents. We consider the strength of the overall portfolio to be more important than the
strength of any particular patent. In fact, many patents are part of our patent
families and it is difficult, if not impossible, to make any assessment regarding
the materiality of one patent in that family over another. Even if a patent is
not used offensively to prevent a competitor from practicing the same art, it may still
provide a deterrent against a competitors potential patent infringement claim against
us.

There
can be no assurance that patents will issue from any of our pending applications or that
existing or future patents will be sufficiently broad to protect our technology. While we
attempt to protect our intellectual property rights through patents, copyrights and
non-disclosure agreements there can be no assurance that we will be able to protect our
technology, or that competitors will not be able to develop similar technology
independently. In addition, the laws of certain foreign countries may not protect our
intellectual property to the same extent as the laws of the United States. Furthermore, certain
types of intellectual property are country-specific; for example, U.S. patents provide
protection in the U.S. but generally do not provide protection outside the U.S.  Moreover, there
can be no assurance that our existing or future patents will not be challenged,
invalidated or circumvented, or that the rights granted thereunder will provide meaningful
competitive advantages to us. In any of such events, our business, financial condition,
results of operations and cash flows could be harmed.

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

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

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

# Employees

As
of September 30, 2005, we had 1,056 full-time and temporary employees worldwide. None of
our employees is represented by a labor union, and we have never experienced a work
stoppage or strike. We consider our employee relations to be good.

# Environmental Matters

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

---

# Executive Officers of the
Registrant

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

|Name                                                                                                                                                                 | Age                        | Position                                                                                                                                                                                                                                                        
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Raymon F. Thompson (1) 
Larry E. Murphy (2)    
Timothy C. Dodkin (3)  
Larry A. Viano (4)     
Dana R. Scranton (5)   
Richard P. Schuster (6)
Paul M. Siblerud (7) | 64
 46
 56
 51
 50
 49
 46 | Chairman of the Board and Chief Executive Officer
President and Chief Operating Officer
Executive Vice President
Vice President, Chief Financial Officer
Vice President, Surface Preparation Technology
Vice President, Global Service
Vice President, Marketing

---

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

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

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

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

(5)Dana R. Scranton has served as our Vice President, Surface Preparation
          Technology since September 2001. Dr. Scranton has 13 years of experience with
          Semitool in the areas of engineering, product management and marketing. He has a
          total of 18 years experience in the semiconductor capital equipment business.

(6)Richard P. Schusterjoined us in 1984 and has served as our Vice President,
          Global Service since February 2002. Prior to 2002, Mr. Schuster was our Director
          of Service for North America.

(7)  
          Paul M. Siblerud has been employed by us since 1991 and has served as
          Vice President, Marketing since February 2005. Mr. Siblerud also has led the
          Advanced Packaging division and has served in positions in our engineering
          group.

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

# Item 1A.  Risk Factors

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

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

We have incurred significant net
losses in the past. Our operating results for future periods are subject to numerous
uncertainties, and we cannot assure that we will be able to maintain the profitability
that we achieved in fiscal 2005 and 2004. It is possible that in future quarters our
operating results will decrease from the previous quarter or fall below the expectations
of securities analysts and investors. In this event, the trading price of our common stock
could significantly decline.

---

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

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

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

During any quarter, a significant
portion of our net sales may be derived from the sale of a relatively small number of high
priced systems. The selling prices of our systems range from under $100,000 to in excess
of $2.9 million. Accordingly, a small change in the number and/or mix of tools we
sell may cause significant changes in our operating results.

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

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

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

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

During downturns, the semiconductor
equipment industry typically experiences a more pronounced percentage decrease in revenues
than the semiconductor industry. The semiconductor industry experienced a downturn that
began in fiscal 2001, which seriously affected our net sales, gross margin and results of
operations. In addition, during downturns, it is critical to appropriately align our cost
structure with prevailing market conditions, to minimize the effect of such downturns on
our operations, and in particular, to continue to maintain our core research and
development programs. If we are unable to align our cost structure in response to such
downturns on a timely basis, or if such implementation has an adverse impact on our
business, then our financial condition or results of operations may be negatively affected
to an even larger extent during industry downturns.

---

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

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

We have experienced periods of
significant growth and decline in net sales. Our net sales increased 36.4% from
approximately $139.6 million in fiscal 2004 to approximately $190.4 million in fiscal
2005. However, there have been other periods of significant declines in net sales; for
example, our net sales decreased 51.8% from approximately $256.5 million for fiscal
2001 to approximately $123.7 million for fiscal 2002. In addition, our consolidated
orders backlog increased 62.6% from approximately $37.7 million at September 30,
2004 to $61.3 million at September 30, 2005. If we are unable to effectively manage
periods of rapid decline or sales growth, our business, financial condition, results of
operations and cash flows could be significantly harmed.

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

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

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

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

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

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

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

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

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

Our ten largest customers accounted
for approximately 58.2%, 56.9% and 58.4% of net sales in fiscal 2005, 2004 and 2003,
respectively. There is a limited number of mostly large companies operating in the highly
concentrated, capital intensive semiconductor industry. Accordingly, we expect that we
will continue to depend on a relatively small number of large companies for a significant
portion of our net sales. Although the composition of the group of largest customers may
change from year to year, the loss of, or a significant curtailment of purchases by, one
or more of our key customers or the delay or cancellation of a large order could cause our
net sales to decline significantly, which would harm our business, financial condition,
results of operations and cash flows. Similarly, delays in payments by large customers
could have a significant impact on our cash flows.

---

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

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

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

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

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

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

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

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

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

We introduced our Raider platform
in 2003, which accounts for a substantial portion of current and anticipated sales.

We introduced our Raider platform in 2003
and intend to leverage this core technology platform, which is based on our prior
platforms, to expand our product portfolio and increase market opportunities. We expect
that revenue from this product platform will continue to account for a significant portion
of our revenue. Accordingly, acceptance of this product platform is critical to our future
success. Factors that may affect the market acceptance of this product include the
performance, price and total cost of ownership of the product, and the availability,
functionality and price of competing products and technologies. Failure of this new
product to maintain market acceptance would significantly impact our prospects.

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

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

---

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

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

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

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

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

# Our future success
depends on international sales.

Our net sales attributable to
customers outside the United States as a percentage of our total net sales were
approximately 72.7%, 51.8% and 61.4% in fiscal 2005, 2004 and 2003, respectively. We
expect net sales outside the United States to continue to represent a significant portion
of our future net sales. Sales to customers outside the United States are subject to
various risks, including:

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

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

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

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

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

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

---

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

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

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

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

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

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

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

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

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

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

We believe that our existing balances
of cash, cash equivalents and marketable securities, our cash flow from operations, and a
revolving credit facility we finalized in November 2004 and amended in the first quarter
of fiscal 2006 will be sufficient to meet our cash needs for working capital and capital
expenditures for at least the next 12 months. We may, however, require additional
financing to fund our operations in the future. As a result of growing our business, we experienced negative cash flows from operating activities of $9.6 million
for the year ended September 30, 2005.  We experienced negative cash flows from operating activities of $10.1
million for the year ended September 30, 2003.  Despite the negative cash flows from operating activities, we have
been able to fulfill our working capital and capital expenditure needs due to available cash resources and
maintaining adequate debt financing arrangements.  Although we expect existing debt financing arrangements and
cash flows generated from operating activities to be sufficient to fund operations at the current and projected
levels in the future, there is no assurance that our operating plan will be achieved.  We may need to take actions
to reduce costs, seek alternative financing arrangements or pursue additional placement of our common stock.

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

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

---

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

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

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

We place a strong emphasis on the
technically innovative features of our products and, where available, we generally seek
patent protection for those features. We currently hold 295 U.S. patents, some
with pending foreign counterparts, have approximately 188 U.S. patent
applications pending and intend to file additional patent applications, as we deem
appropriate. There can be no assurance that patents will issue from any of our pending
applications or that existing or future patents will be sufficiently broad to protect our
technology. While we attempt to protect our intellectual property rights through patents,
copyrights and non-disclosure agreements, there can be no assurance that we will be able
to protect our technology, or that competitors will not be able to develop similar
technology independently. In addition, the laws of certain foreign countries do not
protect our intellectual property to the same extent as the laws of the United States.
Furthermore, certain types of intellectual property are country-specific; for example, U.S. patents provide
protection in the U.S. but generally do not provide protection outside the U.S.
Moreover, there can be no assurance that our existing or future patents will not be
challenged, invalidated or circumvented, or that the rights granted thereunder will
provide meaningful competitive advantages to us. In any of such events, our business,
financial condition, results of operations and cash flows could be harmed.

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

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

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

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

In fiscal 2005, approximately 72.7% of
our net sales were derived from sales in foreign countries, including certain countries in
Asia such as Singapore, Taiwan, Japan, China and Korea. The laws of some foreign countries
do not protect our proprietary rights to as great an extent as do the laws of the United
States, and many U.S. companies have encountered substantial problems in protecting
their proprietary rights against infringement in such countries, some of which are
countries in which we have sold and continue to sell systems. For example,  in many countries
 other than the U.S., the public disclosure of an invention prior to the filing of a patent
application for the invention would invalidate the ability of a company to obtain a patent. Similarly, in contrast
to the United States where the contents of patent applications may remain confidential during the patent
prosecution process in certain cases, the contents of a patent application may be published before a patent is
granted, which provides competitors an advanced view of the contents of applications prior to the establishment of
patent rights. For these and other reasons, we also have not filed patent applications in these countries to the
same extent that we file in the U.S. There is a risk that our means of protecting our proprietary rights may not be adequate in these
countries. Our competitors in these countries may independently develop similar technology
or duplicate our systems. If we fail to adequately protect our intellectual property in
these countries, it would be easier for our competitors to sell competing products in
those countries.

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

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

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

---

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

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

# Item 1B.  Unresolved Staff
Comments

Not applicable.

# Item 2.  Properties

We
own two manufacturing facilities located on sites in Kalispell, Montana with approximately
200,000 square feet in the aggregate and intend to expand our facilities by the
acquisition of a 72,000 square-foot building located near our
Kalispell headquarters. Additionally, we own two manufacturing facilities located in
Libby, Montana housing approximately 20,000 square feet in the aggregate. We also own a facility located in
Coopersburg, Pennsylvania, which serves as a manufacturing facility for our Rhetech, Inc.
subsidiary. We are constructing a 29,000 square-foot production and office building in
Salzburg, Austria, which we expect to occupy in December 2005. We believe that our
existing manufacturing facilities along with our anticipated expansion will be adequate to
meet our requirements for the foreseeable future and that suitable additional or
substitute space will be available as needed. We own an office building in Cambridge, UK,
which serves as our European headquarters for sales and customer support. We also lease 11
other smaller facilities worldwide, which are used as sales and customer service centers.

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

# Item 3.  Legal Proceedings

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

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

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

---

# PART II

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

Our Common Stock is traded under the
symbol SMTL on the Nasdaq National Market. The approximate number of
shareholders of record at December 1, 2005 was 144 and the reported last sale price on
that date of our common stock on the Nasdaq National Market was $10.18. The high and low
sales prices for our common stock reported by the Nasdaq National Market are shown below.

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

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

# Item 6.  Selected
Financial Data

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

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

|                                                 | Year Ended September 30, | 
|------------------------------------------------ | ------------------------ | 
|
|Statement of Operations Data:                    |                          | 
|Net sales                                        |                          | 
|Gross profit (1)                                 |                          | 
|Gain on sale of subsidiary (2)                   |                          | 
|Income (loss) from operations                    |                          | 
|Net income (loss) before cumulative effect of    |                          | 
|change in accounting principle                   |                          | 
|Cumulative effect of change in accounting        |                          | 
|principle (net of tax) (3)                       |                          | 
|Net income (loss)                                |                          | 
|Diluted earnings (loss) per share                |                          | 
|Balance Sheet Data:                              |                          | 
|Cash, cash equivalents and marketable securities |                          | 
|Working capital (1)                              |                          | 
|Total assets                                     |                          | 
|Short-term debt                                  |                          | 
|Long-term debt and capital leases                |                          | 
|Shareholders' equity                             |                          | 

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

|(2) | We
sold our wholly-owned subsidiary, Semy Engineering, Inc., on February 16,
2001.
|--- | ----------------------------------------------------------------------------------

|(3) | The
cumulative effect is the result of our adopting the Securities and Exchange
               Commissions Staff Accounting Bulletin 101 (SAB 101), Revenue
               Recognition in Financial Statements.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

---

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

# Overview

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

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

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

As the semiconductor manufacturing
process increases in complexity and production parameters become more stringent,
semiconductor manufacturers have increasingly relied upon providers of semiconductor
equipment that features improved process control, smaller footprint and a lower cost of
ownership of their manufacturing processes.  Our solutions address critical applications
within the semiconductor manufacturing process, and enable our customers to manufacture
more advanced semiconductor devices that feature higher levels of performance.  Key
elements of our solution include technological leadership, a comprehensive product
portfolio, including our Raider platform and vertically-integrated manufacturing and design
capabilities.

# Key Performance Indicators

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

A summary of key factors that
impacted our financial performance during fiscal year 2005 includes:

- Our fiscal 2005 bookings were $193.6 million and include over $104 million in bookings for our Raider platform.
Fourth quarter fiscal 2005 bookings were over $65 million.
- Shipments in fiscal 2005 were $170.1 million including approximately $88 million from Raider shipments.
- Net income was $10.1 million on net sales of $190.4 million in fiscal 2005 compared with net income of $7.4
million on net sales of $139.6 million in fiscal 2004.
- Our gross margin declined to 50.9% of net sales, down from 55.4% in fiscal 2004.
- Fiscal 2004 bookings, shipments, net sales, gross margin and net income figures were all favorably impacted by
$10.8 million in license initiation fees for our seed layer enhancement patents.
- Cash, cash equivalents and marketable securities were $7.0 million at September 30, 2005, a decrease of $15.4
million from $22.4 million at September 30, 2004, reflecting increased investment in inventory as we built
inventory in response to customer demand.

---

# Results of Operations

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

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

# Fiscal 2005 Compared with
Fiscal 2004 and Fiscal 2003

# Net Sales

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

Semiconductor equipment sales consist of
revenues from sales of equipment (tools), spare parts and
service.  License fee revenue represents the license initiation fee for our seed layer enhancement patents.

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

Net sales increased $22.6 million in
fiscal 2004 as compared with fiscal 2003. The increase in net sales reflected the improved
state of the semiconductor and semiconductor equipment industries. All product lines
showed improvement in fiscal 2004, particularly surface preparation applications and spare
parts. Surface preparation net sales were favorably impacted by customer purchases of our
new Raider systems for single-wafer cleaning applications as well as by customer purchases
of our batch tools, both of which expanded our customers manufacturing capacity. ECD
net sales were primarily sales of our new Raider systems for plating applications. Fiscal
2004 was also benefited by the receipt of $10.8 million in license initiation fees for our
seed layer enhancement patents.

Fiscal 2003 net sales were adversely
impacted by the downturn in the semiconductor and semiconductor equipment industries.
Customer purchases were primarily focused on newer technology products, especially
single-wafer tools, rather than on tools that increased manufacturing capacity. Product
sales continued trends to 300mm equipment and single-wafer platforms.

Geographically, more than half of our
fiscal 2005 net tool sales were derived from Asia. European sales accounted for approximately
28% of net tool sales while North America contributed 19% of our net tool sales. This compares with
approximately half of our fiscal 2004 net tool sales being derived from North America, which
correlated with our first shipments of the Raider platform. Europe and Asia each accounted
for approximately 25% of our remaining tool sales in fiscal 2004. We anticipate continued
strong sales in the Asian market in fiscal 2006.

---

# Gross Profit

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

Gross profit increased $19.5 million
or 25.2% in fiscal 2005 compared to fiscal 2004. Fiscal 2004 gross profit increased $42.2
million or 119.6% compared with fiscal 2003 gross profit of $35.3 million. We recorded a
$19.1 million inventory write-down in fiscal 2003 due to obsolescence caused by the
introduction of our new Raider product.

Gross profit increased in absolute
dollars in fiscal 2005 and declined by 4.5 percentage points from fiscal 2004. The fiscal
2004 gross margin was favorably impacted by the $10.8 million license initiation fees
discussed above. Exclusive of the license initiation fees, gross margin would have been
essentially flat year over year, declining less than one percentage point. The variability
in gross margin year over year is primarily related to product mix as spare parts and
service sales contributed a higher percentage to overall sales revenues in fiscal 2004
than in fiscal 2005. Spare parts and service sales typically provide for a higher gross
margin than do tool sales.

Excess and obsolete inventory charges
were lower in fiscal 2004 as compared to fiscal 2003 because of the inventory write-down
in fiscal 2003. Of the 25.3 percentage point difference in gross margin in fiscal 2004 as
compared with fiscal 2003, the inventory write-down in fiscal 2003 accounted for 11
percentage points. The receipt of $10.8 million in license initiation fees for our seed
layer enhancement patents also contributed over six points to the increase in margin in
fiscal 2004. Improved absorption of manufacturing costs also contributed to the improved
margin in fiscal 2004 because our factory operated at higher levels of output.

Fiscal 2005 gross margin was not
significantly impacted by sales of tools containing parts that had been previously
written-down. Fiscal 2004 gross margin was favorably impacted by approximately 1.0
percentage point due to the sale of tools that contained certain parts that had been
previously written-down. Revenues on those sales totaled $9.0 million.

# Selling, General and
Administrative

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

Selling, general and administrative
(SG&A) expenses include employment costs for sales, marketing, customer support and
administrative personnel as well as travel, communications, professional fees and expenses
related to sales and service offices at our global locations. SG&A expenses increased
$15.1 million in fiscal 2005 as compared with fiscal 2004 after decreasing $1.0 million in
fiscal 2004 from fiscal 2003. As a percentage of net sales, SG&A expenses declined to
34.9% in fiscal 2005 from 36.8% in fiscal 2004 and 44.8% in fiscal 2003.

Employment costs increased
approximately $6.0 million in fiscal 2005 as compared to fiscal 2004 as we restored wages
from previously imposed pay reductions, increased staff to support expanded business
activity and accrued for profit sharing bonuses. Commission expense, primarily related to
increased sales activity in Asia, increased more than $4 million in the year over year
comparison. Legal expenses declined approximately $3.0 million as plaintiff litigation
related to our seed layer enhancement patents concluded in early fiscal 2005. Increased
professional fees primarily related to increased audit and Sarbanes-Oxley Section 404
compliance offset the reduction in legal costs. Sarbanes-Oxley and audit compliance fees
were in excess of $2.6 million, more than triple our fiscal 2004 costs. Travel and other
expenses increased related to the overall increase in business opportunity and activity.

Legal expenses decreased more than 50%
in fiscal 2004 compared to fiscal 2003 as a result of our efforts to bring our plaintiff
litigation to conclusion and to manage our legal costs. Costs related to worldwide
marketing and customer support efforts increased by approximately 38% as a result of
increased business opportunity and activity. Professional fees increased by over 70%
primarily as a result of additional accounting and legal support expense related to the
current financial regulatory environment. Commission expense declined in fiscal 2004 as
compared to fiscal 2003 reflecting the change in our geographic sales mix from Asia to
North America. Generally, commission expense is directly variable with sales and is also
dependent on the geographic region of the sale as commission rates vary from region to
region.

---

# Research and Development

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

Research and Development (R&D)
expense consists of salaries, project materials, laboratory costs, consulting fees and
other costs associated with our product development efforts. R&D expense increased
$4.6 million in fiscal 2005 as compared to fiscal 2004 and decreased $2.9 million in
fiscal 2004 as compared to fiscal 2003.

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

R&D depreciation expense declined
46% in fiscal 2004 as compared with fiscal 2003, as assets placed in service earlier
reached the end of their estimated useful lives. Prototype expense also declined in fiscal
2004 because our focus was meeting new customer requirements for the Raider platform
whereas in the prior year we were engaged in the development of this new platform. These
decreases were partially offset by increases in other operating expenses as a result of a
general increase in business activity. In fiscal 2004, our R&D projects focused on
development of our single-wafer megasonic processing chamber to improve particle removal
for the critical cleaning market, development of the environmentally-friendly HydrOzone
cleaning process for critical layers in the transistor-formation step of IC fabrication
and development of the next-generation Capsule II processing chamber for post-etch
cleaning, wafer backside and bevel cleaning. For our plating technology, we also developed
a membrane chamber that reduces chemical consumption, which is critical for cost sensitive
chip manufacturing and wafer level packaging applications.

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

# Other Income (Expense)

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

Net other income (expense) increased
to a net income of $3.8 million in fiscal 2005. In October 2004, we received a seed layer
enhancement litigation settlement payment of $2.9 million from Novellus Systems, Inc.
which accounts for most of the year over year increase. Net other income (expense)
declined to a net expense of $139,000 in fiscal 2004 from net income of $596,000 in fiscal
2003. Interest income declined from $590,000 in fiscal 2003 to $332,000 in fiscal 2004 to
$309,000 in fiscal 2005, reflecting reduced cash investments. We reported a minimal
foreign exchange loss in fiscal 2005. In fiscal 2004, we reported foreign exchange losses
because of fluctuations in the Yen, Euro and the British pound. In fiscal 2003, we
reported foreign exchange losses because of fluctuations in the Yen and the Euro. Other
income in fiscal 2003 included the proceeds we received from a settlement in connection
with a patent claim that we pursued against a German manufacturer of semiconductor
equipment.

---

# Income Taxes

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

Our estimated effective tax rate
increased to 32% in fiscal 2005 as compared to 31.5% in fiscal 2004 and 39% in fiscal
2003. We recognized a Research and Experimentation Credit of approximately $186,000 in the
first quarter of fiscal 2005. Legislation to extend the Credit was signed into law after
September 30, 2004, therefore we were unable to recognize the Credit in fiscal 2004, when
it was generated. This resulted in a recorded tax rate of 30.7% for fiscal 2005. The
primary difference in the recorded tax rate for fiscal 2005 is the effect of research
and development credits related to increasing research and development activity. The
difference in the effective tax rate in fiscal 2004 compared to fiscal 2003 is primarily
due to the effect of research and development credits and our foreign income exclusion,
which increased in fiscal 2004 as compared to fiscal 2003 because we were profitable in
fiscal 2004.

# Backlog and Deferred
Revenue

|                                      | September 30, | 
|------------------------------------- | ------------- | 
|
|
|Backlog                               |               | 
|Percentage change in backlog from     |               | 
|prior year-to-date period end         |               | 
|Deferred revenue                      |               | 
|Percentage change in deferred revenue |               | 
|from prior year-to-date period end    |               | 

Approximately 60% of our current
backlog is for tools on the Raider platform. Deferred revenue decreased $20.5 million at
September 30, 2005 as compared with September 30, 2004 primarily because of increased
shipments of Raiders into existing customer environments where Raiders have been
previously installed or accepted, in accordance with our revenue recognition policy.
Current deferrals include all or a part of 27 Raiders at September 30, 2005 as compared
with 17 Raiders at September 30, 2004; however, the fiscal year 2004 figures include a
higher percentage of Raiders that represented new tools shipped into new customer
environments, requiring full deferral of revenue on those tools.

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

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

# Liquidity and Capital
Resources

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

---

In fiscal 2004, cash provided by
operations was $2.9 million. The primary sources of cash from operating activities were
the receipt of the $10.8 million in license initiation fees included in income from
operations and the receipt of over $16.0 million in income tax refunds. Inventory
increased $24.5 million and accounts payable increased $8.8 million as a result of our
plan to reduce manufacturing cycle times and provide faster deliveries to our customers by
stocking components that will help shorten our lead times. Trade receivables increased due
to higher shipment levels in fiscal 2004. The increase in deferred profit was the result
of revenue and expenses deferred on our new Raider products pending final customer
acceptance. In fiscal 2003, our deferred profit pool was being relieved as we received
customer acceptances on new tools deferred in prior periods. In fiscal 2004, we shipped
new tools to new customers which, under our revenue recognition policy guided by SAB 104,
requires that revenue and the associated expenses be deferred, until customer acceptance
is received.

In fiscal 2003, we used cash from
operations of $10.1 million. The net loss in fiscal 2003, adjusted for non-cash benefits,
most notably the inventory write-down of $19.1 million, depreciation and amortization and
decreases in tax assets, was the primary factor in the use of cash from operating
activities in fiscal 2003. Changes in working capital accounts, notably decreases in trade
receivables, provided $16.5 million in cash. This was offset by an increase in income tax
refund receivable of $8.4 million related to the net operating loss, and reductions in
deferred profit of $15.2 million, the result of the receipt of customer acceptances on new
tools deferred in prior periods that were not offset by new tool deferrals.

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

In fiscal 2004, investing activities
included $8.6 million in purchases of factory equipment and other property and net cash
used for the purchase of marketable securities of $1.1 million. We invested an additional
$1.4 million in our development and demonstration laboratories in fiscal 2004 by
transferring finished goods inventory to property, plant and equipment. We also invested
$1.4 million in intangible assets, primarily in our patent portfolio.

We used $1.3 million to acquire
property, plant and equipment, primarily laboratory equipment in fiscal 2003. Consistent
with our focus on product and process development, we further invested in our development
and demonstration laboratories with a transfer of $2.6 million in finished goods inventory
to property, plant and equipment in fiscal 2003. Cash invested in intangible assets,
primarily intellectual property rights, was approximately $1.5 million in fiscal 2003.

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

Financing activities consisted
primarily of cash received from stock option exercises of $1.2 million offset by long-term
debt repayments of $236,000 during fiscal 2004. Cash used in financing activities for
fiscal 2003 primarily consisted of net repayments on long-term borrowings of $634,000
offset by proceeds from stock option exercises of $69,000.

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

The following commitments as of
September 30, 2005, incurred in the normal course of business, have been included in the
consolidated financial statements with the exception of purchase order commitments and
operating lease obligations, which are properly excluded under accounting principles
generally accepted in the United States of America. They are disclosed in the following
table in order to provide a consolidated picture of our financial position and liquidity.

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

We have agreements with limited
liability companies wholly-owned by Mr. Raymon F. Thompson, our Chairman and Chief
Executive Officer, to lease aircraft and an aircraft hangar. Under these agreements, rent
expense was approximately $3,289,200, $2,933,600 and $2,094,000 for the years ended
September 30, 2005, 2004 and 2003, respectively. The current rental rate is approximately
$274,000 per month for both the aircraft and the hangar; the lease terms are
month-to-month and therefore are not included in the above table. In fiscal 2004, we
incurred $802,000 of leasehold improvements to leased aircraft. The improvements are being
amortized over a three-year period, which represents the estimated useful life.

---

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

As of September 30, 2005, our
principal sources of liquidity consisted of approximately $6.5 million of cash and cash
equivalents, $0.5 million in marketable securities and incoming cash generated from
operations. As a result of growing our business, we experienced negative cash flows from
operating activities of $9.6 million for the year ended September 30, 2005. We experienced
negative cash flows from operating activities of $10.1 million for the year ended
September 30, 2003. Despite the negative cash flows from operating activities, we have
been able to fulfill our working capital and capital expenditure needs due to available
cash resources and maintaining adequate debt financing arrangements. We expect
existing debt financing arrangements and cash flows generated from operating activities to
be sufficient to fund operations at the current and projected levels in the future.

We have a $15.0 million credit agreement with our
bank.  In the first quarter of fiscal 2006,
we negotiated an amendment to the agreement increasing our revolving credit
facility from $15.0 million to $30.0 million. We are currently in negotiations with the
bank for a long-term loan to finance the acquisition of additional manufacturing
facilities in the Kalispell area.

We believe that we have sufficient
cash and cash equivalents, along with funds expected to be generated from operations and
amounts available under our credit facility to meet operating expenses and planned capital
expenditures through fiscal 2006 and into the foreseeable future. We estimate capital
expenditures will be between $10.0 million and $12.0 million during the next 12 months. We
currently have an effective shelf registration statement, which registers the offer and
sale of up to an aggregate $75.0 million of our securities. If additional financial
resources are required in the future, we expect either to issue securities from the shelf
registration statement or to issue other financial instruments, whichever management deems
advisable. Of course, there can be no assurance that in the future we will be able to
issue additional common stock or other financial instruments.

# Critical Accounting
Policies and Estimates

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

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

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

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

---

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

Warranty Obligations.  We
provide for the estimated cost of equipment warranties when the related revenue is
recognized. We track individual warranties on a tool-by-tool basis and develop estimated
rates by equipment class based on this history. The rates are used to estimate the
warranty accrual for a given specific piece of equipment. These rates are revised
periodically to reflect current cost trends due to the current life cycle of that product
class. The warranty accrual is reduced by actual costs of providing the warranty or if a
balance is remaining at the end of the warranty period, then that amount is also written
off. Warranty accrual expense impacts primarily Cost of Sales. While we engage in
extensive product quality programs and processes, including actively monitoring and
evaluating the quality of our component suppliers, our warranty obligation is affected by
product failure rates, material usage and service delivery costs incurred in correcting a
product failure. Should actual product failure rates, material usage or service delivery
costs differ from our estimates, revisions to the estimated warranty liability would be
required.

Allowance for Doubtful Accounts.
  We maintain allowances for doubtful accounts for estimated losses resulting from the
inability of our customers to make required payments. We record expense as a component of
selling, general and administrative within the Consolidated Statements of Operations. If
the financial condition of our customers were to deteriorate, due to the cyclicality of
the industries we serve or for other reasons, resulting in an impairment of their ability
to make payments, additional allowances and expense may be required. Likewise, if we are
successfully able to collect on an amount presumed to be uncollectible, the allowance for
doubtful accounts and the related expense may be reduced. In general, it takes longer to
collect payment in the capital equipment industry than in certain other industries. Days
Sales Outstanding (DSO) of peer companies in our industry ranges between approximately 50
and 140 days.

Impairment of Investments in
Marketable Securities.  We record an investment impairment charge when we believe an
investment has experienced a decline in value that is other than temporary. Future adverse
changes in market conditions or poor operating results of underlying investments could
result in losses or an inability to recover the carrying value of the investments that may
not be reflected in an investments current carrying value, thereby possibly
requiring an impairment charge in the future. Any investment impairment would be recorded
in the consolidated financial statements as Other Expense.

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

# Litigation

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

# New Accounting
Pronouncements

In December 2004, the FASB issued SFAS
No. 123(R), Share-Based Payment. This Statement revises FASB Statement No.
123, Accounting for Stock-Based Compensation and supersedes APB Opinion No.
25, Accounting for Stock Issued to Employees. SFAS No. 123(R) focuses
primarily on the accounting for transactions in which an entity obtains employee services
in share-based payment transactions. SFAS No. 123(R) generally requires companies to
recognize in the statement of income the cost of employee services received in exchange
for awards of equity instruments based on the grant-date fair value of those awards. In
March 2005, the U.S. Securities and Exchange Commission (SEC) issued SAB 107 which
expresses views of the SEC staff regarding the application of SFAS No. 123(R). Among other
things, SAB 107 provides interpretive guidance related to the interaction between SFAS No.
123(R) and certain SEC rules and regulations, as well as provides the SEC staffs
views regarding the valuation of share-based payment arrangements for public companies. On
April 21, 2005, the SEC issued the final rule Amendment to Rule 4-01(A) of
Regulation S-X Regarding the Compliance Date for Statement of Financial Accounting
Standards No. 123 (Revised 2004), Share-Based Payment, which revised the effective
date of SFAS No. 123(R) to the beginning of our next fiscal year that begins after June
15, 2005. Accordingly, we will adopt SFAS No. 123(R) in our first quarter of fiscal 2006.
We are currently evaluating the provisions of SFAS No.123(R) including the assessment of
allowable option valuation methodologies and methods of transition. Were we to continue to
value options using the Black-Scholes option pricing model, the impact of the adoption of
this standard would result in approximately $300,000 of pretax stock compensation expense
per quarter or $1.2 million per year.

---

In November 2004, the FASB issued
SFAS Statement No. 151, Inventory Costs  an Amendment of ARB No. 43,
Chapter 4 (SFAS No. 151). SFAS No. 151 amends ARB 43, Chapter 4, to
clarify that abnormal amounts of idle facility expense, freight, handling costs, and
wasted materials (spoilage) should be recognized as current-period charges. In
addition, this Statement requires that allocation of fixed production overheads to the
costs of conversion be based on the normal capacity of the production facilities. The
provisions of this Statement are effective for inventory costs incurred during fiscal
years beginning after June 15, 2005. Accordingly, we will adopt SFAS No. 151 in our
first quarter of fiscal 2006. We do not expect the adoption of SFAS No. 151 to have a
material effect on our results of operations or financial condition.

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

In March 2005, the FASB issued
Interpretation No. 47, Accounting for Conditional Asset Retirement Obligations an
interpretation of FASB Statement No. 143, (FIN 47) which clarifies that an entity is
required to recognize a liability for the fair value of a conditional asset retirement
obligation if the fair value of the liability can be reasonably estimated even though
uncertainty exists about the timing and/or method of settlement and that the fair value of
the liability should be recognized when incurred. The provisions of this Interpretation
are effective no later than the end of fiscal years ending after December 15, 2005.
Accordingly, we will adopt FIN 47 by the end of fiscal 2006. We do not expect the adoption
of FIN 47 to have a material effect on our results of operations or financial condition.

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

# Market Risks

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

As of September 30, 2005, we had
approximately $3.4 million in long-term debt and no short-term debt. Our long-term debt
bears interest at a fixed rate. As a result, changes in the fixed rate interest market
would change the estimated fair value of the fixed rate long-term debt. However, we
believe that a 10% change in the long-term interest rate would not have a material effect
on our business, financial condition, results of operations or cash flows.

All of our international operations
are subject to inherent risks in conducting business abroad, including fluctuation in the
relative value of currencies. We manage this risk and attempt to reduce such exposure
through an economic hedge using short-term forward exchange contracts. At September 30,
2005, we held forward contracts to sell Japanese Yen with a total face value of $7.1
million and a total market value of $6.7 million and a total unrealized gain of
approximately $400,000. The impact of movements in currency exchange rates on forward
contracts is offset to the extent of receivables denominated in Japanese Yen. The effect
of a 10% change in foreign exchange rates on hedged transactions involving Japanese Yen
forward exchange contracts and the underlying transactions would not be material to our
financial condition, results of operations or cash flows. We do not hold or issue
derivative financial instruments for trading or speculative purposes.

---

# Item 8.  Financial
Statements and Supplementary Data

SEMITOOL, INC.CONSOLIDATED BALANCE SHEETS
September 30, 2005 and 2004(Amounts in Thousands, Except Share Amounts)

|                                                                                 | 2005 |  | 2004 |        
|-------------------------------------------------------------------------------- | ---- |  | ---- | -------
|
|Current assets:                                                                  |      |  |      |        
|Cash and cash equivalents                                                        |      |  | $    | 6,557  
|Marketable securities                                                            |      |  |      | 475    
|Trade receivables, less allowance for doubtful accounts of $270 and $271         |      | 
|in 2005 and 2004                                                                 |      |  |      | 42,165 
|Inventories                                                                      |      |  |      | 72,294 
|Income tax refund receivable                                                     |      |  |      | 4      
|Prepaid expenses and other current assets                                        |      |  |      | 4,110  
|Deferred income taxes                                                            |      |  |      | 9,655  
|                                                                                 |      |  |      |        
|Total current assets                                                             |      |  |      | 135,260
|Property, plant and equipment, net                                               |      |  |      | 35,558 
|Intangibles, less accumulated amortization of $1,579 and $1,030 in 2005 and 2004 |      |  |      | 7,146  
|Other assets                                                                     |      |  |      | 716    
|                                                                                 |      |  |      |        
|Total assets                                                                     |      |  | $    | 178,680
|                                                                                 |      |  |      |        

|LIABILITIES AND SHAREHOLDERS' EQUITY                                     |  | 
|------------------------------------------------------------------------ |  | 
|Current liabilities:                                                     |  | 
|Accounts payable                                                         |  | 
|Accrued commissions                                                      |  | 
|Accrued warranty                                                         |  | 
|Accrued payroll and related benefits                                     |  | 
|Income taxes payable                                                     |  | 
|Other accrued liabilities                                                |  | 
|Customer advances                                                        |  | 
|Deferred profit                                                          |  | 
|Long-term debt, due within one year                                      |  | 
|                                                                         |  | 
|Total current liabilities                                                |  | 
|Long-term debt, due after one year                                       |  | 
|Deferred income taxes                                                    |  | 
|                                                                         |  | 
|Total liabilities                                                        |  | 
|                                                                         |  | 
|Commitments and contingencies                                            |  | 
|Shareholders' equity:                                                    |  | 
|Preferred stock, no par value, 5,000,000 shares authorized,              |  | 
|no shares issued and outstanding                                         |  | 
|Common stock, no par value, 75,000,000 shares authorized,                |  | 
|28,732,777 and 28,668,357 shares issued and outstanding in 2005 and 2004 |  | 
|Retained earnings                                                        |  | 
|Accumulated other comprehensive loss                                     |  | 
|                                                                         |  | 
|Total shareholders' equity                                               |  | 
|                                                                         |  | 
|Total liabilities and shareholders' equity                               |  | 
|                                                                         |  | 

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

---

SEMITOOL,
INC.CONSOLIDATED STATEMENTS OF OPERATIONSFor the years ended
September 30, 2005, 2004 and 2003 (Amounts in Thousands, Except Per Share Amounts)

|                                            | 2005 |  | 2004 |         | 2003 |  
|------------------------------------------- | ---- |  | ---- | ------- | ---- | -
|Net sales                                   |      |  | $    | 190,373 |      | $
|Cost of sales                               |      |  |      | 93,404  |      |  
|                                            |      |  |      |         |      |  
|Gross profit                                |      |  |      | 96,969  |      |  
|                                            |      |  |      |         |      |  
|Operating expenses:                         |      | 
|Selling, general and administrative         |      |  |      | 66,513  |      |  
|Research and development                    |      |  |      | 19,742  |      |  
|                                            |      |  |      |         |      |  
|Total operating expenses                    |      |  |      | 86,255  |      |  
|                                            |      |  |      |         |      |  
|Income (loss) from operations               |      |  |      | 10,714  |      |  
|                                            |      |  |      |         |      |  
|Other income (expense):                     |      | 
|Interest income                             |      |  |      | 309     |      |  
|Interest expense                            |      |  |      | (122    | )    |  
|Other, net                                  |      |  |      | 3,606   |      |  
|                                            |      |  |      |         |      |  
|Total other income (expense)                |      |  |      | 3,793   |      |  
|                                            |      |  |      |         |      |  
|Income (loss) before income taxes           |      |  |      | 14,507  |      |  
|Income tax provision (benefit)              |      |  |      | 4,457   |      |  
|                                            |      |  |      |         |      |  
|Net income (loss)                           |      |  | $    | 10,050  |      | $
|                                            |      |  |      |         |      |  
|Earnings (loss) per share:                  |      | 
|Basic                                       |      |  | $    | 0.35    |      | $
|                                            |      |  |      |         |      |  
|Diluted                                     |      |  | $    | 0.35    |      | $
|                                            |      |  |      |         |      |  
|Weighted average common shares outstanding: |      | 
|Basic                                       |      |  |      | 28,709  |      |  
|Diluted                                     |      |  |      | 29,086  |      |  

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

---

SEMITOOL, INC.CONSOLIDATED STATEMENTS
OF CHANGES IN SHAREHOLDERS EQUITYFor the years ended September 30, 2005, 2004 and 2003
(Amounts in Thousands)

|                                      | Common Stock |  |  |        | 
|------------------------------------- | ------------ |  |  | ------ | 
|
|Balance September 30, 2002            |              |  |  | 28,428 | 
|Net loss                              |              |  |  | --     | 
|Exercise of stock options             |              |  |  | 28     | 
|Other comprehensive income            |              |  |  | --     | 
|                                      |              |  |  |        | 
|                                      |              |  |  |        | 
|Balance September 30, 2003            |              |  |  | 28,456 | 
|Net income                            |              |  |  | --     | 
|Exercise of stock options             |              |  |  | 212    | 
|Income tax effect of nonqualified     |              | 
|stock options                         |              |  |  | --     | 
|Compensation expense recognized under |              | 
|employee stock option plans           |              |  |  | --     | 
|Other comprehensive income            |              |  |  | --     | 
|                                      |              |  |  |        | 
|                                      |              |  |  |        | 
|Balance September 30, 2004            |              |  |  | 28,668 | 
|Net income                            |              |  |  | --     | 
|Exercise of stock options             |              |  |  | 65     | 
|Income tax effect of nonqualified     |              | 
|stock options                         |              |  |  | --     | 
|Compensation expense recognized under |              | 
|employee stock option plans           |              |  |  | --     | 
|Other comprehensive loss              |              |  |  | --     | 
|                                      |              |  |  |        | 
|                                      |              |  |  |        | 
|Balance September 30, 2005            |              |  |  | 28,733 | 
|                                      |              |  |  |        | 

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

---

SEMITOOL, INC.CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended September 30, 2005, 2004 and 2003(Amounts in Thousands)

|                                                                   | 2005 |  | 2004 |         | 2003 |  
|------------------------------------------------------------------ | ---- |  | ---- | ------- | ---- | -
|Operating activities:                                              |      |  |      |         |      |  
|Net income (loss)                                                  |      |  | $    | 10,050  |      | $
|Adjustments to reconcile net income (loss) to net                  |      | 
|cash provided by (used in) operating activities:                   |      | 
|Non-cash inventory write-down and other charges                    |      |  |      | --      |      |  
|Loss on disposition of assets                                      |      |  |      | 116     |      |  
|Depreciation and amortization                                      |      |  |      | 7,237   |      |  
|Deferred income taxes                                              |      |  |      | 1,805   |      |  
|Income tax benefit of nonqualified stock options exercised         |      |  |      | 29      |      |  
|Compensation expense recognized under employee stock options plans |      |  |      | 253     |      |  
|Change in:                                                         |      | 
|Trade receivables                                                  |      |  |      | 9,977   |      |  
|Inventories                                                        |      |  |      | (23,836 | )    |  
|Income tax refund receivable                                       |      |  |      | 1,257   |      |  
|Prepaid expenses and other current assets                          |      |  |      | (1,555  | )    |  
|Other assets                                                       |      |  |      | (250    | )    |  
|Accounts payable                                                   |      |  |      | (2,722  | )    |  
|Accrued commissions                                                |      |  |      | (1,210  | )    |  
|Accrued warranty                                                   |      |  |      | 1,811   |      |  
|Accrued payroll and related benefits                               |      |  |      | 2,340   |      |  
|Income taxes payable                                               |      |  |      | (2,230  | )    |  
|Other accrued liabilities                                          |      |  |      | 1,864   |      |  
|Customer advances                                                  |      |  |      | (1,277  | )    |  
|Deferred profit                                                    |      |  |      | (13,284 | )    |  
|                                                                   |      |  |      |         |      |  
|Net cash provided by (used in) operating activities                |      |  |      | (9,625  | )    |  
|                                                                   |      |  |      |         |      |  
|Investing activities:                                              |      | 
|Purchases of marketable securities                                 |      |  |      | (2,490  | )    |  
|Proceeds from sale and maturities of marketable securities         |      |  |      | 8,004   |      |  
|Purchases of property, plant and equipment                         |      |  |      | (6,429  | )    |  
|Increases in intangible assets                                     |      |  |      | (1,206  | )    |  
|Proceeds from sale of property, plant and equipment                |      |  |      | 543     |      |  
|                                                                   |      |  |      |         |      |  
|Net cash used in investing activities                              |      |  |      | (1,578  | )    |  
|                                                                   |      |  |      |         |      |  
|Financing activities:                                              |      | 
|Proceeds from exercise of stock options                            |      |  |      | 349     |      |  
|Repayments of line of credit and short-term debt                   |      |  |      | --      |      |  
|Borrowings under long-term debt                                    |      |  |      | 1,314   |      |  
|Repayments of long-term debt and capital leases                    |      |  |      | (225    | )    |  
|                                                                   |      |  |      |         |      |  
|Net cash provided by (used in) financing activities                |      |  |      | 1,438   |      |  
|                                                                   |      |  |      |         |      |  
|Effect of exchange rate changes on cash and cash equivalents       |      |  |      | (46     | )    |  
|                                                                   |      |  |      |         |      |  
|Net decrease in cash and cash equivalents                          |      |  |      | (9,811  | )    |  
|Cash and cash equivalents at beginning of year                     |      |  |      | 16,368  |      |  
|                                                                   |      |  |      |         |      |  
|Cash and cash equivalents at end of year                           |      |  | $    | 6,557   |      | $
|                                                                   |      |  |      |         |      |  

---

SEMITOOL, INC.CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
For the years ended September 30, 2005, 2004 and 2003(Amounts in Thousands)

|                                                                       | 2005 |  | 2004 |       | 2003 |  
|---------------------------------------------------------------------- | ---- |  | ---- | ----- | ---- | -
|Supplemental disclosures of cash flow information:                     |      |  |      |       |      |  
|Cash paid (received) during the year for:                              |      | 
|Interest, net of amounts capitalized                                   |      |  | $    | 116   |      | $
|Income taxes                                                           |      |  |      | 5,208 |      |  
|Supplemental disclosures of non-cash financing and investing activity: |      | 
|Inventory transferred to equipment                                     |      |  | $    | 6,906 |      | $

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

---

SEMITOOL, INC.CONSOLIDATED STATEMENTS OF COMPREHENSIVE
INCOME (LOSS)For the years ended September 30, 2005, 2004 and 2003(Amounts in Thousands)

|                                                        | 2005 |  | 2004 |        | 2003 |  
|------------------------------------------------------- | ---- |  | ---- | ------ | ---- | -
|Net income (loss):                                      |      |  | $    | 10,050 |      | $
|Net gain (loss) on cash flow hedges                     |      |  |      | 234    |      |  
|Unrealized gain (loss) on available-for-sale securities |      |  |      | 6      |      |  
|Foreign currency translation adjustments                |      |  |      | (343   | )    |  
|                                                        |      |  |      |        |      |  
|Total comprehensive income (loss)                       |      |  | $    | 9,947  |      | $
|                                                        |      |  |      |        |      |  

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

---

# SEMITOOL, INC.NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS

1.     Company
Organization and Summary of Significant Accounting Policies:

| | Semitool,
Inc. (Semitool or the Company) designs, manufactures, installs and services highly-engineered equipment
for use in the fabrication of semiconductor devices. The Companys products are
focused on the wet chemical process steps in integrated circuit, or IC, manufacturing and
include systems for wafer surface preparation and electrochemical deposition, or ECD,
applications. Semitools surface preparation systems are designed for wet cleaning,
stripping and etching processes, including photoresist and polymer removal and metal
etching. The Companys ECD systems are used for copper and gold plating for the ICs
internal wiring, or interconnects; solder and gold bumps for wafer level packaging
applications; and other metals for various semiconductor and related applications. The
Companys products address critical applications within the semiconductor
manufacturing process, and help enable its customers to manufacture more advanced
semiconductor devices that feature higher levels of performance.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

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

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

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

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

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

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

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

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

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

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

---

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

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

| | Certain
forecasted transactions and assets are exposed to foreign currency risk. The Company
monitors foreign currency exposures regularly to maximize the overall effectiveness of
the foreign currency hedge positions. The only currency hedged is the Japanese Yen.
Forward contracts used to hedge forecasted international sales on credit for up to 18
months in the future are designated as cash flow hedging instruments. Derivative gains
and losses included in OCI are reclassified when forecasted transactions become
receivables. During the fiscal year ended September 30, 2005, the amount transferred from
OCI to Other income (expense) was not material. The Company estimates that all $123,000
of net derivative gains, currently reported as a separate component of accumulated other
comprehensive loss, will be reclassified into earnings within the next 12 months.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

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

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

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

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

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

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

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

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

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

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

---

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

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

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

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

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

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

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

| | Semitool
Japan has the Yen as its functional currency and invoices its customers in Yen. All
assets and liabilities of Semitool Japan are translated at year-end exchange rates and
all revenues and expenses are re-measured at average rates prevailing during the year.
Translation adjustments are reported as a separate component of accumulated other
comprehensive loss. A transaction gain of $110,000 in 2005, and losses
of $1,500 and $49,000 in 2004 and 2003 related to cash flow hedges and their
underlying receivables are included in Other income (expense) in the
Consolidated Statements of Operations.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

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

| | In December 2004, the FASB issued SFAS No. 123(R), Share-Based Payment. This
Statement revises FASB Statement No. 123, Accounting for Stock-Based Compensation and
supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees. SFAS
No. 123(R) focuses primarily on the accounting for transactions in which an entity
obtains employee services in share-based payment transactions. SFAS No. 123(R) generally
requires companies to recognize in the statement of income the cost of employee services
received in exchange for awards of equity instruments based on the grant-date fair value
of those awards. In March 2005, the U.S. Securities and Exchange Commission (SEC) issued
SAB 107, which expresses views of the SEC staff regarding the application of SFAS No.
123(R). Among other things, SAB 107 provides interpretive guidance related to the
interaction between SFAS No. 123(R) and certain SEC rules and regulations, as well as
provides the SEC staffs views regarding the valuation of share-based payment
arrangements for public companies. On April 21, 2005, the SEC issued the final rule Amendment
to Rule 4-01(A) of Regulation S-X Regarding the Compliance Date for Statement of
Financial Accounting Standards No. 123 (Revised 2004), Share-Based Payment, which
revised the effective date of SFAS No. 123(R) to the beginning of our next fiscal year
that begins after June 15, 2005. Accordingly, the Company will adopt SFAS No. 123(R) in
its first quarter of fiscal 2006. The Company is currently evaluating the provisions of
SFAS No.123(R) including the assessment of allowable option valuation methodologies and
methods of transition. Were the Company to continue to value options using the
Black-Scholes option pricing model, the impact of the adoption of this standard would
result in approximately $300,000 of pretax stock compensation expense per quarter or $1.2
million per year.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

---

| | In
November 2004, the FASB issued SFAS Statement No. 151, Inventory Costs
 an Amendment of ARB No. 43, Chapter 4 (SFAS No. 151). SFAS No. 151
amends ARB 43, Chapter 4, to clarify that abnormal amounts of idle facility expense,
freight, handling costs, and wasted materials (spoilage) should be recognized as
current-period charges. In addition, this Statement requires that allocation of fixed
production overheads to the costs of conversion be based on the normal capacity of the
production facilities. The provisions of this Statement are effective for inventory costs
incurred during fiscal years beginning after June 15, 2005. Accordingly, the Company
will adopt SFAS No. 151 in its first quarter of fiscal 2006. The Company does not expect
the adoption of SFAS No. 151 to have a material effect on its results of operations or
financial condition.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | In
March 2005, the FASB issued Interpretation No. 47, Accounting for Conditional Asset
Retirement Obligations an interpretation of FASB Statement No. 143, (FIN 47) which
clarifies that an entity is required to recognize a liability for the fair value of a
conditional asset retirement obligation if the fair value of the liability can be
reasonably estimated even though uncertainty exists about the timing and/or method of
settlement and that the fair value of the liability should be recognized when incurred.
The provisions of this Interpretation are effective no later than the end of fiscal years
ending after December 15, 2005. Accordingly, the Company will adopt FIN 47 by the end of
fiscal 2006. The Company does not expect the adoption of FIN 47 to have a material effect
on its results of operations or financial condition.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | The
Company accounts for stock-based employee compensation using the intrinsic value method
under Accounting Principles Board Opinion No. 25 (APB No. 25), Accounting for Stock
Issued to Employees and has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123 (SFAS No. 123) Accounting for Stock-Based
Compensation as amended by SFAS No 148 (SFAS No. 148) Accounting for
Stock-Based Compensation Transition and Disclosure. APB No. 25 provides that
compensation expense relative to employee stock options is measured based on the
intrinsic value of the stock options granted. Compensation expense is recognized in the
statement of operations in the case where the stock options are granted at exercise
prices below fair market value on the date of grant. If the stock options are granted at
market value, no compensation expense is recorded. SFAS No. 123 provides for a fair value
based method of accounting for an employee stock option. For stock options, fair value is
determined using an option pricing model that takes into account the stock price at the
grant date, the exercise price, the expected life of the option, the volatility of the
underlying stock, expected dividends, and the risk-free rate over the expected life of
the option. SFAS No. 123 requires entities continuing to use an intrinsic value based
method of accounting prescribed by APB No. 25 to provide pro forma disclosures of net
income and earnings per share as if the fair value method of accounting had been used.
SFAS No. 148 requires prominent disclosure of the method used to value options and the
effect of the method used on reported results in both annual and interim financial
statements.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

---

| | For options granted at market value, the Company does not recognize an expense. However, for
options granted at exercise prices below fair market value on the date of grant, the
Company recognizes compensation expense and amortizes deferred stock-based compensation
on the accelerated vesting method described in FASB Interpretation Number 28 over the
vesting periods of the applicable stock options (normally five years). The Company
estimates the fair value of its stock-based awards to employees using a Black-Scholes
option pricing model. See Note 9 for detailed assumptions used by the Company to compute
the fair value of stock-based awards for purposes of pro forma disclosures under SFAS No.
123. Had compensation cost for the Option Plan been determined based on the fair value
consistent with the provisions of SFAS No. 123, the Companys net income (loss) and
earnings (loss) per share would have been changed to the pro forma amounts shown below
(in thousands, except for per share amounts):
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                         | 2005 |  | 2004 |        | 2003 |  
|-------------------------------------------------------- | ---- |  | ---- | ------ | ---- | -
|Net income (loss), as reported                           |      |  | $    | 10,050 |      | $
|Add: Compensation expense recorded under APB No. 25,     |      | 
|net of related tax effects                               |      |  |      | 175    |      |  
|Deduct: Total stock-based compensation expense           |      | 
|determined under fair value based method for all awards, |      | 
|net of related tax effects                               |      |  |      | (843   | )    |  
|                                                         |      |  |      |        |      |  
|Pro forma net income (loss)                              |      |  | $    | 9,382  |      | $
|                                                         |      |  |      |        |      |  
|Basic earnings (loss) per share:                         |      | 
|As reported                                              |      |  | $    | 0.35   |      | $
|Pro forma                                                |      |  | $    | 0.33   |      | $
|Diluted earnings (loss) per share:                       |      | 
|As reported                                              |      |  | $    | 0.35   |      | $
|Pro forma                                                |      |  | $    | 0.32   |      | $

| | Computation
of Earnings (Loss) Per Share
| | ----------------------------------------

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

|                                                  | 2005 |  | 2004 |        | 2003 |  
|------------------------------------------------- | ---- |  | ---- | ------ | ---- | -
|Numerator:                                        |      |  |      |        |      |  
|Net income (loss) used for basic and diluted      |      | 
|earnings (loss) per share                         |      |  | $    | 10,050 |      | $
|                                                  |      |  |      |        |      |  
|Denominator:                                      |      | 
|Weighted average common shares used for           |      | 
|basic earnings (loss) per share                   |      |  |      | 28,709 |      |  
|Effects of dilutive stock options                 |      |  |      | 377    |      |  
|                                                  |      |  |      |        |      |  
|Denominator for diluted earnings (loss) per share |      |  |      | 29,086 |      |  
|                                                  |      |  |      |        |      |  

| | Diluted
earnings (loss) per share excludes the effects of antidilutive stock options to purchase 403,350,
194,250 and 1,531,115 shares of common stock in fiscal 2005, 2004 and 2003, respectively.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

---

2.     Securities
Available-For-Sale:

| | Securities
available-for-sale consist of the following (in thousands):
| | ----------------------------------------------------------------------

|                           | Amortized
Cost |  | Gross
Unrealized
Gain |       | Gross
Unrealized
Loss |   | Market
Value | 
|-------------------------- | -------------- |  | --------------------- | ----- | --------------------- | - | ------------ | 
|September 30, 2005:        |                |  |                       |       |                       |   |              | 
|U.S. government agencies   |                |  | $                     | --    |                       | $ | --           | 
|U.S. corporate obligations |                |  |                       | --    |                       |   | --           | 
|Non-taxable municipal      |                |  |                       | 865   |                       |   | --           | 
|Other                      |                |  |                       | --    |                       |   | --           | 
|                           |                |  |                       |       |                       |   |              | 
|                           |                |  | $                     | 865   |                       | $ | --           | 
|                           |                |  |                       |       |                       |   |              | 
|September 30, 2004:        |                | 
|U.S. government agencies   |                |  | $                     | 250   |                       | $ | --           | 
|U.S. corporate obligations |                |  |                       | 1,449 |                       |   | --           | 
|Non-taxable municipal      |                |  |                       | 8,042 |                       |   | --           | 
|Other                      |                |  |                       | --    |                       |   | --           | 
|                           |                |  |                       |       |                       |   |              | 
|                           |                |  | $                     | 9,741 |                       | $ | --           | 
|                           |                |  |                       |       |                       |   |              | 

| | Cash
and cash equivalents included investments in debt instruments and other securities of
$390,000 and $3.7 million at September 30, 2005 and September 30, 2004, respectively.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Contractual
maturities of short-term investments at September 30, 2005 and 2004 were all due in less
than one year. Gross realized gains or losses were immaterial on sales of
available-for-sale securities for fiscal 2005 and fiscal 2004. Semitool manages its cash
equivalents and short-term investments as a single portfolio of highly liquid securities
that is intended to be available to meet the Companys current cash requirements.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

3.     Inventories:

| | Inventories
at September 30, 2005 and 2004 are summarized as follows (in thousands):
| | ------------------------------------------------------------------------------------

|                        | 2005 |  | 2004 |       
|----------------------- | ---- |  | ---- | ------
|Parts and raw materials |      |  | $    | 37,165
|Work-in-process         |      |  |      | 26,057
|Finished goods          |      |  |      | 9,072 
|                        |      |  |      |       
|                        |      |  | $    | 72,294
|                        |      |  |      |       

4.     Property,
Plant and Equipment:

| | Property,
plant and equipment at September 30, 2005 and 2004 is summarized as follows (in
thousands):
| | -----------------------------------------------------------------------------------------------------

|                                               | 2005 |  | 2004 |        
|---------------------------------------------- | ---- |  | ---- | -------
|Buildings and improvements                     |      |  | $    | 23,332 
|Machinery and equipment                        |      |  |      | 35,633 
|Furniture, fixtures and leasehold improvements |      |  |      | 8,947  
|Vehicles and aircraft                          |      |  |      | 9,037  
|                                               |      |  |      |        
|                                               |      |  |      | 76,949 
|Less accumulated depreciation and amortization |      |  |      | (45,491
|                                               |      |  |      |        
|                                               |      |  |      | 31,458 
|Land and land improvements                     |      |  |      | 4,100  
|                                               |      |  |      |        
|                                               |      |  | $    | 35,558 
|                                               |      |  |      |        

| | Depreciation
expense was $6,694,000, $5,187,000 and $7,915,000 for fiscal 2005, 2004 and 2003,
respectively.
| | ------------------------------------------------------------------------------------------------------------

---

5.     Intangible
Assets:

| | Amortization
expense for intangible assets was $549,000, $418,000 and $717,000 for fiscal 2005, 2004 and 2003, respectively.
Based on patent rights granted and recorded at September 30, 2005, and assuming no
subsequent impairment of the underlying assets, the annual estimated amortization expense
is expected to be as follows (in thousands):
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Year Ending
September 30, |  | Total      | 
| | ------------------------- |  | ---------- | 
| |                           |  | 2006       | 
| |                           |  | 2007       | 
| |                           |  | 2008       | 
| |                           |  | 2009       | 
| |                           |  | 2010       | 
| |                           |  | Thereafter | 

| | Accumulated
amortization was $1,579,000 and $1,030,000 at September 30, 2005 and 2004, respectively.
| | ----------------------------------------------------------------------------------------------------

6.     Note
Payable to Bank:

| | On
November 1, 2004, the Company entered into a $15 million Credit Agreement with a bank,
with an expiration date of March 1, 2006. In the first quarter of fiscal 2006, the
Company amended the Agreement to provide for up to $30 million and an expiration date of March
1, 2008. Borrowings are collateralized by certain assets of the Company and bear interest
at the banks prime rate or LIBOR plus 2.25% per annum. The Agreement requires
monthly interest payments only, until March 1, 2008, when the then outstanding principal
balance is due and payable in full. The original Agreement provides for a non-utilization
fee payable quarterly at a rate of 0.30% per annum on the average daily amount of the
unused portion of the overall credit limit for each such year, and the amended Agreement
provides for a non-refundable annual commitment fee equal to 0.10% of the credit limit,
commencing March 1, 2006. Additionally, the Agreement contains various restrictive
financial and non-financial covenants. The financial covenants include measurements of
tangible net worth, total liabilities divided by tangible net worth, pre-tax profit and a
maximum borrowing limit based upon total accounts receivable. At September 30, 2005 there
were no advances outstanding on the Credit Agreement.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
a result of growing its business, the Company experienced negative cash flows from operating
activities of $9.6 million for the year ended September 30, 2005. The Company experienced negative
cash flows from operating activities of $10.1 million for the year ended September 30,
2003. Despite the negative cash flows from operating activities, the Company has been able to
fulfill its working capital and capital expenditure needs due to available cash resources
and maintaining adequate debt financing arrangements. The Company expects existing debt
financing arrangements and cash flows generated from operating activities to be
sufficient to fund operations at the current and projected levels in the future.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

---

7.     Long-Term
Debt:

| | Long-term
debt at September 30, 2005 and September 30, 2004 is summarized as follows (in
thousands):
| | ----------------------------------------------------------------------------------------------------

|                                                               | 2005 |  | 2004 |      
|-------------------------------------------------------------- | ---- |  | ---- | -----
|Mortgage term note payable in monthly installments of          |      |  |      |      
|$23, including interest at a blended rate of 5.5%, maturing on |      | 
|September 1, 2014. (A)                                         |      |  | $    | 1,886
|Mortgage term note payable to the Pennsylvania Industrial      |      | 
|Development Authority (PIDA) in monthly installments of $6,    |      | 
|including interest at 4.25%, maturing on December 1, 2008. (B) |      |  |      | 203  
|Mortgage term note payable to the Raiffeisenbank Hallein       |      | 
|in monthly installments of EUR 11 (US $13),                    |      | 
|including interest at 3.5%, maturing on March 5, 2016. (C)     |      |  |      | 1,314
|                                                               |      |  |      |      
|                                                               |      |  |      | 3,403
|Less current portion                                           |      |  |      | 292  
|                                                               |      |  |      |      
|                                                               |      |  | $    | 3,111
|                                                               |      |  |      |      

|(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 Bank
          of America providing the remaining 20%. The notes are personally guaranteed by
          Raymon F. Thompson, the Companys Chairman and Chief Executive Officer.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

|(C) | The
mortgage term note payable to Raiffeisenbank Hallein provides for EUR           2,500,000
for the construction of a production and office building in Salzburg,           Austria.
At September 30, 2005, there were EUR 1,090,000 (US $1,314,000) of           advances
outstanding on the note payable. Payment amounts listed in the above           table have
been prorated to reflect the 44% draw-down on the loan, at September           30, 2005.
The Company anticipates borrowing up to the full amount of the loan           commitment
and beginning April 5, 2006, principal and interest will be payable           in monthly
installments of EUR 25,000 (US $30,000). Interest only is payable           through March
31, 2006, at 3-months EURIBOR +0.875%, rounded up to the full 1/8           percent.
Interest is fixed at 3.5% from April 1, 2006 through March 31, 2011.           From April
1, 2011, interest will be charged on the basis of 3-months EURIBOR           +0.875%,
rounded up to the full 1/8 percent, subject to quarterly adjustment,           whereby
the interest rate for the respective subsequent calendar quarter is set           based
on the EURIBOR of the first bank working day of the quarter. The note           payable
is collateralized by a lien on the premises in Salzburg, Austria upon           which the
production and office building resides.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Principal
maturities for long-term debt at September 30, 2005, are summarized as follows (in
thousands):
| | --------------------------------------------------------------------------------------------------------

| | Year Ending
September 30, |  | Notes
Payable | 
| | ------------------------- |  | ------------- | 
| |                           |  | 2006          | 
| |                           |  | 2007          | 
| |                           |  | 2008          | 
| |                           |  | 2009          | 
| |                           |  | 2010          | 
| |                           |  | Thereafter    | 
| |                           |  |              
| |                           |  |               | 
| |                           |  |              
| |                           | 

---

8.     Accumulated
Other Comprehensive Loss:

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

| | Accumulated
other comprehensive loss at September 30, 2005 and 2004 consisted of the following
components (in thousands):
| | -------------------------------------------------------------------------------------------------------------------------

|                                                                                | 2005 |  | 2004 |     
|------------------------------------------------------------------------------- | ---- |  | ---- | ----
|Unrealized loss on investments                                                  |      |  | $    | (3  
|Unrealized gain (loss) on derivative instruments qualifying as cash flow hedges |      |  |      | 123 
|Cumulative translation adjustments                                              |      |  |      | (615
|                                                                                |      |  |      |     
|                                                                                |      |  | $    | (495
|                                                                                |      |  |      |     

9.     Employee
Benefit and Stock Option Plans:

| | Semitool
maintains a profit-sharing plan and trust under Section 401(k) of the Internal Revenue
Code. Under the terms of the plan, U.S. employees may make voluntary contributions to the
plan. Semitool contributes a matching amount equal to 50% of the employees
voluntary contribution for up to 5% of the employees compensation. Semitool may
also make non-matching contributions to the plan. Total profit sharing contribution cost
for this plan was approximately $785,000, $735,000 and $820,000 for the years ended
September 30, 2005, 2004 and 2003, respectively.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Semitool
Europe Ltd. maintains a defined contribution pension agreement. This pension agreement is
open to all employees with more than three months of service. The employer and employee
contributions are invested in each individual members personal pension plan with a
United Kingdom insurance company as Trustee. The employer has an obligation to make
contributions at one-half of the contribution rate paid by the employee, subject to a
rate between 2.5% and 5.0% of the employees salary. The total pension cost for this
plan for the years ended September 30, 2005, 2004 and 2003 approximated $51,000, $44,000
and $45,000, respectively.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | In
February 2004, the Board of Directors adopted and the shareholders approved the Semitool,
Inc. 2004 Stock Option Plan (the Option Plan), replacing the Semitool, Inc. 1994 Stock
Option Plan. The total shares reserved for issuance under the Option Plan are 3,300,000
at September 30, 2005. 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 and directors, independent contractors and consultants.
The Option Plan also provides for automatic grants of nonqualified stock options to
independent directors. The Option Plan will expire in February 2014 unless terminated
earlier at the discretion of the Board of Directors. Options generally have a ten-year
term.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

---

| | The
following summary shows stock option activity for the three years ended September 30,
2005:
| | -----------------------------------------------------------------------------------------------

|                               | 2005 |  | 2004 |           | 2003 | 
|------------------------------ | ---- |  | ---- | --------- | ---- | 
|
|Outstanding, beginning of year |      |  |      | 1,634,925 |      | 
|Granted                        |      |  |      | 439,700   |      | 
|Exercised                      |      |  |      | (64,420   | )    | 
|Forfeited                      |      |  |      | (26,900   | )    | 
|                               |      |  |      |           |      | 
|                               |      |  |      |           |      | 
|                               |      |  |      |           |      | 
|Outstanding, end of year       |      |  |      | 1,983,305 |      | 
|                               |      |  |      |           |      | 
|Exercisable, end of year       |      |  |      | 1,078,105 |      | 

| | 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
fiscal 2005, 2004 and 2003, respectively: dividend yield of 0% for all years; expected
volatility of 80.0% for all years; risk-free interest rates of 3.9%, 3.3% and 2.8%,
respectively; and expected lives of 4.6, 4.6 and 4.8 years, respectively.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

| | The
Company granted a total of 13,000 stock-based awards during fiscal 2003 with exercise
prices equal to the market price of the stock on the grant date. The weighted-average
exercise price and weighted-average fair value of these awards were $4.80 and $3.08,
respectively. The Company granted a total of 336,000 stock-based awards during fiscal
2003 with exercise prices less than the market price of the stock on the grant date. The
weighted-average exercise price and weighted-average fair value of these awards were
$4.03 and $2.58, respectively. The Company did not grant stock-based awards during fiscal
2003 with exercise prices greater than the market price of the stock on the grant date.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

---

| | The
following tables summarize information about stock options outstanding at September 30,
2005:
| | -------------------------------------------------------------------------------------------------

|                   | Options Outstanding |  | Options Exercisable |          
|------------------ | ------------------- |  | ------------------- | ---------
|
|
|$  3.28  -  $ 4.88 |                     |  |                     | 434,180  
|$  4.98  -  $ 7.45 |                     |  |                     | 610,875  
|$  7.50  -  $11.25 |                     |  |                     | 881,500  
|$11.70  -  $15.88  |                     |  |                     | 46,250   
|$19.19  -  $19.25  |                     |  |                     | 10,500   
|                   |                     |  |                     |          
|                   |                     |  |                     |          
|                   |                     |  |                     | 1,983,305
|                   |                     |  |                     |          

| | The
exercise and sale of certain qualified options resulted in the treatment of those options
as nonqualified options for tax purposes. As a result, the Company received tax benefits
associated with those options of $29,000 and $276,000 in fiscal 2005 and fiscal 2004,
respectively, which were recorded as additional capital.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

10.    Other
Income (Expense):

| | Other,
net for fiscal 2005 includes a $2.9 million seed layer enhancement litigation settlement
payment received from Novellus Systems, Inc. in October 2004. For fiscal 2003, Other, net
includes proceeds received from a settlement in connection with a patent claim that the
Company pursued against a German manufacturer of semiconductor equipment.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

11.    Income
Taxes:

| | The
provision (benefit) for income taxes for the years ended September 30, 2005, 2004 and
2003 consists of the following (in thousands):
| | ----------------------------------------------------------------------------------------------------------------------------------------

|         | 2005 |  | 2004 |       | 2003 |  
|-------- | ---- |  | ---- | ----- | ---- | -
|Federal: |      |  |      |       |      |  
|Current  |      |  | $    | 244   |      | $
|Deferred |      |  |      | 1,547 |      |  
|State:   |      | 
|Current  |      |  |      | 347   |      |  
|Deferred |      |  |      | 168   |      |  
|Foreign: |      | 
|Current  |      |  |      | 2,047 |      |  
|Deferred |      |  |      | 104   |      |  
|         |      |  |      |       |      |  
|         |      |  | $    | 4,457 |      | $
|         |      |  |      |       |      |  

| | Domestic
and foreign components of income (loss) before income taxes for the years ended September
30, 2005, 2004 and 2003 are as follows (in thousands):
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------

|         | 2005 |  | 2004 |        | 2003 |  
|-------- | ---- |  | ---- | ------ | ---- | -
|Domestic |      |  | $    | 8,468  |      | $
|Foreign  |      |  |      | 6,039  |      |  
|         |      |  |      |        |      |  
|         |      |  | $    | 14,507 |      | $
|         |      |  |      |        |      |  

---

| | The
components of the deferred tax assets and liabilities as of September 30, 2005 and 2004
are as follows (in thousands):
| | --------------------------------------------------------------------------------------------------------------------------

|                                 | 2005 |  | 2004 |       
|-------------------------------- | ---- |  | ---- | ------
|Deferred tax assets:             |      |  |      |       
|Accrued warranty                 |      |  | $    | 1,533 
|Net operating loss carryforwards |      |  |      | 283   
|Credit carryover                 |      |  |      | 844   
|Deferred profit                  |      |  |      | 4,395 
|Other accrued liabilities        |      |  |      | 1,431 
|Inventories                      |      |  |      | 957   
|Other                            |      |  |      | 212   
|                                 |      |  |      |       
|Deferred tax assets              |      |  |      | 9,655 
|                                 |      |  |      |       
|Deferred tax liabilities:        |      | 
|Depreciation and amortization    |      |  |      | (3,498
|Other                            |      |  |      | (10   
|                                 |      |  |      |       
|Total deferred tax liabilities   |      |  |      | (3,508
|                                 |      |  |      |       
|Net deferred tax asset           |      |  | $    | 6,147 
|                                 |      |  |      |       

| | Semitool
has net operating loss carryforwards of approximately $14 million in various states. The
losses expire in fiscal years 2007 through 2023. The Company estimates the tax effect of
the net operating losses to be approximately $283,000. Semitool has a research and
experimentation credit carryforward in the State of Montana of approximately $197,000,
which will expire by fiscal year 2020. Semitool also has an Alternative Minimum Tax
credit carryforward of approximately $647,000 that does not expire.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Cumulative
undistributed earnings of foreign subsidiaries, for which no U.S. income or foreign
withholding taxes have been recorded, were approximately $13.6 million at September 30,
2005. Such earnings are expected to be reinvested indefinitely. Determination of the
amount of unrecognized deferred tax liability with respect to such earnings is not
practicable. The additional taxes payable on the earnings of foreign subsidiaries, if
remitted, would be substantially offset by U.S. tax credits for foreign taxes already
paid.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
American Jobs Creation Act of 2004, signed into law on October 22, 2004, provides for a
special one-time dividend received deduction on the repatriation of certain foreign
earnings to a United States company (parent of a controlled foreign corporation). At
Semitools election, this deduction would be available for repatriated dividends
received in either fiscal 2005 or fiscal 2006.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Semitool
has not yet determined whether it will make the special one-time dividend received
deduction election. The Company estimates the range of possible amounts being considered
for repatriation to be from zero to approximately $1,477,000. The maximum tax expense
from the repatriation would be approximately $78,000. Semitool expects to complete its
evaluation by December 31, 2006.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
differences between the consolidated provision (benefit) for income taxes and income
taxes computed using income (loss) before income taxes and the U.S. federal income tax
rate for the years ended September 30, 2005, 2004 and 2003 are as follows (in thousands):
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                   | 2005 |  | 2004 |        | 2003 |  
|-------------------------------------------------- | ---- |  | ---- | ------ | ---- | -
|Amount computed using the statutory rate           |      |  | $    | 5,077  |      | $
|Increase (decrease) in taxes resulting from:       |      | 
|State taxes, net of federal benefit                |      |  |      | 291    |      |  
|Effect of foreign taxes                            |      |  |      | (151   | )    |  
|Research and experimentation credit                |      |  |      | (1,033 | )    |  
|Meals and entertainment and other permanent items  |      |  |      | 313    |      |  
|Extraterritorial income exclusion                  |      |  |      | (574   | )    |  
|Subpart F income net of related foreign tax credit |      |  |      | 542    |      |  
|Other, net                                         |      |  |      | (8     | )    |  
|                                                   |      |  |      |        |      |  
|                                                   |      |  | $    | 4,457  |      | $
|                                                   |      |  |      |        |      |  

| | The
Research and Experimentation Credit (Credit) expired on June 30, 2004. Legislation
extending the Credit was not signed into law by September 30, 2004. Therefore, the
Company was unable to recognize approximately $186,000 of the Credit generated in the
fourth quarter of fiscal 2004. The Credit was recognized during the first quarter of
fiscal 2005.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

---

12.    Related
Party Transactions:

| | Semitool
has agreements with limited liability companies wholly-owned by Mr. Raymon F. Thompson,
the Companys Chairman and Chief Executive Officer, to lease aircraft and an
aircraft hangar. Under these agreements, rent expense was approximately $3,289,200,
$2,933,600 and $2,094,000 for the years ended September 30, 2005, 2004 and 2003,
respectively. The rental rate for fiscal 2006 will be approximately $274,000 per month
for both the aircraft and the hangar; the lease terms are month-to-month. In fiscal 2004,
Semitool incurred $802,000 of leasehold improvements to leased aircraft. The improvements
are being amortized over a three-year period, which represents the estimated useful life.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

13.    Commitments
and Contingencies:

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

| | The
Company has various operating lease agreements for equipment and office space that expire
through the year 2014. Total rent expense for the years ended September 30, 2005, 2004
and 2003, exclusive of amounts paid to a related party as described in Note 12, was
approximately $1.8 million, $1.5 million and $1.9 million, respectively. At September 30,
2005, future rental payments under these agreements are as follows (in thousands):
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Year Ending
September 30, |  | Total      | 
| | ------------------------- |  | ---------- | 
| |                           |  | 2006       | 
| |                           |  | 2007       | 
| |                           |  | 2008       | 
| |                           |  | 2009       | 
| |                           |  | 2010       | 
| |                           |  | Thereafter | 
| |                           |  |           
| |                           |  |            | 
| |                           |  |           

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

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

| | Changes
in the Companys accrued warranty liability, for fiscal 2005 and fiscal 2004, were
as follows (in thousands):
| | ---------------------------------------------------------------------------------------------------------------------

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

| | With
the exception of product warranties, the Company has not issued any guarantees or any
indirect guarantee for the indebtedness of others.
| | ---------------------------------------------------------------------------------------------------------------------------------------------

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

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

---

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

14.    Shareholders Equity:

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

15.    Financial
Instruments and Certain Concentrations:

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

| | The
following methods and assumptions were used to estimate the fair value of each class of
financial instrument at September 30, 2005 and 2004 for which it is practicable to
estimate that value:
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | Marketable
Securities  Marketable securities are marked-to-market at September 30, 2005 and
September 30, 2004 to approximate fair value.
| | ------------------------------------------------------------------------------------------------------------------------------------------

| | Long-Term
Debt  The fair value of notes payable is based on the discounted value of
contractual cash flows using an estimated discount rate of 6.75% and 4.75% at September
30, 2005 and 2004, which the Company could currently obtain for debt with similar
remaining maturities.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
estimated fair value of financial instruments at September 30, 2005 and 2004 consisted of
the following (in thousands):
| | ---------------------------------------------------------------------------------------------------------------------------

|                          | 2005 |  | 2004 |      
|------------------------- | ---- |  | ---- | -----
|
|Cash and cash equivalents |      |  | $    | 6,557
|Marketable securities     |      |  |      | 475  
|Long-term debt            |      |  |      | 3,403

| | At
September 30, 2005 and 2004, trade receivables of the Company were primarily from
companies in the semiconductor industry, and included approximately $32.4 million and
$34.8 million, respectively, of foreign receivables. Accordingly, the Company is exposed
to concentrations of credit risk. The Company routinely assesses the financial strength
of its customers.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

---

16.    Segments,
Geographic Location and Major Customers:

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

| | Advanced
Micro Devices accounted for 16.7% and 19.4% of net sales in fiscal 2005 and fiscal 2003,
respectively. No customer accounted for over 10% of net sales in fiscal 2004.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Financial
information by geographic location for 2005, 2004 and 2003 is summarized as follows (in
thousands):
| | -------------------------------------------------------------------------------------------------------------

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

17.    Inventory
Write-Down and Other Charges:

| | In
the fourth quarter of fiscal 2003, the Company wrote down $19.1 million in obsolete
inventory and $384,000 in patents. The write-downs resulted primarily from a change in
forecasted demand for certain of our products due to the successful introduction of our
new Raider platform.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

18.    Subsequent
Event:

| | On
November 1, 2004, the Company entered into a $15 million Credit Agreement with a bank,
which expires on March 1, 2006. In the first quarter of fiscal 2006, the Company amended
the agreement to $30 million to expire on March 1, 2008. Borrowings are collateralized by
certain assets of the Company and bear interest at the prime rate or LIBOR plus 2.25% per
annum. The Credit Agreement contains financial and non-financial covenants. The financial
covenants include measurements of tangible net worth, total liabilities divided by
tangible net worth, pre-tax profit and a maximum borrowing limit based upon total
accounts receivable. The Company had not borrowed any amounts under the Credit Agreement
through September 30, 2005.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

---

19.    Quarterly
Financial Data (Unaudited):

| | For
each quarter of fiscal 2005 and 2004 (in thousands, except for per share amounts):
| | --------------------------------------------------------------------------------------

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

|                                  | Year Ended September 30, 2004 | 
|--------------------------------- | ----------------------------- | 
|
|Net sales                         |                               | 
|Gross profit                      |                               | 
|Net income (loss)                 |                               | 
|Earnings (loss) per basic share   |                               | 
|Earnings (loss) per diluted share |                               | 
|                                  |                               | 

---

REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM

To The Board of Directors and
ShareholdersSemitool, Inc.:

We have completed an integrated audit
of Semitool, Inc.s 2005 consolidated financial statements and of its internal
control over financial reporting as of September 30, 2005 and audits of its 2004 and 2003
consolidated financial statements in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Our opinions, based on our audits, are
presented below.

Consolidated financial
statements and financial statement schedule

In our opinion, the consolidated
financial statements listed in the index appearing under Item 15(a)(1) present fairly, in
all material respects, the financial position of Semitool, Inc. and its subsidiaries at
September 30, 2005 and 2004, and the results of their operations and their cash flows for
each of the three years in the period ended September 30, 2005 in conformity with
accounting principles generally accepted in the United States of America. In addition, in
our opinion, the financial statement schedule listed in the index appearing under Item
15(a)(2) presents fairly, in all material respects, the information set forth therein when
read in conjunction with the related consolidated financial statements. These financial
statements and the financial statement schedule are the responsibility of the Companys
management. Our responsibility is to express an opinion on these financial statements and
the financial statement schedule based on our audits. We conducted our audits of these
statements in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material
misstatement. An audit of financial statements includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and evaluating
the overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

Internal control over
financial reporting

Also, in our opinion,
managements assessment, included in Managements Report on Internal Control
Over Financial Reporting appearing under Item 9A , that the Company maintained effective
internal control over financial reporting as of September 30, 2005 based on criteria
established in Internal Control  Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission (COSO), is fairly stated, in all
material respects, based on those criteria. Furthermore, in our opinion, the Company
maintained, in all material respects, effective internal control over financial reporting
as of September 30, 2005, based on criteria established in Internal Control 
Integrated Framework issued by the COSO. The Companys management is responsible
for maintaining effective internal control over financial reporting and for its assessment
of the effectiveness of internal control over financial reporting. Our responsibility is
to express opinions on managements assessment and on the effectiveness of the
Companys internal control over financial reporting based on our audit. We conducted
our audit of internal control over financial reporting in accordance with the standards of
the Public Company Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material respects. An
audit of internal control over financial reporting includes obtaining an understanding of
internal control over financial reporting, evaluating managements assessment,
testing and evaluating the design and operating effectiveness of internal control, and
performing such other procedures as we consider necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinions.

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

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

/s/PricewaterhouseCoopers
LLPSeattle, WashingtonDecember 13, 2005

---

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

None.

# Item 9A.  Controls and
Procedures

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

|(b) | Managements
Report on Internal Control over Financial Reporting.  The management of
Semitool is responsible for establishing and maintaining adequate internal
control over financial reporting, as such term is defined in Rule 13a-15(f)
under the Exchange Act.
Semitools internal control over financial reporting was designed to
provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting standards. Under
the supervision and with the participation of management, including our
Chairman and Chief Executive Officer and Chief Financial Officer, we
conducted an assessment of the effectiveness of our internal control over
financial reporting as of September 30, 2005. In making this assessment,
management used the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) in Internal Control  Integrated
Framework.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Based on
our assessment using the criteria set forth by COSO in Internal Control Integrated
Framework, management concluded that our internal control over financial reporting
was effective as of September 30, 2005.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Managements
assessment of the effectiveness of Semitools internal control over financial
reporting as of September 30, 2005 has been audited by PricewaterhouseCoopers LLP, an
independent registered public accounting firm, as stated in their report included herein.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

# Item 9B.  Other Information

None.

---

# PART III

# Item 10.  Executive
Officers and Directors

|(a) | The
information concerning our directors, our audit committee and our audit
committee financial expert, is contained in our Proxy Statement to be
filed in connection with our 2006 Annual Meeting of Shareholders and is
incorporated herein by reference.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

|(c) | The
information concerning compliance with Section 16(a) of the Securities
Exchange Act of 1934, as amended, required under this item is contained in
our Proxy Statement to be filed in connection with our 2006 Annual Meeting
of Shareholders under the caption Other Matters - Section 16(a) Beneficial Ownership
Reporting Compliance and is incorporated herein by reference.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

# Item 11.  Executive
Compensation

The information concerning
compensation of executive officers and directors required under this item is contained in
our Proxy Statement to be filed in connection with our 2006 Annual Meeting of Shareholders
under the caption Executive Compensation and Other Information and is incorporated herein by
reference.

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

The information concerning certain principal
holders of securities and security ownership of executive officers and directors required
under this item is contained in our Proxy Statement to be filed in connection with our
2006 Annual Meeting of Shareholders under the caption Security Ownership of Certain
Beneficial Owners and Management and is incorporated herein by reference.

# Equity Compensation Plans

The following table summarizes our
equity compensation plans as of September 30, 2005:

|                                      | Number of
securities to be
issued upon
exercise of
outstanding options |  | Weighted-average
exercise price
of outstanding
options |           | Number of securitie
remaining available
for future issuance
under stock option
plans | 
|------------------------------------- | ---------------------------------------------------------------------- |  | ------------------------------------------------------ | --------- | ------------------------------------------------------------------------------------ | 
|Equity compensation plans approved by |                                                                        |  |                                                        |           |                                                                                      | 
|shareholders                          |                                                                        |  |                                                        | 1,983,305 |                                                                                      | 

# Item 13.  Certain
Relationships and Related Transactions

The information concerning certain
relationships and related transactions required under this item is contained in our Proxy
Statement to be filed in connection with our 2006 Annual Meeting of Shareholders under the
caption Certain Transactions and is incorporated herein by reference.

# Item 14.  Principal
Accounting Fees and Services

The information on principal
accounting fees and services required under this item is contained in our Proxy
Statement to be filed in connection with our 2006 Annual Meeting of Shareholders under the
captions Audit Fees and Non-Audit Fees and Policy on Audit Committee
Pre-Approval of Audit and Non-Audit Services of the Independent Registered Public
Accounting Firm and is incorporated herein by reference.

---

# PART IV

# Item 15.  Exhibits and
Financial Statement Schedules

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

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

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

| | Consolidated Balance
Sheets     at September 30, 2005 and September
30, 2004
| | ----------------------------------------------------------------------------

| | Consolidated Statements
of Operations     for the Years Ended September 30, 2005,
September 30, 2004 and September 30, 2003
| | ---------------------------------------------------------------------------------------------------------------------------

| | Consolidated Statements
of Changes in Shareholders' Equity     for the Years Ended
September 30, 2005, September 30, 2004 and September 30, 2003
| | ------------------------------------------------------------------------------------------------------------------------------------------------

| | Consolidated Statements
of Cash Flows     for the Years Ended September 30, 2005,
September 30, 2004 and September 30, 2003
| | ---------------------------------------------------------------------------------------------------------------------------

| | Consolidated Statements
of Comprehensive Income (Loss)     for the Years Ended September
30, 2005, September 30, 2004 and September 30, 2003
| | --------------------------------------------------------------------------------------------------------------------------------------------

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

| | Report of
Independent Registered Public Accounting Firm
| | -------------------------------------------------------

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

| | Schedule II
- Valuation and Qualifying Accounts
| | -----------------------------------------------

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

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

|Exhibit No.                                                                                                                                                                                                                                                              | Description                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|3.1      
3.8      
3.9      
3.2 (ii) 
10.1     
10.2/10.3
         
10.4     
10.12    
10.21    
10.22    
         
10.41    
10.42    
10.43    
10.44    
10.45    
         
10.46    
         
21.1     
23.1     
31.1     
31.2     
32.1     
         
32.2 | Restated Articles of Incorporation of the Company   (1)
Amendment to the Restated Articles of Incorporation of the Company   (3)
Correction to the Amendment of the Restated Articles of Incorporation of the Company   (3)
Amended Bylaws of Semitool, Inc.   (4)
Semitool, Inc. 2004 Stock Option Plan   (4)  *
Aircraft lease agreement, dated January 15, 2004, as amended by Amendment No 1, dated March 31, 2004,     between the
Company and EAGLE I LLC.   (4)
Aircraft lease agreement, dated March 31, 2004, between the Company and EAGLE II LLC.   (4)
Agreement between the Company and the Semitool European Companies   (1)
Promissory Note, dated March 26, 1998, between Rhetech, Inc. and CoreStates Bank, N.A.   (2)
Mortgage, Assignment of Leases and Security Agreement, dated March 26, 1998 between Rhetech, Inc. and     CoreStates Bank,
N.A.   (2)
Employment Agreement between Larry A. Viano and the Company dated June 1, 2003   (5)  *
Employment Agreement between Timothy C. Dodkin and the Company dated June 30, 2003   (5)  *
Employment Agreement between Larry Murphy and the Company dated April 20, 2004   (6)  *
Aircraft lease agreement, dated August 22, 2004, between the Company and EAGLE III LLC.   (7)
Credit Agreement, dated as of November 1, 2004, between the Company and
     Wells Fargo HSBC Trade Bank, N.A.   (7)
Loan Agreement, dated May 17, 2005, between Raiffeisenbank Hallein and
     Semitool Austria, GmbH   (8)
Subsidiaries of Registrant
Consent of Independent Registered Public Accounting Firm
Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
     Section 906 of the Sarbanes-Oxley Act of 2002
Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
     Section 906 of the Sarbanes-Oxley Act of 2002

---

---

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

|(2) | Incorporated
herein by reference to the identically numbered exhibit to the Companys
Quarterly Report on Form 10-Q, date of report March 31, 1998.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------

|(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, 2000.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------

|(4) | Incorporated
herein by reference to the identically numbered exhibit to the Companys
Quarterly Report on Form 10-Q, date of report March 31, 2004.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------

|(5) | Incorporated
herein by reference to the identically numbered exhibit to the Companys
Quarterly Report on Form 10-Q, date of report June 30, 2003.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------

|(6) | Incorporated
herein by reference to Exhibit 10.1 to the Companys Quarterly Report
on Form 10-Q, date of report June 30, 2004.
|--- | ------------------------------------------------------------------------------------------------------------------------------

|(7) | Incorporated
herein by reference to the identically numbered exhibit to the Companys
Annual Report on Form 10-K, date of report September 30, 2004.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------

|(8) | Incorporated
herein by reference to the identically numbered exhibit to the Companys
Quarterly Report on Form 10-Q, date of report June 30, 2005.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------

* Denotes a management contract or
compensatory plan or arrangement.

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

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

---

# Signatures

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

|Dated:  December 13, 2005 |  | SEMITOOL, INC.By: /s/Raymon F. Thompson
Raymon F. ThompsonChairman of the Board and Chief Executive Officer(Principal Executive Officer)
|------------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------

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

|Signature                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |  | Title                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |  | Date                                                                                                                                                                                                                                                                                                         
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|/s/Raymon F. Thompson
Raymon F. Thompson     
                       
                       /s/Larry A. Viano      
Larry A. Viano         
                       
                       /s/Howard E. Bateman   
Howard E. Bateman      /s/Donald P. Baumann   
Donald P. Baumann      /s/C. Richard Deininger
C. Richard Deininger   /s/Timothy C. Dodkin   
Timothy C. Dodkin      /s/Daniel J. Eigeman   
Daniel J. Eigeman      /s/Charles P. Grenier  
Charles P. Grenier     /s/Steven C. Stahlberg 
Steven C. Stahlberg |  | Chairman of the Board and                   
Chief Executive Officer
(Principal Executive Officer)
                                            
Vice President, Chief Financial Officer     
and Treasurer
(Principal Accounting and Financial Officer)
                                            
           Director                         
                                            
           Director                         
                                            
           Director                         
                                            
Director and Executive Vice President       
                                            
           Director                         
                                            
           Director                         
                                            
           Director |  | December 13, 2005
                 
December 13, 2005
                
December 13, 2005
                 
December 13, 2005
                 
December 13, 2005
                 
December 13, 2005
                
December 13, 2005
                
December 13, 2005
                
December 13, 2005

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SEMITOOL, INC.SCHEDULE II  VALUATION AND QUALIFYING ACCOUNTS
For the years ended September 30, 2005, 2004 and 2003(Amounts in Thousands)

|                                |  | Additions |   |       | 
|------------------------------- |  | --------- | - | ----- | 
|
|Year ended September 30, 2005:  |  |           |   |       | 
|Deducted from asset accounts:   |  |          
|Allowance for doubtful accounts |  |           | $ | 271   | 
|Inventory allowance             |  |           |   | 645   | 
|Year ended September 30, 2004:  |  |          
|Deducted from asset accounts:   |  |          
|Allowance for doubtful accounts |  |           |   | 319   | 
|Inventory allowance             |  |           |   | --    | 
|Year ended September 30, 2003:  |  |          
|Deducted from asset accounts:   |  |          
|Allowance for doubtful accounts |  |           |   | 394   | 
|Inventory allowance             |  |           |   | 6,739 | 

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