# UNITED STATES
                  SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

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# 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, 2003

# OR

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

# For the Transition Period From ___________ to ____________

# Commission File Number 0-25424

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

|Montana                                                       | 81-0384392                         
|------------------------------------------------------------- | -----------------------------------
|(State or other jurisdiction ofincorporation or organization) | (I.R.S. EmployerIdentification No.)

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

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

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

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

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

Indicate by check mark whether the registrant is an accelerated filer (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, 2003
(based on the last reported sale price on the Nasdaq National Market as of such date) was
$67,329,515.

The number of shares of the
registrants Common Stock, no par value, outstanding as of December 11, 2003 was
28,481,027.

# 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 17, 2004.

# 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. Forward-looking
statements are included in the discussion of our business, properties and legal matters
and include, without limitation, statements regarding:

- trends in the semiconductor industry,
- Semitools solutions for electrochemical deposition and wafer surface preparation,
- our strategy to increase our market share,
- the performance and acceptance of our products,
- manufacturing strategy,
- the pursuit of new and growing markets,
- competition,
- patent filings,
- environmental regulations,
- research and development,
- the ability to maintain worldwide sales, service and customer support, 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,
- use of sales, service and support organizations,
- the contribution of international sales to net sales,
- backlog and deferred revenue,
- gross margins,
- results from operations,
- the ability to finance activities,
- interest expense,
- the sufficiency of funds, and
- effects of new accounting standards.

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 Factors
That Might Affect Our Future Financial Results and Stock Price 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 electrochemical
deposition, wafer surface preparation and wafer transport container cleaning. Our
electrochemical deposition systems are used for plating copper and gold 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. Our
surface preparation systems are designed for wet cleaning, stripping and etching
processes, including photoresist and polymer removal and metal etching. Typically, there
are hundreds of manufacturing steps in fabricating semiconductor devices and after many of
these steps a wet cleaning, stripping or etching process is required. Our customers
include many of the major semiconductor device and wafer level packaging manufacturers
worldwide.

Semitool,
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 on this page 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.  We assume no obligation to update or revise any
forward-looking statements in this annual report on Form 10-K, whether as a result of new
information, future events or otherwise, unless we are required to do so by law.
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

The
semiconductor industry produces microelectronic devices that are used in a broad array of
consumer and industrial products such as computers, cellular phones, televisions, audio
systems and automobiles. The semiconductor equipment industry, of which we are a part,
serves the semiconductor industry.

Microelectronic
devices consist of millions of microscopic transistors and other components that store
information and allow the execution of instructions. These components are connected
together with metal wiring to form the functional IC. Fabrication of an IC involves
hundreds of complex and repetitive process steps, involving an array of sophisticated
manufacturing equipment and chemical media. ICs are fabricated on substrates, or wafers,
made of a semiconductor material, most commonly silicon. The fabrication process involves,
among others, the deposition of multiple layers of dielectric or insulating films and
electrically conducting metal films and repeated cleaning, stripping and etching processes
to prepare the surface for the next step. When completed, the wafer may contain several
hundred ICs. Traditionally, the individual ICs are separated from the wafer by a process
involving sawing, or dicing, after which the wafer is cleaved into separate ICs. The IC is
then packaged by connecting it to pins via metal wires or contacts and encapsulating the
IC in a polymer. Some manufacturers are using a newer process that allows for packaging
the ICs before they are separated from the wafer. The packaged microelectronic devices are
then placed into an electronic product, such as a computer or cellular phone.

Cleaning,
stripping, etching or otherwise conditioning the surface of the wafer are steps repeated
throughout the semiconductor fabrication process. These processes are important, since the
integrity of the next step may depend strongly on the effectiveness of the cleaning,
stripping, or etching step. In addition, process reliability and particle contamination
are increasingly critical, as shrinking device dimensions link ever-smaller contaminants
and lower contamination levels to IC failure. Relatively new materials such as copper and
low-K dielectrics are changing the manner in which deposition processes are performed, and
these fundamental material changes influence the direction of process development.

There
are two fundamental means by which surface preparation wet process steps are performed,
spray and immersion. Immersion processes, or wet benches, use 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 while the wafers are spun on their axis inside an enclosed
process chamber, where the chemical is brought to the wafers instead of the wafers to the
chemical. Spray technology utilizes the chemical reaction, the mechanical force of the
spray and the centrifugal force from spinning to remove contaminants and dry the wafers.
Spray systems can be configured to process wafers in a batch or single-wafer mode.

The
semiconductor industry is showing an increased interest in spray processing systems in
both single-wafer and batch formats. Reasons for this include the more aggressive nature
of a spray process when compared to an immersion process and the reduced footprint, which
saves costly clean room space. Spray systems, especially in a single-wafer format, may
offer a greater potential for efficiently processing wafers containing ICs with smaller
feature sizes on large substrates as they offer greater control of the process.

Newer
packaging technologies have been developed and are being adopted by the industry to enable
smaller personal products such as PDAs and mobile phones. These technologies are called
wafer level or chip-scale packaging. This method packages the ICs while they are
still in the wafer-state, so that upon separation from the wafer the IC can be directly
placed into an electronic product. Wafer level 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. Wafer level
packaging uses fabrication processes similar to IC fabrication and includes, among others,
electrochemical deposition for connective solder and gold bumps, photoresist stripping and
under-bump metal etching.

Reducing
the size of each IC increases the number of ICs that can be fabricated on any size wafer.
This reduces the cost per device on a given wafer and, in addition, provides a potential
for increased capacity on existing equipment. To further reduce costs, the industry has
begun a migration to the 300mm, or 12 inch, diameter wafer from the common 200mm, or 8
inch, wafer size. Most 300mm processing cannot be performed on previous generations of
equipment, necessitating the purchase of new systems. While new 200mm fabs continue to be
built, most new fabs are now 300mm. As 300mm fabs cost more to build and provide greater
capacity, it is possible that fewer will be built as compared to 200mm fabs.

The
semiconductor industry has experienced significant growth in semiconductor foundry
capacity. A foundry is a manufacturer that fabricates devices on a contract basis for IC
designers that typically do not have a fabrication capability or may not have sufficient
capacity to meet their own needs. Most of the foundry growth has been in Asia,
particularly Taiwan. It is anticipated that China may provide a base of further expansion
of foundries, which is expected to provide a substantial market for semiconductor
equipment.

Despite
broad-based markets, the semiconductor industry experiences business cycles that are
punctuated by periods of either under or over supply. In general, in periods of under
supply, semiconductor manufacturers increase capital equipment spending and, conversely,
in periods of over supply reduce their capital equipment spending. However, the market for
semiconductor equipment also is characterized by rapid technological development and
product innovation. As a result, to meet new technological advancements, manufacturers may
purchase new equipment despite the timing of the market cycle.

# The Semitool Solutions

We
leverage our extensive experience to provide equipment and process solutions for the
electrochemical deposition, wafer surface preparation, cleaning, stripping and etching
segments of the semiconductor equipment market.

Electrochemical
Deposition Solutions. Our electrochemical deposition, or ECD, systems incorporate
proprietary electroplating technology on a platform that processes one wafer at a time in
multiple process chambers. Our leading single-wafer design is modular, with process
chambers arranged in a linear orientation, providing flexibility in system configuration.
Typically, these systems include a combination of ECD and surface preparation process
chambers to address a customers specific application. ECD applications include
copper interconnect and seed layer repair for logic and power ICs, gold bumps for high
speed communication ICs, and solder bumps for advanced wafer level packaging. These
systems are available to accommodate wafer diameters from 100mm to 300mm and can be scaled
for customers capacity requirements. We introduced our first electroplating system
in 1993 and continue to be a technological leader in electroplating applications for the
semiconductor industry. Selling prices of these systems typically range from approximately
$1.5 to $2.8 million.

Single-Wafer
Surface Preparation Solutions. Our single-wafer processing systems for wet cleaning,
stripping and etching are available to accommodate 150mm, 200mm and 300mm wafer sizes.
These systems share a common platform with our ECD equipment and are designed with a
linear arrangement of the processing chambers for high volume production. In addition, our
patented Capsule process chamber provides selectable processing for each side of the
wafer. Selling prices for these systems range from $1.5 to $2.6 million.

Batch
Wafer Surface Preparation Solutions. Our batch systems for wet cleaning, stripping and
etching applications include fully and semi-automated systems for 150mm, 200mm and 300mm
wafer processing in up to 50 wafer batches. These systems use proprietary spray technology
to deliver the chemicals, deionized water and gases to the wafer surface in an enclosed
chamber. The wafers are spun on their axis and exposed to a sequenced spray of chemicals
and dry 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 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 and water consumption. Selling prices for these systems range from
under $15,000 to $2.0 million.

# Strategy

Our
objective is to increase our worldwide market share in electrochemical deposition, surface
preparation, wafer level packaging and ancillary applications used by the semiconductor
and related industries. Our business strategy incorporates the following key elements:

Maintain
and Expand Technology Leadership. We intend to continue investing in research and
development to maintain and expand our position as a technological leader in surface
preparation and electrochemical deposition. Our focus is on delivering leading-edge
technical innovation and system reliability with yield enhancement and low cost of
ownership. We believe these factors are the leading drivers for market acceptance of
semiconductor processing equipment.

Offer
a Broad Range of Products Incorporating Innovative Wet Processing Technologies. We offer a
broad range of differentiated products for use in diverse process applications to broaden
our opportunity in the semiconductor related markets and with each customer.

Integrate
Design and Manufacturing Expertise. Our strategy is one of close integration of design and
manufacturing, coupled with selective vertical manufacturing integration to achieve
innovative solutions, cost and quality advantages and to reduce the time to market for new
products and product enhancements.

Expansion
of Asian Market Presence. Over the past several years, we have expanded our presence in
the Asian market and revenue from that region is a significant part of consolidated net
revenues. We believe the Asian region, including China, has the potential for additional
significant long-term growth. It is our sales, marketing and service strategy to expand
our installed base of equipment in this region.

# Products

Our
broad product suite of highly engineered, innovative processing systems leverages our core
wet chemical processing expertise, and more than two decades of experience building and
supporting production-proven semiconductor manufacturing equipment. Our primary wet
chemical processing solutions are electrochemical deposition equipment, primarily for the
plating of copper, gold and solder, multi-wafer batch and single-wafer cleaning, stripping
and etching equipment and wafer transport container cleaning equipment. All of these
solutions leverage and extend our original spin-spray technologies.

# Electrochemical Deposition (ECD) Products

RAIDER ECD        The
Raider ECD is an automated single-wafer processor for high volume electrochemical
deposition. 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 repair, ECD fill, wafer backside clean, bevel-edge clean, film thickness
metrology and rapid thermal anneal. The tool uses our proprietary computational fluid
dynamics, or CFD, designed processing chamber arranged in a linear format. This CFD
chamber allows the user to optimize plating profiles for downstream operations such as
better matching of film characteristics to chemical-mechanical planarization equipment,
resulting in reduced processing time and cost. Our proprietary Capsule cleaning chamber,
which is also used in our Raider SP, is integrated into the tool for bevel-edge and other
cleaning processes. The modularity of the platform provides our customers with the
flexibility to configure the chamber mix to meet their specific needs. The primary
applications for the Raider ECD are copper, gold, nickel, platinum and solder depositions.
It is available to accommodate 150mm, 200mm and 300mm wafer sizes.

ACMS        The
Advanced Chemical Management System, or ACMS, is an automated electroplating bath control
unit. It maintains the desired chemical balance in the plating baths by automatically
analyzing and replenishing the chemical constituents using our proprietary technology.
Fully integrated with the Companys ECD systems, the primary applications are copper
and solder deposition.

# Single-Wafer Surface Preparation Products

RAIDER SP        The
Raider SP is a fully automated system with up to ten single-wafer process chambers for
high volume production. 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 chamber, which allows side selectable processing. In
addition, the system can be equipped with spray, immersion, megasonic, or vapor process
chambers. Applications include wafer backside, bevel and edge clean for removal of
unwanted copper and other contamination, post-etch polymer removal, critical
pre-deposition cleans, and metal etching. The Raider SP is available to accommodate 150mm,
200mm & 300mm wafer sizes.

# Batch Wafer Surface Preparation Products

SIRIUS        Introduced
to the market during fiscal 2002, the Sirius was designed specifically to deliver our
patented 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 used, disposal and delivery
costs. The Sirius is a manually loaded semi-automated system with a 50 wafer capacity
spray processing chamber. The system is available to accommodate either 200mm or 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.

SAT        The
Spray Acid Tool, or SAT, is a manually loaded semi-automated system for performing
sequential processing of 25 wafers per spray process chamber. The SAT is designed for
wafer processing using highly caustic and corrosive media for an array of cleaning,
stripping and etching applications. The system can be equipped with up to three 200mm
process chambers and is ideal for medium to low production volumes and research and
development activity.

SST        The
Spray Solvent Tool, or SST, is a manually loaded semi-automated system for performing
sequential processing of 25 wafers per spray process chamber. The SST is designed for
wafer processing using flammable solvents for removal of photoresist, etch polymers,
polyimides and organic contaminants. The system can be equipped with up to two 200mm
process chambers and is ideal for medium to low production volumes and research and
development activity.

SRD        The
Spin Rinser/Dryer, or SRD, is a high efficiency cleaning system utilizing deionized water
to remove water soluble contaminants, chemical residue and particulate matter. The SRD is
available with up to three 25 wafer spray process chambers in a single system. It is
available to accommodate wafer sizes up to 300mm in diameter.

SCEPTER        The
Scepter series is an advancement of our semi-automated products, the SATs, SSTs, and
SRDs, 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.

# Wafer Transport Container Cleaning

STORM        The
Storm is designed to clean the containers used to transport the wafers from process step
to process step. A key factor in achieving high manufacturing yields is controlling
contamination from these reusable containers. Our system processes multiple containers
simultaneously, offering high productivity in a small footprint and is available to
accommodate either 200mm or 300mm wafer sizes.

# Customers, Sales and
Marketing

Our
customers include leading worldwide semiconductor manufacturers. The following is a
representative list in alphabetical order of our largest United States and international
customers:

|                                                                                                                                                                          |  |                                                                                                                                                                                                                  |  |                                                                                                                                                                                                                    
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Advanced Micro Devices
Agilent Technologies  
Anadigics             
Cree                  
Headway Technologies  
Hewlett  Packard      
IBM                   
Infineon |  | Intel                       
Maxim Integrated Products   
Micron Technology           
Motorola                    
National Semiconductor      
NEC                         
Sandia National Laboratories
Sanyo |  | Seagate
Semiconductor Mfg. Intl. Corp.
Siliconware Precision Industries
STMicroelectronics
Taiwan Semiconductor Mfg. Co. LTD
Texas Instruments
United Microelectronics Corporation
United Monolithic Semiconductors

Our
top ten customers accounted for 58.4%, 58.6% and 38.7% of net sales in fiscal 2003, 2002
and 2001. Advanced Micro Devices accounted for 19.4% and 21.2% of our net sales in fiscal 2003
and fiscal 2002, respectively. No customer accounted for over 10% of net sales in fiscal
2001.

International
sales, primarily in Europe, Asia and Japan, accounted for approximately 61.4% of
consolidated net sales in fiscal 2003, 62.6% of consolidated net sales in fiscal 2002 and
63.8% of consolidated net sales for fiscal 2001. While the relative proportion of
international sales to total consolidated sales is nearly unchanged from fiscal 2002 to
2003, the geographic mix has shifted. On a combined basis, sales in Japan and Korea
declined nearly 17% year-over-year, while the rest of Asia and Europe declined by lesser
amounts. We have direct sales and customer support organizations located in Europe, Japan,
Singapore and Korea, and for some products, an independent distributor serves Japan.
Independent sales representatives serve Taiwan and China. We market and sell our products
in the United States through our sales organization, which includes direct sales personnel
and a limited use of independent sales representatives for specific products.

Field
service personnel and application engineers located in the United States, Europe, Japan
and Asia, provide warranty service, post-warranty service and equipment installation.
Field service engineers are located at over 40 sites throughout the world, including
dedicated site-specific engineers at certain customer locations pursuant to customer
agreements. 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 19 outsourced locations throughout the world, which allows
us to offer same day or overnight delivery in most instances.

# Backlog and Deferred
Revenue

Consolidated
orders backlog was $19.9 million at September 30, 2003, down 27.9% from $27.6 million at
September 30, 2002. Semiconductor equipment orders represented 100% of consolidated orders
backlog at September 30, 2003 and September 30, 2002.

We
include in backlog those customer orders for which we have written customer authorization
and for which shipment is scheduled within the next twelve months. Orders are generally
subject to cancellation or rescheduling by customers with limited or no cancellation fees.
During periods of downturns in the semiconductor industry, we have experienced significant
cancellations and delays.

Our
deferred revenue relates to equipment already shipped to customers and equipment subject to installation
that will be recognized as sales when acceptance is received from the
customer. At September 30, 2003, deferred revenue was $10.7 million, a decrease of 72.1%
as compared to deferred revenues of $38.3 million at September 30, 2002. The associated
deferred profit was also lower at September 30, 2003. Deferred revenue is not included in
orders backlog.

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

# Manufacturing

Most
of our manufacturing is conducted at our facilities located 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 $18.1
million in fiscal 2003, $23.1 million in fiscal 2002 and $27.5 million in fiscal 2001.
These expenditures, as a percentage of our net sales, represented approximately 15.5%,
18.7% and 10.7% in each of these fiscal years.

# 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 in the time required,
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 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 installed customer bases. Our primary
competitors in electrochemical deposition include Applied Materials, Inc., Novellus
Systems, Inc., and Ebara Corporation. In wet surface preparation applications, our
competition includes Applied Materials, Inc., FSI International, Inc., Mattson Technology,
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.

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. There
can be no assurance that we will have sufficient resources to continue to make such
investments 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.

Moreover,
there has been significant merger and acquisition activity among our competitors and
potential competitors. These combinations may provide such 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. There can be no assurance 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 integrate capital equipment 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 that
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.

# Patents and Other
Intellectual Property

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 215 U.S.
patents, some with pending foreign counterparts, have 190 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 may not protect our intellectual property
to the same extent as the laws of the United States. 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. We currently are involved in patent litigation, which is
described in Item 3, Legal Proceedings. Although we are not aware of any potential
infringement by our products of any patents or proprietary rights of others, other than as
alleged by Novellus, Inc., which is described in Item 3, Legal Proceedings, further
commercialization of our products 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.

From
time to time, we receive invitations to take a license to other parties patents or
to grant a license on our technology. We evaluate these potential transactions on a
case-by-case basis. Offers to us to take a license that are rejected by us could lead to
an offeror making a claim of infringement.

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, including the litigation in which we currently are engaged,
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

At
September 30, 2003, we had 701 full-time and temporary employees worldwide. None of our
employees are 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)  |     |         
|Timothy C. Dodkin (2)   |     |         
|Larry A. Viano (3)      |     |         
|Dana R. Scranton (4)    |     |         
|Richard P. Schuster (5) |     |         

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

(2)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.

(3)Larry A. Viano joined us in 1985 and has served as our Vice President and
          Chief Financial Officer since May 2003. He also serves as our Secretary,
          Treasurer, Principal Accounting Officer and Controller. He is a Certified Public
          Accountant.

(4)Dana R. Scranton has served as our Vice President, Surface Preparation
          Technology since September 2001. Mr. Scranton has 11 years of experience with
          Semitool in the areas of engineering, product management and marketing. Mr.
          Scranton has a total of 16 years experience in the semiconductor capital
          equipment business.

(5)Richard P. Schusterjoined us in 1984 and has served as our Vice President,
          Global Service since February 2002.

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

# Item 2. Properties

We
have two manufacturing facilities located on sites in Kalispell, Montana with
approximately 200,000 square feet in the aggregate. We also own a building and land
located in Coopersburg, Pennsylvania, which serves as a manufacturing facility for our
Rhetech, Inc. subsidiary. We believe that our existing manufacturing facilities will be
adequate to meet our requirements for the foreseeable future and that suitable additional
or substitute space will be available as needed. During fiscal 2001, we sold land and
buildings that we owned in Cambridge, UK and during fiscal 2002, construction was
completed on an office building on land retained at that location. We also lease 13 other
smaller facilities worldwide, which are used as sales and customer service centers.

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

# Item 3. Legal Proceedings

On
January 16, 2002, we filed suit against Tokyo Electron, Ltd. and its subsidiaries, Tokyo
Electron Kyushu Ltd. and Tokyo Electron America, Inc., referred to collectively as TEL, in
the United States District Court for the Northern District of California (Case No.
C-02-0288 EMC). The suit alleged infringement of our U.S. Patent 5,784,797 entitled
Carrierless Centrifugal Semiconductor Processing System (797 Patent), relating
to the centrifugal cleaning and processing of semiconductor wafers. The defendants
answered the complaint denying the claim and seeking to have the patent declared invalid.
In addition, the defendants asserted counterclaims alleging our infringement of three
patents: U.S. Patent 4,985,722 entitled Apparatus for Coating a Photo-Resist Film
and/or Developing it After Being Exposed; U.S. Patent 5,446,416 entitled
Resist Processing Method; and U.S. Patent 5,740,053 entitled Method of
Controlling Monitor Used in Cleaning Machine and Object Processing Machine and Monitor
Apparatus. After reaching an out-of-court settlement, on October 17, 2003 the court
entered an order dismissing the claims and counterclaims of both parties. The terms of the
settlement are confidential, except that there was no exchange of monetary compensation.

In
June 2001, we filed separate suits against Applied Materials, Inc., (Case No. CV-01-1066
AS), Novellus Systems, Inc. (Case No. CV-01-874 KI) and Ebara Corporation and Ebara
Technologies, Inc. (Case No. CV-01-873 BR). The suits against all three parties are in the
United States District Court for the District of Oregon. The suits allege infringement of
Semitools U.S. Patent 6,197,181 (Chen) Apparatus and Method for
Electrolytically Depositing a Metal on a Microelectronic Workpiece (181
Patent) and seek injunctive relief, damages for past infringement and increased damages
for willful infringement. Each defendant has answered our complaints denying the claims
and seeking to have the patent declared invalid. In addition, Novellus has counterclaimed
for infringement of four of their patents: viz., U.S. Patent 6,179,983 Method and
Apparatus for Treating Surface Including Virtual Anode; U.S. Patent 6,074,544
Method of Electroplating Semiconductor Wafer Using Variable Currents and Mass
Transfer to Obtain Uniform Plated Layer; U.S. Patent 6,110,346 Method of
Electroplating Semiconductor Wafer Using Variable Currents and Mass Transfer to Obtain
Uniform Plated Layer; and U.S. Patent 6,162,344 Method of Electroplating
Semiconductor Wafer Using Variable Currents and Mass Transfer to Obtain Uniform Plated
Layer. On July 22, 2002, the District Court dismissed with prejudice Novellus
counterclaim for infringement of U.S. Patent 6,179,983. The remaining counterclaims seek
injunctive relief, damages for past infringement, increased damages for willful
infringement and attorneys fees. We believe that the remaining counterclaims are
without merit and we are contesting the actions vigorously. A trial date has been set for
the suit against Applied Materials in February 2004, and in November 2004 for Novellus and
Ebara. Given the inherent uncertainty of litigation, there can be no assurance that the
ultimate outcome will be in our favor. If Novellus were to prevail in its counterclaims,
it could have a material adverse effect on our business, financial condition, results of
operations and cash flows. Further, regardless of the ultimate outcome, there can be no
assurance that the diversion of managements attention, and any costs associated with
any of the lawsuits, will not have a material adverse effect on our business, financial
condition, results of operations and cash flows.

We
are subject to other legal proceedings and claims which have arisen in the ordinary course
of our business and have not been finally adjudicated. Although there can be no assurance
as to the ultimate disposition of these matters, it is the opinion of our 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 and 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 Our
Common Stock and Related Shareholder Matters

Our Common Stock is traded under the
symbol SMTL principally on the Nasdaq National Market. The approximate number
of shareholders of record at December 11, 2003 was 146 and the reported last sale price on
that date of our common stock on the Nasdaq National Market was $10.98. The high and low
sales prices for our common stock reported by the Nasdaq National Market are shown below.

|               | Common Stock Price Range
|-------------- | ------------------------
|
|
|
|               |                         
|First Quarter  |                         
|Second Quarter |                         
|Third Quarter  |                         
|Fourth Quarter |                         

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

# Item 6. Selected
Financial Data

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

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

|                                                 | Year Ended SeptembEr 30,
|------------------------------------------------ | ------------------------
|
|Statement of Operations Data:                    |                         
|Net sales                                        |                         
|Gross profit (1)                                 |                         
|Income (loss) from operations                    |                         
|Gain on sale of subsidiary (2)                   |                         
|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)                                |                         
|Basic earnings (loss) per share                  |                         
|Diluted earnings (loss) per share                |                         
|Average number of basic common shares            |                         
|Average number of diluted common shares          |                         
|                                                 |                         
|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. Data to reflect the change in
          accounting principle in accordance with SAB 101 are not available to restate
          financial information for fiscal years prior to 2001.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

We
design, manufacture, market, install and service our highly engineered equipment for use
in the fabrication of semiconductor devices. Our products are focused on the wet chemical
process steps in integrated circuit (IC) manufacturing and include systems for
electrochemical deposition, wafer surface preparation and cleaning of wafer containers.
Our electrochemical deposition systems are used for plating copper and gold 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 surface preparation systems are designed for wet cleaning, stripping and
etching processes, including photoresist and polymer removal and metal etch. Typically,
there are hundreds of manufacturing steps in fabricating semiconductor devices and after
many of these steps a wet cleaning, stripping or etching process is required. Our
customers include many of the major semiconductor device and wafer level packaging
manufacturers worldwide.

We
provide worldwide sales, service and support primarily through our employees located in
regional offices in the United States, Europe, Japan, Korea, and Singapore and through
independent sales organizations for certain products in Taiwan, Japan and China. We expect
that international sales will continue to account for a significant portion of net sales,
particularly in Asia with the industry trend to outsourcing IC device manufacturing to
foundries in that region, although the percentage of international sales and the
geographic distribution may fluctuate from period to period.

# CRITICAL ACCOUNTING
POLICIES AND ESTIMATES

Our
discussion and analysis of our financial condition and results of operations is based upon
our consolidated financial statements, which have been prepared in accordance with
accounting principles generally accepted in the United States. The preparation of these
financial statements requires us to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenues and expenses, and related disclosure of
contingent assets and 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 affect our more significant judgments
and estimates used in the preparation of our consolidated financial statements.

Revenue Recognition        Our
revenue recognition policy, as discussed in Note 1 to the financial statements located in
Item 8 below, is significant because revenue is a key component of our results of
operations. In addition, revenue recognition determines the timing of certain expenses,
such as cost of sales, installation, warranty and commission expenses. 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 policy.

Inventories        We
write down the carrying value of inventories for estimated obsolescence and marketability
based upon assumptions about future use, demand and market conditions. If actual future
use, demand or market conditions are less favorable than those projected by us, additional
inventory valuation write-downs may be required, as they were during fiscal 2003, when the
introduction of a new product rendered certain inventory obsolete.

Warranty Obligations        We
provide for the estimated cost of product warranties at the time revenue is recognized.
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. 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 may be required.

Impairment of Investments        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.

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 in
the period such determination was made.

# Results of Operations

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

|                                                    | Year Ended September 30,
|--------------------------------------------------- | ------------------------
|
|Statement of Operations Data:                       |                         
|Net sales                                           |                         
|Cost of sales (1)                                   |                         
|                                                    |                         
|Gross profit                                        |                         
|                                                    |                         
|Operating expenses:                                 |                         
|Selling, general and administrative                 |                         
|Research and development                            |                         
|                                                    |                         
|Total operating expenses                            |                         
|                                                    |                         
|Income (loss) from operations                       |                         
|Other income (expense), net                         |                         
|Gain on sale of subsidiary (2)                      |                         
|                                                    |                         
|Income (loss) before income taxes and               |                         
|cumulative effect of change in accounting principle |                         
|Income tax provision (benefit)                      |                         
|Cumulative effect of change in accounting           |                         
|principle, net of tax benefit (3)                   |                         
|                                                    |                         
|Net income (loss)                                   |                         
|                                                    |                         

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

Results of Operations for the
Fiscal Years Ended September 30, 2003, 2002 and 2001

Change in Accounting Principle        In
December 1999, the staff of the Securities and Exchange Commission, or SEC, issued staff
accounting bulletin No. 101, Revenue Recognition in Financial Statements, or
SAB 101. During the fourth quarter of fiscal 2001, we adopted SAB 101 retroactive to
October 1, 2000. 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
acceptance. Sales of existing products into customer environments where the product has
previously been accepted are treated as multiple element arrangements if multiple elements
exist. 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 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.

As
a result of implementing SAB 101, the Company changed its method of accounting for revenue
recognition. This change resulted in cumulative deferred revenue of $57.8 million as of
October 1, 2000, which was recorded as a non-cash charge of $17.6 million after reduction
for income taxes of $8.7 million, or a charge of $0.61 per share, to reflect the
cumulative effect of the accounting change as of the beginning of fiscal 2001. The
resulting deferred profit balance as of October 1, 2000 was $26.3 million. Deferred profit
equals the amount of system revenue that was shipped, but deferred under SAB 101 less all
applicable product, warranty and commission costs. Of the $26.3 million in deferred
profit, the full amount was recognized in fiscal 2001. The change in revenue recognition
did not affect our cash flow.

Software
revenue from the our wholly-owned subsidiary, Semy Engineering, Inc. was recognized when
there was persuasive evidence of an arrangement, the software had been delivered, the
price was fixed and determinable, and collectibility was probable in accordance with the
AICPAs Statement of Position 97-2 Software Revenue Recognition. We
disposed of our software subsidiary in February 2001.

Consolidated Net Sales        Consolidated
net sales were $117.0 million for fiscal 2003, $123.7 million for fiscal 2002 and $256.5
million for fiscal 2001. This two year downward trend in sales reflects the state of the
semiconductor and semiconductor equipment industries. Although there are signs that an
industry upturn has begun, we are still cautious as to the timing and extent of an upturn
in demand for our products. Customer purchases in fiscal 2003 and 2002 were primarily
focused on newer technology products, especially single-wafer cleaning tools, rather than
in fiscal 2001 where customers purchased products that also added to their manufacturing
capacity. Product sales in fiscal 2003 continued the trends of fiscal 2002 to 300mm
equipment and single-wafer platforms. Neither fiscal 2003 or 2002 included sale of
software as compared to the $7.4 million in software sales in fiscal 2001. Those sales in
fiscal 2001 occurred prior to February of that year when we sold our software division.

In
fiscal 2003, electrochemical deposition products contributed 25%, cleaning, stripping and etching products
contributed 45% and parts, service and other contributed 30% to net sales compared to 34%, 40% and
26% contributed in fiscal 2002.  This reflects normal year-to-year fluctuations.

The
geographic distribution of net sales in fiscal year 2003 was North America, 38.8%, Europe,
31.4%, and Asia, including Japan, 29.8%. While the relative proportion of international
sales to total consolidated sales for fiscal 2003 is nearly unchanged from the previous
fiscal year, the geographic mix has shifted. On a combined basis, sales in Japan and Korea
declined nearly 17%, while the rest of Asia and Europe declined by lesser amounts. The
geographic distribution of net sales in fiscal year 2002 was as follows: North America,
37.5%, Europe, 37.1%, and Asia, including Japan, 25.4%.

Fiscal
2003 shipments totaled $95.9 million, compared to $123.8 million in fiscal 2002 and $229.4
million in fiscal 2001.

Orders Backlog        Orders
backlog decreased 27.9% to $19.9 million at September 30, 2003 from $27.6 million at
September 30, 2002. Orders are generally subject to cancellation or rescheduling by
customers with limited or no cancellation fees. In fiscal 2003, we experienced both
cancellations and the forward rescheduling of equipment delivery dates by customers.
Because of these factors and orders placed and shipped in the same quarter, our orders
backlog is not necessarily indicative of actual revenue for any succeeding period.

Deferred Revenue        Under
the SAB 101 method of revenue recognition, certain revenues and their associated profit
are deferred and recognized when customer acceptance is received. Deferred revenue at
September 30, 2003 was $10.7 million, down 72.1% from fiscal 2002s $38.3 million, as a result
of lower shipment levels due to the downturn in the semiconductor industry.

Gross Profit        Our
gross margin for fiscal 2003 was 30.1%, compared to 47.8% in fiscal 2002 and 49.9% in
fiscal 2001. The year-over-year decrease in gross margin from fiscal 2002 is primarily
attributable to the write-down of $19.1 million in inventory due to obsolescence, which
was caused by the introduction of a new product. The gross margin decrease from fiscal
2001 to fiscal 2002 was primarily attributable to reduced manufacturing overhead
absorption, as a result of our lower operating levels, higher inventory obsolescence and
changes in sales mix.

Our
gross margin has been and, we believe, will continue to be affected by a variety of
factors, including the cost to manufacture, service and support new and enhanced products,
inventory obsolescence, the mix and average selling prices of products sold and operating
level.

Selling, General and Administrative        Selling,
general and administrative (SG&A) expenses include employment costs for sales,
marketing, customer support and administrative personnel, travel, communications, sales,
service and administrative office expenses and professional fees. SG&A expenses were
$52.4 million, $60.5 million and $68.0 million for each of fiscal years 2003, 2002 and
2001. As a percentage of net sales, selling, general and administrative expenses were
44.8%, 48.9% and 26.5% for the same periods. The downward trend in SG&A expenses in
absolute dollars from fiscal 2002 to fiscal 2003 is the result of continued cost control
during the industry downturn. Reduced staffing and related expenses resulted in cost
reductions, which were partially offset by increased legal expenses related to patent
litigation.

The
decrease in absolute dollars in selling, general and administrative expenses from fiscal
2001 to fiscal 2002 is primarily the result of cost reductions, which include manpower
reductions and lower sales commissions. These decreases were partially offset by a $4.4
million increase in legal expenses associated with ongoing patent litigation brought by us
to protect our intellectual property.

Research and Development        Research
and development (R&D) expense consists of employment costs, project materials,
laboratory costs, consulting fees, and other costs associated with our product development
efforts. R&D expenses were $18.1 million for fiscal 2003, $23.1 million for fiscal
2002 and $27.5 million for fiscal 2001. As a percentage of net sales, research and
development expenses were 15.5%, 18.7% and 10.7% for each of these years. The decline in
fiscal 2003 R&D expenses as compared to fiscal 2002 is continued cost control in the
form of staff reductions and related expenses. R&D projects in fiscal 2003 include the
further development of our Raider products for single-wafer electrochemical deposition
and single-wafer cleaning, stripping and etching in both 200mm and 300mm.

The
fiscal 2001 to 2002 year-over-year decrease in R&D costs was mainly due to a reduction
in employee costs as manpower was reduced in response to the industry downturn. This
reduction was partially offset by an increase in depreciation expense, as we updated our
process development and demonstration laboratories. Fiscal 2002 R&D projects included
enhancements to our Capsule processor and electrochemical deposition products, the
development of the Sirius system and other projects focused on the industry technology
trends toward smaller feature sizes and the transition to copper, wafer level packaging
and 300mm.

We
believe that continued timely development of products is necessary to remain competitive
in an equipment market characterized by rapid technological change and we expect to
maintain a high level of product development investment.

Other Income (Expense), Net        Other
income (expense), net was income of $596,000 for fiscal 2003, $1.5 million for fiscal 2002
and $2.9 million for fiscal 2001. The primary components of other income, net in each of
fiscal years 2003, 2002, and 2001 were a foreign exchange loss of $284,000, a foreign
exchange gain of $364,000 and a foreign exchange loss of $46,000 and interest income of
$590,000, $943,000 and $1.1 million, which were partially offset by interest expense of
$205,000, $205,000, and $802,000. In fiscal 2001, we recorded a gain of $2.3 million on the sale
of land and buildings that we owned in Cambridge, UK.  The foreign exchange gains primarily consist of net
gains and losses resulting from the re-measurement of our balance sheet amounts
denominated in non-U.S. currencies into U.S. Dollars, which is our functional currency.
The currency exchange gains and losses were due primarily to fluctuations of the U.S.
Dollar against the Japanese Yen and the Euro.

Income Taxes        The
$13.5 million income tax benefit recorded in fiscal 2003 compares to an $8.7 million tax benefit in fiscal 2002 and a $23.2
million tax provision for fiscal 2001. The effective income tax rate for each of fiscal
years 2003, 2002, and 2001 was 39.0%, 38.0%, and 34.9%. The anticipated tax rate for
fiscal 2004 is 33.0%, but this expectation can be affected by tax legislation, geographic
composition of our pretax income and research and experimentation credits as a percentage
of pretax income. If we are not able to generate taxable income in fiscal 2004, our
effective tax rate could go to zero as we may be unable to utilize operating losses generated.
In this event, we would also need to write-down a portion or all of our net deferred tax assets of $6.6 million.

# Liquidity and Capital
Resources

Cash
and cash equivalents and marketable securities at September 30, 2003 were $27.9 million
down $12.9 million from the beginning of the year. During fiscal 2003, cash used in
operations was $10.1 million, which contrasts with fiscal 2002 when cash provided by
operations was $2.0 million. The year-over-year change in cash from operations is
primarily attributable to the net loss adjusted for non-cash benefits, most notably the
inventory write-down of $19.1 million, depreciation and amortization and decreases in
deferred tax assets. Changes in working capital accounts, notably decreases in trade
receivables provided $16.5 million in cash, but were 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 industry-wide downturn.

We
expect future accounts receivable and inventory balances to fluctuate with net sales. As
is customary in the semiconductor manufacturing equipment industry, products are generally
built to fill specific customer orders, with typical order fulfillment times ranging from
four to six weeks for certain products to six months or longer for more complex products.
Accordingly, while our finished goods inventory accounts for 24.0% of total inventory at
September 30, 2003, overall inventory levels tend to fluctuate with the level and type of
orders received and order cancellations.

Cash
used in investing activities for fiscal 2003 was $788,000 as compared to cash used in
investing activities of $6.7 million for the year ended September 30, 2002. Cash used to
purchase plant, property and equipment in fiscal 2003 was $1.3 million and primarily
included laboratory equipment. 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 plant, property and equipment in
fiscal 2003. Cash invested in intangible assets, which primarily consisted of intellectual
property rights, was approximately $1.5 million in fiscal 2003 compared to $1.7 million
for fiscal 2002.

Cash
used in financing activities for fiscal 2003 primarily consisted of net repayments on
long-term borrowings of $634,000 compared to $317,000 in long-term debt repayments in
fiscal 2002. The exercise of stock options in fiscal 2003 provided $69,000 in cash
compared to $255,000 in fiscal 2002.

The
following commitments as of September 30, 2003 have been included in the consolidated
balance sheet and statement of operations included under Item 8. Financial Statements and
Supplemental Data, with the exception of purchase order commitments which are properly
excluded under general accepted accounting principles, and they are disclosed in the
following table in order to provide a consolidated picture of our financial position and
liquidity. 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 any financing, liquidity, market or credit risk that could arise if we had
engaged in such relationships.

|                           | Payments Due by Period (amounts in thousands)
|-------------------------- | ---------------------------------------------
|
|
|
|
|Long-term debt             |                                              
|Capital lease obligations  |                                              
|Operating leases           |                                              
|Purchase order commitments |                                              
|                           |                                              
|Total commitments          |                                              
|                           |                                              

Semitool
has agreements with Mr. Raymon F. Thompson, the Companys chairman, to lease aircraft
and an aircraft hangar. Under these agreements, rent expense was approximately $2,094,000,
$2,600,000 and $2,127,000 for the years ended September 30, 2003, 2002 and 2001,
respectively. The current rental rate is approximately $175,000 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.

As
of September 30, 2003, our principal sources of liquidity consisted of approximately $23.0
million of cash and cash equivalents, $4.9 million in marketable securities, and
ongoing operations. We believe that we have sufficient cash and cash equivalents, along
with funds expected to be generated from operations to meet operating expenses and planned
capital expenditures through fiscal 2004, and into the foreseeable future. We estimate
capital expenditures will be between $3.0 to $5.0 million during fiscal 2004. We currently
have an effective shelf registration statement, which registers the offer and sale of up
to an aggregate $75 million of our securities. If additional financial resources are
required in the future, we expect either to issue securities from the shelf registration
statement, to issue other financial instruments or to obtain a suitable credit facility,
whichever management deems advisable. However, there can be no assurance that in the
future we will be able to issue additional common stock or other financial instruments or
that we will be able to obtain a credit facility on acceptable terms.

# Litigation

We
currently are involved in patent litigation which is described in Item 3, Legal
Proceedings. Although we are not aware of any infringement by our products of any
patents or proprietary rights of others, other than as alleged by Novellus, Inc., which is
described in Item 3, Legal Proceedings, further commercialization of our
products could provoke claims of infringement from third parties. 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 against claimed infringement of the rights of others and
to determine the scope and validity of the proprietary rights of others. Any such
litigation, including the litigation in which we currently are engaged, could result in
substantial cost and diversion of our efforts, which by itself could have a material
adverse effect on our business, 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.

We
are subject to other legal proceedings and claims which have arisen in the ordinary course
of our business and have not been finally adjudicated. Although there can be no assurance
as to the ultimate disposition of these matters, it is the opinion of 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 and cash flows.

FACTORS THAT MIGHT
AFFECT OUR FUTURE FINANCIAL RESULTS AND STOCK PRICE

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.

Cyclicality
in the semiconductor industry and the semiconductor equipment industry has historically
led to substantial variations in demand for our products and may from time to time
continue to do so.

Our
operating results are subject to significant variation due to the cyclical nature of the
semiconductor industry. Our business depends upon the capital spending of semiconductor
manufacturers, which, in turn, depend upon the current and anticipated market demand for
semiconductors and products using semiconductors. The semiconductor industry recently
experienced a downturn, which seriously affected our operating results. Typically, the
semiconductor equipment industry experiences a more pronounced percentage decrease in
revenues than the semiconductor industry as a whole.

The
semiconductor industry may continue to be depressed in fiscal 2004, and:

- demand in the semiconductor industry may continue to decline;
- any recovery of the semiconductor industry may not result in an increased demand by semiconductor manufacturers for capital
equipment or our products; and
- the semiconductor industry may experience other, possibly more severe and prolonged,
downturns in the future.

Any
failure of the semiconductor industry to fully recover from this downturn will harm our
business, financial condition, results of operations and cash flows.

Our
quarterly operating results have varied in the past and probably 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 may continue to do
so in the future, which could cause our common stock price to decline. 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 and
technological developments in the semiconductor industry;
- 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 tools in the quarter;
- product development costs, including research, development, engineering and marketing
expenses associated with our introduction of new products and product enhancements;
- costs associated with protecting our intellectual property;
- level of our fixed expenses relative to our net sales; and
- 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 value systems. The selling price of our systems range from
under $100,000 to in excess of $2.8 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 101 (SAB 101) Revenue Recognition in Financial Statements provides
guidance on the recognition of revenue for sales that involve contractual customer
acceptance provisions and product installation commitments. Timing of revenue recognition
from new systems, 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. 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.

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

We
have experienced periods of significant growth and decline in net sales. Our net sales
decreased 51.8% from approximately $256.5 million for fiscal year 2001 to approximately
$123.7 million for fiscal year 2002 and then declined 5.4% to $117.0 million in fiscal
2003. In addition, our consolidated orders backlog decreased 27.9% from approximately
$27.6 million at September 30, 2002 to $19.9 million at September 30, 2003. If we are
unable to effectively manage periods of rapid sales growth or decline, 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.

Following
the revenue recognition guidance provided in SAB 101, 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 on a
case-by-case basis 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
ability to reduce costs is limited by our ongoing need to invest in research and
development and to maintain a high level of customer service and support.

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.

We
currently do not maintain a credit facility but rely on cash reserves and cash flow to
finance our operations.

We
elected not to renew our $40 million credit facility in October 2001 and decided to rely
on our cash reserves and expected cash flow to finance our operations. If there is a
future need for a credit facility to finance current operations or growth, there is no
assurance that we will be able to obtain a facility on reasonable terms to meet our needs.

We
depend on our key customers and we do not have long-term contracts with these or any other
customers.

Our
ten largest customers accounted for approximately 58.4% of net sales in fiscal 2003, 58.6%
of net sales in fiscal 2002 and 38.7% in fiscal 2001. 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.

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 61.4% in fiscal 2003, 62.6% in fiscal 2002 and 63.8% in
fiscal 2001. 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 in each of the countries outside the United States in which we operate;
- tariffs and other market barriers in each of the countries outside the United States in which we operate;
- potentially adverse tax consequences in each of the countries outside the United States in which we operate;
- outbreaks of hostilities, particularly in Israel, Korea or Taiwan;
- difficulties in managing foreign sales representatives and distributors in each of the
countries outside the United States in which we operate; and
- difficulties in staffing and managing foreign branch operations in each of the countries
outside the United States in which we operate.

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 the customer's 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 that
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, often times depends
on many factors, including a 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.

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;
- cost of using our products;
- ability to ship products in the time required;
- timeliness and quality of technical support service;
- our success in developing new and enhanced products; and
- the price of our products compared to our competitors' 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. Our competitors
are likely to announce the introduction of new products or lower prices which will affect
the prices of our systems and the level of discounts we grant our customers. To the extent
that any of our semiconductor equipment systems are not distinguished from those of our
competitors by significant technological advantages, we may experience increased price
competition or loss of market share with respect to those systems.

Moreover,
there has been significant merger and acquisition activity among our competitors and
potential competitors. These combinations may provide such 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. There can be no assurance 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 integrate capital equipment 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.

There
can be no assurance that we will be able to compete successfully in the future.

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 indemnify our customers in some circumstances against liability arising
from defects in our systems. Our product and commercial liability policy currently
provides only limited coverage per claim. In the event of a successful product liability
and/or commercial claim, we could be obligated to pay damages, which are not covered by
that insurance or which are significantly in excess of our insurance limits.

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. As a result, 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 such funds will be available in the future or, if available, that
they will be adequate.

Introductions
of new products by us or our competitors could adversely affect sales of our existing
products and cause these existing products and related inventories to become obsolete or
unmarketable for specific purposes. There can be no assurance that we will be able 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.

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. In addition, since our
customers are not obligated by long-term contracts to purchase our systems, our
anticipated product orders may not materialize, or orders that do materialize may be
cancelled. 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.

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 215
U.S. patents, some with pending foreign counterparts, have 190 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 may not protect our
intellectual property to the same extent as the laws of the United States. 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. We currently are involved in patent litigation which is
described in Item 3. Legal Proceedings. Although we are not aware of any potential
infringement by our products of any patents or proprietary rights of others (other than as
alleged by Novellus, Inc., which is described in Item 3. Legal Proceedings), further
commercialization of our products 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.

From
time to time, we receive invitations to take a license to other parties patents or
to grant a license on our technology. We evaluate these potential transactions on an
individual case-by-case basis. Offers to us to take a license that are rejected by us
could lead to an offeror making a claim of infringement.

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, including the litigation in which we currently are engaged,
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.

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 2003, approximately 61.4% of our net sales were derived from sales in foreign
countries, including certain countries in Asia such as 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, Taiwan is not a signatory to the Patent Cooperation Treaty, which is designed to
specify rules and methods for defending intellectual property internationally. In Taiwan,
the publication of a patent prior to its filing would invalidate the ability of a company
to obtain a patent. Similarly, in contrast to the United States where the contents of
patents remain confidential during the patent prosecution process, the contents of a
patent are published upon filing which provides competitors an advanced view of the
contents of a patent application prior to the establishment of patent rights. 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.

The
anti-takeover provisions of Montana law and our Articles of Incorporation and Bylaws may
make a change of control of Semitool difficult, even if a change of control would be
beneficial to our shareholders. 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. Although
we have no present plans to issue any preferred stock, we view the authorized preferred
stock as a financing vehicle. In addition, under Montana law and our charter documents,
our Board of Directors may adopt additional anti-takeover measures in the future.

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, President
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. In addition, at times in our industry, we have often
experienced significant employee attrition, and we may experience further attrition due to
the current downturn. Further, to support future growth, we will need to attract and
retain additional qualified employees. Competition for such personnel can be intense, and
we may not be successful in attracting and retaining qualified senior executives and other
employees.

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 timely deliver our systems, our net sales could suffer a material adverse effect.

Our
stock price may be volatile and our common stock may be thinly traded, which could cause
investors to lose a substantial part of their investments in our common stock.

The
stock market in general, and the stock prices of technology companies in particular, have
experienced volatility which has often been unrelated to the operating performance of any
particular company or companies. If market or industry-based fluctuations continue, our
common stock price could decline regardless of our actual operating performance and
investors could lose a substantial part of their investments. The market price of our
common stock will likely fluctuate in response to a number of factors, including the
following:

- variations in our operating results;
- announcements by us or our competitors of significant contracts or acquisitions;
- our failure to meet management guidance on financial performance or the performance estimates of securities analysts;
- changes in financial estimates of our net sales and operating results by management or securities analysts;
- stock market price and volume fluctuations attributable to inconsistent trading volume levels; and
- general stock market conditions.

We
could be subject to class action litigation due to stock price volatility, which, if it
occurs, will distract our management and could result in substantial costs or large
judgments against us.

In
the past, securities class action litigation has often been brought against companies
following periods of volatility in the market prices of their securities. Securities
litigation could result in substantial costs and divert our managements attention
and resources, which could cause harm to our business, financial condition, results of
operations and cash flows.

# New Accounting
Pronouncements

In
June of 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement
Obligations. The statement provides accounting and reporting standards for
recognizing obligations related to asset retirement costs associated with the retirement
of tangible long-lived assets. Under this statement, obligations associated with the
retirement of long-lived assets are to be recognized at their fair value in the period in
which they are incurred if a reasonable estimate of fair value can be made. The fair value
of the asset retirement costs is capitalized as part of the carrying amount of the
long-lived asset and subsequently allocated to expense using a systematic and rational
method over the assets useful life. Any subsequent changes to the fair value of the
liability due to passage of time or changes in the amount or timing of estimated cash
flows is recognized as an accretion expense. We will be required to adopt this statement
on October 1, 2003. The adoption of this statement will not have a significant
impact on our results of operations, financial position or cash flows.

# 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, 2003, we had approximately $2.6 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, 2003, we held forward contracts to sell Japanese Yen
with a total face value of $1.04 million, a total market value of $1.10 million and a
total unrealized loss of approximately $60,000. However, 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, 2003 and 2002
                                    (Amounts in Thousands, Except Share Amounts)

|ASSETS                                                                       |  | 
|---------------------------------------------------------------------------- |  | 
|
|Current assets:                                                              |  | 
|Cash and cash equivalents                                                    |  | 
|Marketable securities                                                        |  | 
|Trade receivables, less allowance for doubtful accounts                      |  | 
|of $319 and $394 in 2003 and 2002                                            |  | 
|Inventories                                                                  |  | 
|Income tax refund receivable                                                 |  | 
|Prepaid expenses and other current assets                                    |  | 
|Deferred income taxes                                                        |  | 
|                                                                             | 
|Total current assets                                                         |  | 
|Property, plant and equipment, net                                           |  | 
|Intangibles, less accumulated amortization of $612 and $753 in 2003 and 2002 |  | 
|Other assets, net                                                            |  | 
|                                                                             | 
|Total assets                                                                 |  | 
|                                                                             | 

|LIABILITIES AND SHAREHOLDERS' EQUITY                                     |  | 
|------------------------------------------------------------------------ |  | 
|Current liabilities:                                                     |  | 
|Note payable to bank and other short-term debt                           |  | 
|Accounts payable                                                         |  | 
|Accrued commissions                                                      |  | 
|Accrued warranty and installation                                        |  | 
|Accrued payroll and related benefits                                     |  | 
|Income taxes payable                                                     |  | 
|Other accrued liabilities                                                |  | 
|Customer advances                                                        |  | 
|Deferred profit                                                          |  | 
|Long-term debt and capital leases, due within one year                   |  | 
|                                                                         | 
|Total current liabilities                                                |  | 
|Long-term debt and capital leases, due after one year                    |  | 
|Deferred income taxes                                                    |  | 
|                                                                         | 
|Total liabilities                                                        |  | 
|                                                                         | 
|Commitments and contingencies                                            |  | 
|Shareholders' equity:                                                    |  | 
|Preferred stock, no par value, 5,000,000 shares authorized, no           |  | 
|shares issued and outstanding                                            |  | 
|Common stock, no par value, 75,000,000 shares authorized,                |  | 
|28,455,777 and 28,427,677 shares issued and outstanding in 2003 and 2002 |  | 
|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 OPERATIONS
                                For the years ended September 30, 2003, 2002 and 2001
                                  (Amounts in Thousands, Except Per Share Amounts)

|                                                     | 2003 | 2002 | 2001
|---------------------------------------------------- | ---- | ---- | ----
|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):                              |      |     
|Interest income                                      |      |      |     
|Interest expense                                     |      |      |     
|Other, net                                           |      |      |     
|                                                     |     
|Total other income (expense)                         |      |      |     
|                                                     |     
|Gain on sale of subsidiary                           |      |      |     
|                                                     |     
|Income (loss) before income taxes and cumulative     |      |     
|effect of change in accounting principle             |      |      |     
|Income tax provision (benefit)                       |      |      |     
|                                                     |     
|Net income (loss) before cumulative effect of change |      |     
|in accounting principle                              |      |      |     
|                                                     |     
|Cumulative effect of change in accounting            |      |     
|principle, net of tax                                |      |      |     
|                                                     |     
|Net income (loss)                                    |      |      | $   
|                                                     |     
|Earnings (loss) per share:                           |      |     
|Basic                                                |      |     
|Income (loss) before cumulative effect of change in  |      |     
|accounting principle                                 |      |      | $   
|Cumulative effect of change in accounting principle, |      |     
|net of tax                                           |      |      |     
|                                                     |     
|Basic net income (loss) per share                    |      |      | $   
|                                                     |     
|Diluted                                              |      |     
|Income (loss) before cumulative effect of change in  |      |     
|accounting principle                                 |      |      | $   
|Cumulative effect of change in accounting principle, |      |     
|net of tax                                           |      |      |     
|                                                     |     
|Diluted net income (loss) per share                  |      |      | $   
|                                                     |     
|Weighted average common shares:                      |      |     
|Basic                                                |      |      |     
|Diluted                                              |      |      |     

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

SEMITOOL, INC.
                                      CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
                                         For the years ended September 30, 2003, 2002 and 2001
                                                        (Amounts in Thousands)

|                                  | Common Stock |  |  |       
|--------------------------------- | ------------ |  |  | ------
|
|
|
|
|Balance September 30, 2000        |              |  |  | 28,307
|Net income                        |              |  |  | --    
|Exercise of stock options         |              |  |  | 73    
|Other comprehensive income        |              |  |  | --    
|                                  |             
|Balance September 30, 2001        |              |  |  | 28,380
|Net loss                          |              |  |  | --    
|Exercise of stock options         |              |  |  | 48    
|Income tax effect of nonqualified |              | 
|stock options                     |              |  |  | --    
|Other comprehensive income        |              |  |  | --    
|                                  |             
|Balance September 30, 2002        |              |  |  | 28,428
|Net loss                          |              |  |  | --    
|Exercise of stock options         |              |  |  | 28    
|Other comprehensive income        |              |  |  | --    
|                                  |             
|Balance September 30, 2003        |              |  |  | 28,456
|                                  |             

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, 2003, 2002 and 2001
                                               (Amounts in Thousands)

|                                                                       | 2003 | 2002 | 2001
|---------------------------------------------------------------------- | ---- | ---- | ----
|Operating activities:                                                  |      |      |     
|Net income (loss)                                                      |      |      | $   
|Adjustments to reconcile net income (loss) to net                      |      |     
|cash provided by (used in) operating activities:                       |      |     
|Cumulative effect of accounting change, net of tax                     |      |      |     
|Non-cash inventory write-down and other charges                        |      |      |     
|(Gain) loss on sale of marketable securities                           |      |      |     
|(Gain) loss on disposition of assets                                   |      |      |     
|Depreciation and amortization                                          |      |      |     
|Deferred income taxes                                                  |      |      |     
|Income tax effect of nonqualified stock options exercised              |      |      |     
|Change in:                                                             |      |     
|Trade receivables                                                      |      |      |     
|Inventories                                                            |      |      |     
|Income tax refund receivable                                           |      |      |     
|Prepaid expenses and other current assets                              |      |      |     
|Other assets, net                                                      |      |      |     
|Accounts payable                                                       |      |      |     
|Accrued commissions                                                    |      |      |     
|Accrued warranty and installation                                      |      |      |     
|Accrued payroll and related benefits                                   |      |      |     
|Other accrued liabilities                                              |      |      |     
|Customer advances                                                      |      |      |     
|Deferred profit, net of cumulative effect of accounting change in 2001 |      |      |     
|Income taxes payable                                                   |      |      |     
|                                                                       |     
|Net cash provided by (used in) operating                               |      |     
|activities                                                             |      |      |     
|                                                                       |     
|Investing activities:                                                  |      |     
|Purchases of marketable securities                                     |      |      |     
|Proceeds from sale and maturities of marketable securities             |      |      |     
|Purchases of property, plant and equipment                             |      |      |     
|Increases in intangible assets                                         |      |      |     
|Proceeds from sale of subsidiary                                       |      |      |     
|Proceeds from sale of property, plant and equipment                    |      |      |     
|                                                                       |     
|Net cash provided by (used in) investing                               |      |     
|activities                                                             |      |      |     
|                                                                       |     
|Financing activities:                                                  |      |     
|Proceeds from exercise of stock options                                |      |      |     
|Borrowings under line of credit and short-term debt                    |      |      |     
|Repayments under line of credit and short-term debt                    |      |      |     
|Repayments of long-term debt and capital leases                        |      |      |     
|                                                                       |     
|Net cash used in financing                                             |      |     
|activities                                                             |      |      |     
|                                                                       |     
|Effect of exchange rate changes on cash and cash equivalents           |      |      |     
|                                                                       |     
|Net increase (decrease) in cash and cash equivalents                   |      |      |     
|Cash and cash equivalents at beginning of year                         |      |      |     
|                                                                       |     
|Cash and cash equivalents at end of year                               |      |      | $   
|                                                                       |     

SEMITOOL, INC.
                                  CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
                                For the years ended September 30, 2003, 2002 and 2001
                                               (Amounts in Thousands)

|                                                             | 2003 | 2002 | 2001
|------------------------------------------------------------ | ---- | ---- | ----
|Supplemental disclosures of cash flow information:           |      |      |     
|Cash paid during the year for:                               |      |     
|Interest                                                     |      |      | $   
|Income taxes                                                 |      |      |     
|Supplemental disclosures of non-cash financing and           |      |     
|investing activity:                                          |      |     
|Inventory transferred to equipment                           |      |      | $   
|Marketable securities acquired with the sale of wholly-owned |      |     
|subsidiary, Semy Engineering, Inc.                           |      |      |     

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, 2003, 2002 and 2001
                                               (Amounts in Thousands)

|                                                                    | 2003 | 2002 | 2001
|------------------------------------------------------------------- | ---- | ---- | ----
|Net income (loss)                                                   |      |      | $   
|Net income (loss) on cash flow hedge instruments, net of tax        |      |      |     
|Unrealized gain (loss) on available-for-sale securities, net of tax |      |      |     
|Foreign currency translation adjustment                             |      |      |     
|                                                                    |     
|Total comprehensive income (loss)                                   |      |      | $   
|                                                                    |     

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) designs, manufactures, markets and supports single-wafer and batch
          wet chemical processing systems used in the fabrication of semiconductor
          devices. The Companys primary suites of equipment include electrochemical
          deposition systems for electroplating copper, gold, solder and other metals;
          surface preparation systems for cleaning, stripping and etching silicon wafers;
          and wafer transport container cleaning systems. The Companys equipment is
          used in semiconductor fabrication front-end and back-end processes, including
          wafer level packaging.

Significant accounting policies
followed by the Company are:

# Principles of
Consolidation

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

All significant intercompany accounts
and transactions are eliminated in consolidation.

# Estimates

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

# Cash Equivalents

The Company considers all highly
liquid debt instruments with original maturities of ninety days or less to be 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 included, net of tax, in accumulated other comprehensive income (loss)
(OCI). Realized gains and losses and declines in value of securities judged to
be other than temporary are included in earnings.

# 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 133 to account for hedges. At the inception of the
hedge, the hedging relationship to a forecasted transaction, risk management objective and
the strategy for undertaking the hedge is documented. Quarterly, forward rates are used to
evaluate hedging effectiveness. 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 eighteen 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, 2003, the amount transferred from OCI to Other income (expense), net,
was not material. We estimate that all $55,000 of net derivative losses included in OCI
will be reclassified into earnings within the next twelve 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 133, had no impact on earnings for the fiscal year
ended September 30, 2003. Two cash flow hedges were discontinued during the fiscal year
ended September 30, 2002, with an impact on earnings of ($3,275).

# Inventories

Inventories are carried at the lower
of first-in, first-out (FIFO) cost or market. The Company periodically reviews its
inventories to identify slow moving and obsolete inventories and to record such
inventories at net realizable values. In the fourth quarter of fiscal 2003, the Company
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. 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 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.

# Impairment of Long-Lived
Assets

We evaluate the carrying value of our
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, is less than the
carrying value of the asset.

# Intangible Assets

Intangible assets include legal costs
associated with obtaining patents and, in fiscal 2001, the cost of internally developed software for sale
to our customers.

Costs incurred for internally
developed software products and enhancements after technological feasibility and
marketability had been established for the related product were capitalized and were stated
at the lower of cost or net realizable value. Amortization was provided based on the
greater of the amount computed using (a) the ratio that current gross revenues for a
product bears to the total of current and anticipated future gross revenues for that
product, or (b) the straight-line method over the remaining economic life of the product,
estimated at three years. No software costs were capitalized in fiscal 2003, 2002, and
2001 and no capitalized software remained on the balance sheet as of
September 30, 2003 and 2002.

The cost of patents is amortized on a
straight-line basis over seven years. In the fourth quarter of fiscal 2003, the Company
wrote down patents for which there was no expected future benefit by $384,000.

# 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. During the fourth quarter
of fiscal 2001, the Company adopted SAB 101 retroactive to October 1, 2000. 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, sale of existing
products to new customer environments are not recognized until acceptance. Sales of
existing products into existing customer environments are treated as multiple element
arrangements in accordance with Emerging Issues Task Force Issue No. 00-21,
Accounting for Revenue Arrangements with Multiple Deliverables, if multiple
elements exist. 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.

As a result of implementing SAB 101,
the Company changed its method of accounting for revenue recognition. This change resulted
in a cumulative deferred revenue of $57.8 million as of October 1, 2000, which was
recorded as a non-cash charge of $17.6 million (after reduction for income taxes of $8.7
million), or a charge of $0.61 per share, to reflect the cumulative effect of the
accounting change as of the beginning of fiscal 2001. The deferred profit balance as of
October 1, 2000 was $26.3 million. Deferred profit equals the amount of system revenue
that was shipped, but deferred under SAB 101 less all applicable product, warranty and
commission costs. Of the $26.3 million in deferred profit, the full amount was recognized
in fiscal 2001. The change in revenue recognition did not affect the Companys cash
flow.

Software revenue from our
wholly-owned subsidiary, Semy Engineering, Inc. was recognized when there was persuasive
evidence of an arrangement, the software had been delivered, the price was fixed and
determinable, and collectibility was probable in accordance with the AICPAs
Statement of Position 97-2 Software Revenue Recognition. We sold our software
subsidiary in February 2001.

# Accrued Warranty

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

# Foreign Currency

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 Inc., has the Yen as
its functional currency and invoices its customers in Yen. A loss of $49,000 in 2003, and
gains of $5,000, and $203,000 in 2002 and 2001 are included in Other Income (Expense) in
the Consolidated Statements of Operations and unrealized gains and losses from
remeasurement of the financial statements are reflected as a component of Other
Comprehensive Income (Loss).

# Research and Development
Costs

Costs of research and development are
expensed as incurred.

# Earnings (Loss) Per Share

Basic earnings per share is computed
using the weighted average number of common shares outstanding. Diluted earnings per share
is computed using the weighted average number of common shares outstanding and potential
common shares, except when they are antidilutive. Potential shares result from the assumed
exercise of outstanding stock options. Diluted earnings (loss) per share excludes the
effects of antidilutive stock options of 1,531,115, 1,396,235 and 119,700 in fiscal 2003,
2002 and 2001, respectively.

The following table sets forth the
computation of basic and diluted earnings (loss) per common share for the years ended
September 30, 2003, 2002 and 2001 (in thousands):

|                                                  | 2003 | 2002 | 2001
|------------------------------------------------- | ---- | ---- | ----
|Numerator:                                        |      |      |     
|Net income (loss) used for basic and diluted      |      |     
|earnings (loss) per share                         |      |      | $   
|                                                  |     
|Denominator:                                      |      |     
|Average common shares used for basic              |      |     
|earnings (loss) per share                         |      |      |     
|Effects of dilutive stock options                 |      |      |     
|                                                  |     
|Denominator for diluted earnings (loss) per share |      |      |     
|                                                  |     

# Stock-Based Compensation

The Company 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
Accounting for Stock-Based Compensation Transition and Disclosure. 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):

|                                                         | 2003 | 2002 | 2001
|-------------------------------------------------------- | ---- | ---- | ----
|
|Net income (loss), as reported                           |      |      | $   
|Deduct: Total stock-based employee compensation expense  |      |     
|determined under fair value based method for all awards, |      |     
|net of related tax effects                               |      |      |     
|                                                         |     
|Pro forma net income (loss)                              |      |      | $   
|                                                         |     
|Diluted earnings (loss) per share:                       |      |     
|As reported                                              |      |      | $   
|Pro forma                                                |      |      | $   

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 2003, 2002 and 2001,
respectively: dividend yield of 0% for all years; expected volatility of 80.0%, 77.0% and
80.0%; risk-free interest rates of 2.8%, 4.0% and 5.1%; and expected lives of 4.8, 4.7 and
4.8 years. The weighted-average fair value of stock options granted during the years ended
September 30, 2003, 2002 and 2001, was $2.60, $5.56 and $6.08, respectively.

# New Accounting
Pronouncements

In June of 2001, the FASB issued SFAS
No. 143, Accounting for Asset Retirement Obligations. The statement provides
accounting and reporting standards for recognizing obligations related to asset retirement
costs associated with the retirement of tangible long-lived assets. Under this statement,
obligations associated with the retirement of long-lived assets are to be recognized at
their fair value in the period in which they are incurred if a reasonable estimate of fair
value can be made. The fair value of the asset retirement costs is capitalized as part of
the carrying amount of the long-lived asset and subsequently allocated to expense using a
systematic and rational method over the assets useful life. Any subsequent changes
to the fair value of the liability due to passage of time or changes in the amount or
timing of estimated cash flows is recognized as an accretion expense. The Company will be
required to adopt this statement on October 1, 2003. The
adoption of this statement will not have a significant impact on the Company's results of operations,
financial position or cash flows.

# 2. Securities
Available-For-Sale

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

|                           |  | Gross | Gross |       
|-------------------------- |  | ----- | ----- | ------
|
|
|
|September 30, 2003         |  |       |       |       
|U.S. government agencies   |  |       | $     | 3,686 
|U.S. corporate obligations |  |       |       | 2,551 
|Other                      |  |       |       | 1,432 
|                           | 
|                           |  |       | $     | 7,669 
|                           | 
|September 30, 2002         |  |      
|U.S. government agencies   |  |       | $     | 5,370 
|U.S. corporate obligations |  |       |       | 3,387 
|Other                      |  |       |       | 4,453 
|                           | 
|                           |  |       | $     | 13,210
|                           | 

Cash and cash equivalents included
investments in debt instruments and other securities of $2.8 million and $6.7 million at
September 30, 2003 and September 30, 2002, respectively.

Contractual maturities of short-term
investments at September 30, 2003 and 2002 were all due in less than one year. Gross
realized gains or losses were immaterial on sales of available-for-sale securities for
fiscal 2003 and 2002. Semitool manages its cash equivalents and short-term investments as
a single portfolio of highly marketable securities that is intended to be available to
meet our current cash requirements.

# 3. Inventories:

Inventories at September 30,
2003 and 2002 are summarized as follows (in thousands):

|                        | 2003 | 2002
|----------------------- | ---- | ----
|
|Parts and raw materials |      |     
|Work-in-process         |      |     
|Finished goods          |      |     
|                        |     
|                        |      |     
|                        |     

# 4. Property, Plant and
Equipment:

Property, plant and equipment at
September 30, 2003 and 2002 is summarized as follows (in thousands):

|                                               | 2003 | 2002
|---------------------------------------------- | ---- | ----
|
|Buildings and improvements                     |      |     
|Machinery and equipment                        |      |     
|Furniture, fixtures and leasehold improvements |      |     
|Vehicles and aircraft                          |      |     
|                                               |     
|                                               |      |     
|Less accumulated depreciation and amortization |      |     
|                                               |     
|                                               |      |     
|Land and land improvements                     |      |     
|                                               |     
|                                               |      |     
|                                               |     

Equipment under capital leases and
accumulated amortization thereon were approximately $132,000 and $73,000 as of September
30, 2003 and approximately $666,000 and $425,000 as of September 30, 2002.

# 5. Intangible Assets:

Amortization expense was $717,000, $192,000
and $381,000 for fiscal years 2003, 2002 and 2001, respectively, including $255,000 in amortization
of capitalized software costs in fiscal 2001.  Based on patent rights granted and recorded at
September 30, 2003, 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
|------------------------- | -----
|2004                      |      
|2005                      |      
|2006                      |      
|2007                      |      
|2008                      |      

# 6. Long-Term Debt and
Capital Leases:

Long-term debt and capital
leases at September 30, 2003 are summarized as follows (in thousands):

|                                                                | 
|--------------------------------------------------------------- | 
|Mortgage term note payable in monthly installments of           | 
|$23 including interest at a blended rate of 5.5%, maturing on   | 
|September 1, 2014. (A)                                          | 
|                                                                | 
|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)  | 
|                                                                | 
|Capitalized lease obligation payable in monthly installments of | 
|2 Singapore Dollars (US $1) including interest at 7% maturing   | 
|on March 4, 2005.  Collateralized by equipment                  | 
|                                                                | 
|                                                                | 
|Less current portion                                            | 
|                                                                | 
|                                                                | 
|                                                                | 

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

|(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 $1.8 million at September 30, 2003.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Principal maturities for long-term
debt and capital leases at September 30, 2003, are summarized as follows (in
thousands):

|Year Ending                      | Notes | Capital
|-------------------------------- | ----- | -------
|
|
|2004                             |       |        
|2005                             |       |        
|2006                             |       |        
|2007                             |       |        
|2008                             |       |        
|Thereafter                       |       |        
|Less interest and property taxes |       |        
|                                 |      
|                                 |       |        
|                                 |      

# 7. 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 $820,000,
$669,000, and $1.2 million for the years ended September 30, 2003, 2002 and 2001,
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, 2003, 2002 and 2001 approximated $45,000, $43,000, and $39,000,
respectively.

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

In December 1994, the Board of
Directors adopted and the shareholders approved the Semitool, Inc. 1994 Stock Option Plan
(the Option Plan). The total shares reserved for issuance under the Option Plan are
3,300,000 at September 30, 2003. 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 terminate in December 2004 unless
terminated earlier at the discretion of the Board of Directors. At September 30, 2003,
506,732 shares were available for future issuance under the Option Plan. Options are
granted at an exercise price equal to the market price of the common stock and no
compensation expense has been recognized in 2003, 2002 or 2001 under the Option Plan.
Options granted generally have a ten-year term.

The following summary shows stock
option activity for the three years ended September 30, 2003:

|                   |  | Weighted-
|------------------ |  | ---------
|
|
|
|September 30, 2000 |  |          
|Granted            |  |          
|Exercised          |  |          
|Forfeited          |  |          
|                   | 
|September 30, 2001 |  |          
|Granted            |  |          
|Exercised          |  |          
|Forfeited          |  |          
|                   | 
|September 30, 2002 |  |          
|Granted            |  |          
|Exercised          |  |          
|Forfeited          |  |          
|                   | 
|September 30, 2003 |  |          
|                   | 

The following tables summarize
information about stock options outstanding at September 30, 2003:

|                  | Options Outstanding
|----------------- | -------------------
|
|
|
|
|
|
|$3.22  -  $4.80   |                    
|$4.84  -  $7.25   |                    
|$7.31  -  $10.81  |                    
|$11.13  -  $15.88 |                    
|$18.00  -  $19.25 |                    
|                  |                    
|                  |                    
|                  |                    

|                  | Options Exercisable
|----------------- | -------------------
|
|
|
|
|
|
|$3.22  -  $4.80   |                    
|$4.84  -  $7.25   |                    
|$7.31  -  $10.81  |                    
|$11.13  -  $15.88 |                    
|$18.00  -  $19.25 |                    
|                  |                    
|                  |                    
|                  |                    

The number and weighted-average
exercise prices of options exercisable at September 30, 2003, 2002 and 2001 are summarized
as follows:

|                                          | 2003 | 2002 | 2001   
|----------------------------------------- | ---- | ---- | -------
|
|Number exercisable                        |      |      | 896,627
|                                          |      |      |        
|Weighted-average exercise price per share |      |      | $6.93  

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 $1,940,000 in 2002, which has been recorded as additional capital.

# 8. Income Taxes:

The provision (benefit) for income
taxes for the years ended September 30, 2003, 2002 and 2001 consists of the following (in
thousands):

|         | 2003 | 2002 | 2001
|-------- | ---- | ---- | ----
|
|Federal: |      |      |     
|Current  |      |      | $   
|Deferred |      |      |     
|State:   |      |     
|Current  |      |      |     
|Deferred |      |      |     
|Foreign: |      |     
|Current  |      |      |     
|Deferred |      |      |     
|         |     
|         |      |      | $   
|         |     

Domestic and foreign components of
income (loss) before income taxes for the years ended September 30, 2003, 2002 and 2001
are as follows (in thousands):

|         | 2003 | 2002 | 2001
|-------- | ---- | ---- | ----
|
|Domestic |      |      | $   
|Foreign  |      |      |     
|         |     
|         |      |      | $   
|         |     

The components of the deferred tax
assets and liabilities as of September 30, 2003 and 2002 are as follows (in thousands):

|                                  | 2003 | 2002
|--------------------------------- | ---- | ----
|
|Deferred tax assets:              |      |     
|Accrued warranty and installation |      |     
|Net operating loss carryforwards  |      |     
|Deferred revenue                  |      |     
|Other accrued liabilities         |      |     
|Inventory                         |      |     
|Other                             |      |     
|                                  |     
|Total deferred tax assets         |      |     
|Less valuation allowance          |      |     
|                                  |     
|Deferred tax assets               |      |     
|                                  |     
|Deferred tax liabilities:         |      |     
|Depreciation and amortization     |      |     
|                                  |     
|Total deferred tax liabilities    |      |     
|                                  |     
|Net deferred tax asset            |      |     
|                                  |     

Cumulative undistributed earnings of
foreign subsidiaries, for which no U.S. income or foreign withholding taxes have been
recorded, was approximately $898,000 at September 30, 2003. 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 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, 2003, 2002 and 2001 are as follows (in thousands):

|                                                  | 2003 | 2002 | 2001
|------------------------------------------------- | ---- | ---- | ----
|
|Amount computed using the statutory rate          |      |      | $   
|Increase (decrease) in taxes resulting from:      |      |     
|State taxes, net of federal benefit               |      |      |     
|Effect of foreign taxes                           |      |      |     
|Research and experimentation credit               |      |      |     
|Meals and entertainment and other permanent items |      |      |     
|(Decrease) in valuation allowance                 |      |      |     
|Other, net                                        |      |      |     
|                                                  |     
|                                                  |      |      | $   
|                                                  |     

# 9. Related Party
Transactions:

Semitool has agreements with Mr.
Raymon F. Thompson, the Companys chairman, to lease aircraft and an aircraft hangar.
Under these agreements, rent expense was approximately $2,094,000, $2,600,000, and
$2,127,000 for the years ended September 30, 2003, 2002 and 2001, respectively. The rental
rate for fiscal 2004 will be approximately $175,000 per month for both the aircraft and
the hangar; the lease terms are month-to-month.

# 10. Commitments and
Contingencies:

The Company has various operating
lease agreements for equipment and office space that expire through the year 2007. Total
rent expense for the years ended September 30, 2003, 2002, and 2001, exclusive of amounts
paid to a related party as described in Note 9, was approximately $1.9 million, $2.4
million, and $1.8 million, respectively. At September 30, 2003, future rental payments
under these agreements are as follows (in thousands):

|Year Ending | 
|----------- | 
|
|
|2004        | 
|2005        | 
|2006        | 
|2007        | 
|2008        | 
|Thereafter  | 
|            | 
|            | 
|            | 

With the exception of product
warranties we have not issued any guarantees or any indirect guarantee for the
indebtedness of others.

Our obligations for warranty are
accrued concurrently with the revenue recognized. We make provisions for our 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 our warranty obligations, including changing product
designs and specifications, the ultimate amount incurred for warranty costs could change
in the near term from our current estimate.

The following table shows the fiscal
2003 year to date activity for our warranty accrual (in thousands):

|                                                                             | 
|---------------------------------------------------------------------------- | 
|Accrued warranty balance as of September 30, 2002                            | 
|Accruals for new warranties issued year to date                              | 
|Accruals related to pre-existing warranties (including changes in estimates) | 
|Warranty labor and materials provided year to date                           | 
|                                                                             | 
|Accrued warranty balance as of September 30, 2003                            | 
|                                                                             | 

On January 16, 2002, we filed suit
against Tokyo Electron, Ltd. and its subsidiaries, Tokyo Electron Kyushu Ltd. and Tokyo
Electron America, Inc., referred to collectively as TEL, in the United States District
Court for the Northern District of California (Case No. C-02-0288 EMC). The suit alleged
infringement of our U.S. Patent 5,784,797 entitled Carrierless Centrifugal
Semiconductor Processing System (797 Patent), relating to the centrifugal cleaning
and processing of semiconductor wafers. The defendants answered the complaint denying the
claim and seeking to have the patent declared invalid. In addition, the defendants
asserted counterclaims alleging our infringement of three patents: U.S. Patent 4,985,722
entitled Apparatus for Coating a Photo-Resist Film and/or Developing it After Being
Exposed; U.S. Patent 5,446,416 entitled Resist Processing Method; and
U.S. Patent 5,740,053 entitled Method of Controlling Monitor Used in Cleaning
Machine and Object Processing Machine and Monitor Apparatus. After reaching an
out-of-court settlement, on October 17, 2003 the court entered an order dismissing the
claims and counterclaims of both parties. The terms of the settlement are confidential,
except that there was no exchange of monetary compensation.

In June 2001, we filed separate suits
against Applied Materials, Inc., (Case No. CV-01-1066 AS), Novellus Systems, Inc. (Case
No. CV-01-874 KI) and Ebara Corporation and Ebara Technologies, Inc. (Case No. CV-01-873
BR). The suits against all three parties are in the United States District Court for the
District of Oregon. The suits allege infringement of Semitools U.S. Patent 6,197,181
(Chen) Apparatus and Method for Electrolytically Depositing a Metal on a
Microelectronic Workpiece (181 Patent) and seek injunctive relief, damages for
past infringement and increased damages for willful infringement. Each defendant has
answered our complaints denying the claims and seeking to have the patent declared
invalid. In addition, Novellus has counterclaimed for infringement of four of their
patents: viz., U.S. Patent 6,179,983 Method and Apparatus for Treating Surface
Including Virtual Anode; U.S. Patent 6,074,544 Method of Electroplating
Semiconductor Wafer Using Variable Currents and Mass Transfer to Obtain Uniform Plated
Layer; U.S. Patent 6,110,346 Method of Electroplating Semiconductor Wafer
Using Variable Currents and Mass Transfer to Obtain Uniform Plated Layer; and U.S.
Patent 6,162,344 Method of Electroplating Semiconductor Wafer Using Variable
Currents and Mass Transfer to Obtain Uniform Plated Layer. On July 22, 2002, the
District Court dismissed with prejudice Novellus counterclaim for infringement of
U.S. Patent 6,179,983. The remaining counterclaims seek injunctive relief, damages for
past infringement, increased damages for willful infringement and attorneys fees. We
believe that the remaining counterclaims are without merit and we are contesting the
actions vigorously. A trial date has been set for the suit against Applied Materials in
February 2004, and in November 2004 for Novellus and Ebara. Given the inherent uncertainty
of litigation, there can be no assurance that the ultimate outcome will be in our favor.
If Novellus were to prevail in its counterclaims, it could have a material adverse effect
on our business, financial condition, results of operations and cash flows. Further,
regardless of the ultimate outcome, there can be no assurance that the diversion of
managements attention, and any costs associated with any of the lawsuits, will not
have a material adverse effect on our business, financial condition, results of operations
and cash flows.

We are subject to other legal
proceedings and claims which have arisen in the ordinary course of our business and have
not been finally adjudicated. Although there can be no assurance as to the ultimate
disposition of these matters, it is the opinion of our 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 and cash flows.

# 11. 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.

The Company filed a registration
statement on Form S-3 with the Securities and Exchange Commission on June 16, 2000, which
was subsequently amended on September 1, 2000 in order to convert it to a shelf
registration of the securities of the Company with an aggregate public offering price of
$75 million. All costs related to the registration were expensed in fiscal 2000.

# 12. Financial
Instruments and Certain Concentrations:

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

The following methods and assumptions
were used to estimate the fair value of each class of financial instruments at September
30, 2003 and 2002 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, 2003 to
approximate fair value.
| | -------------------------------------------------------------------------------------------------------------------

| | Note
Payable to Bank and Other Short-term Debt  The carrying value of the note payable to
bank and other short-term debt approximates fair value due to the fact that the
instruments bear a negotiated variable interest rate.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Long-Term
Debt  The fair value of notes payable is based on the discounted value of
contractual cash flows using an estimated discount rate of 4.0% and 4.8% at September 30,
2003 and 2002 which the Company could currently obtain for debt with similar remaining
maturities.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The estimated fair value of financial
instruments at September 30, 2003 and 2002, consisted of the following (in thousands):

|                                               | 2003 | 2002
|---------------------------------------------- | ---- | ----
|
|
|Cash and cash equivalents                      |      |     
|Marketable securities                          |      |     
|Note payable to bank and other short-term debt |      |     
|Long-term debt                                 |      |     

At September 30, 2003 and 2002,
trade receivables of the Company were primarily from companies in the semiconductor
industry, and included approximately $13.1 million and $20.3 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.

# 13. Segments, Geographic
Location and Major Customers:

The Company currently operates in one
segment whose primary products perform cleaning and electroplating processes. The
Companys Software Control Systems segment was sold in February of 2001. The
Companys current product offerings qualify for aggregation under SFAS 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.

Prior to the sale of the
Companys Software Control Systems segment, the Companys reportable segments
had been determined based on the nature of its operations, products offered to customers
and information used by the chief operating decision maker as defined by SFAS 131. The
Companys two reportable segments were Semiconductor Equipment and Software Control
Systems.

The Semiconductor Equipment
segments primary products perform cleaning and electroplating processes. The
Software Control Systems segments primary products were designed to provide advance
process control and operational data reporting for most of the front-end process equipment
in a fab. The Semiconductor Equipments product offerings qualified for aggregation
under SFAS 131 as the products were manufactured and distributed in the same manner, had
similar economic characteristics and were sold to the same customer base.

The accounting policies of the
segments were the same as those described in the Summary of Significant Accounting
Policies note. Segment operating results were measured based on income (loss) from
operations. Internal sales were based on internal transfer prices. Internal sales
reflected sales of products from the Software Control Systems segment to the Semiconductor
Equipment segment. Segment assets consisted of assets that are identified to reportable
segments.

Advanced Micro Devices accounted for 19.4%
and 21.2% of our net sales in fiscal 2003 and fiscal 2002, respectively. No customer
accounted for over 10% of net sales in fiscal 2001.

Financial information by geographic
location for 2003, 2002, and 2001 is summarized as follows (amounts in thousands):

|     | United |  |   | Asia & | 
|---- | ------ |  | - | ------ | 
|
|
|2003 |        |  | $ | 45,290 | 
|2002 |        |  |   | 46,267 | 
|2001 |        |  |   | 92,812 | 

|Property, Plant and Equipment, Net |  |  |  |        | 
|---------------------------------- |  |  |  | ------ | 
|2003                               |  |  |  | 19,843 | 
|2002                               |  |  |  | 23,496 | 
|2001                               |  |  |  | 23,905 | 

# 14. Sale of Semy Engineering,
Inc. Subsidiary:

On February 16, 2001, the Company
sold its Semy Engineering, Inc. subsidiary to Brooks Automation, Inc. (Brooks)
for approximately $39.4 million. The Company received cash of approximately $36.5 million
and 73,243 shares of Brooks common stock valued at approximately $2.9 million on the
date of the sale. This resulted in a gain of approximately $31.1 million ($19.6 million
after tax). Semy Engineering, Inc., constituted our entire Software Control Systems
segment.

# 15. 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. The net impact of the write-downs, after tax, was
a net loss of $11.9 million or $0.42 per share.

# 16. Quarterly Financial
Data (Unaudited):

For each quarter of fiscal 2003 and 2002 (in
thousands, except for per share amounts):

|                                              | Year Ended September 30, 2003
|--------------------------------------------- | -----------------------------
|
|
|Net sales                                     |                              
|Gross profit                                  |                              
|Net loss                                      |                              
|Net loss per basic share                      |                              
|Net loss per diluted share                    |                              
|Shares used in basic per share calculations   |                              
|Shares used in diluted per share calculations |                              

|                                              | Year Ended September 30, 2002
|--------------------------------------------- | -----------------------------
|
|
|Net sales                                     |                              
|Gross profit                                  |                              
|Net loss                                      |                              
|Net loss per basic share                      |                              
|Net loss per diluted share                    |                              
|Shares used in basic per share calculations   |                              
|Shares used in diluted per share calculations |                              

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. The net impact of the write-downs, after tax, was
a net loss of $11.9 million or $0.42 per share.

REPORT OF INDEPENDENT AUDITORS

Board of Directors and
ShareholdersSemitool, Inc.

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, 2003 and September 30, 2002, and the results of their operations and their
cash flows for each of the three years in the period ended September 30, 2003 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 financial statement schedule are the
responsibility of the Companys management; our responsibility is to express an
opinion on these financial statements and financial statement schedule based on our
audits. We conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States of America, which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and evaluating
the overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

As discussed in Note 1 to the
consolidated financial statements, effective October 1, 2000, the Company changed its
method of accounting for revenue recognition in accordance with the guidance in Securities
and Exchange Commission Staff Accounting Bulletin No. 101, Revenue Recognition in
Financial Statements.

/s/PricewaterhouseCoopers
LLP

Seattle, WashingtonDecember
22, 2003

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

None.

# Item 9A. Controls and
Procedures

|(a) | Evaluation of Disclosure Controls and Procedure. Based on their evaluation of
          Semitool, Inc., disclosure controls and procedures (as defined in Rules
          13a-15(e) and 15d-15(e) under the Securities and Exchange Act of 1934) as of the
          end of the period covered by this Annual Report on Form 10-K, Semitools
          Chief Executive Officer and Chief Financial Officer have concluded that
          Semitools disclosure controls and procedures were effective to ensure that
          material information required to be disclosed by Semitool in the reports that it
          files or submits under the Exchange Act is recorded, processed, summarized and
          reported within the time periods specified in the SECs rules and forms.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(b) | Changes in Internal Controls. There were no significant changes in
          Semitools internal control over financial reporting that occurred during
          the Companys most recent fiscal quarter that have materially affected, or
          are reasonably likely to materially affect, the Companys internal control
          over financial reporting.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# 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 2004 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 2004 Annual Meeting of
          Shareholders under the caption 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 2004 Annual Meeting of Shareholders
under the caption Executive Compensation and is incorporated herein by
reference.

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

The information concerning certain principal
holders of securities and security ownership of executive officers and directors required
under this item is contained in our Proxy Statement to be filed in connection with our
2004 Annual Meeting of Shareholders under the caption Security Ownership of Certain
Beneficial Owners and Management and is incorporated herein by reference.

# Item 13. Certain
Relationships and Related Transactions

The information concerning certain
relationships and related transactions required under this item is contained in our Proxy
Statement to be filed in connection with our 2004 Annual Meeting of Shareholders under the
caption Certain Transactions and is incorporated herein by reference.

# Item 14. Principal
Accounting Fees and Services

The information in our 2004 Proxy
Statement set forth under the captions Audit Fees, All Other Fees
and Policy on Audit Committee Pre-Approval of Audit and Permissible Non-Audit
Services of the Independent Auditor is incorporated herein by reference.

# PART IV

# Item 15. Exhibits,
Financial Statement Schedules and Reports on Form 8-K

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

# 1. Financial Statements:

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

| | Report of Independent Auditors
| | ------------------------------

| | Consolidated Balance Sheets at September 30, 2003 and
         September 30, 2002
| | ---------------------------------------------------------------------------------

| | Consolidated Statements of Operations for the Years Ended
         September 30, 2003, September 30, 2002, and
         September 30, 2001
| | ------------------------------------------------------------------------------------------------------------------------------------------

| | Consolidated Statements of Changes in Shareholders' Equity
         for the Years Ended September 30, 2003, September 30, 2002
         and September 30, 2001
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Consolidated Statements of Cash Flows for the Years Ended
         September 30, 2003, September 30, 2002 and
         September 30, 2001
| | -----------------------------------------------------------------------------------------------------------------------------------------

| | Consolidated Statements of Comprehensive Income (Loss) for the
         Years Ended September 30, 2003, September 30, 2002, and
         September 30, 2001
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------

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

# 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 | Restated Articles of Incorporation of the Company   (1)
|--- | -------------------------------------------------------

|3.8 | Amendment to the Restated Articles of Incorporation of the Company   (3)
|--- | ------------------------------------------------------------------------

|3.9 | Correction to the Amendment of the Restated Articles of Incorporation of the Company   (3)
|--- | ------------------------------------------------------------------------------------------

|3.11 | Amended Bylaws of Semitool, Inc.   (5)
|---- | --------------------------------------

|10.12 | Agreement between the Company and the Semitool European Companies   (1)
|----- | -----------------------------------------------------------------------

|10.21 | Promissory Note, dated March 26, 1998 between Rhetech, Inc. and
              CoreStates Bank, N.A.   (2)
|----- | ---------------------------------------------------------------------------------------------------------

|10.22 | Mortgage, Assignment of Leases and Security Agreement, dated
              March 26, 1998 between Rhetech, Inc. and CoreStates Bank, N.A.   (2)
|----- | -----------------------------------------------------------------------------------------------------------------------------------------------

|10.39 | Aircraft lease agreement, dated December 1, 2002 between the Company and EAGLE I LLC.   (4)
|----- | -------------------------------------------------------------------------------------------

|10.40 | Aircraft lease agreement, dated December 1, 2002 between the Company and EAGLE II LLC.   (4)
|----- | --------------------------------------------------------------------------------------------

|10.41 | Employment Agreement between Larry A. Viano and Semitool, Inc. dated June 1, 2003   (6)*
|----- | ----------------------------------------------------------------------------------------

|10.42 | Employment Agreement between Timothy C. Dodkin and Semitool, Inc. dated June 30, 2003   (6)*
|----- | --------------------------------------------------------------------------------------------

|10.43 | Amended and Restated Semitool, Inc. 1994 Stock Option Plan   (7)*
|----- | -----------------------------------------------------------------

|21.1 | Subsidiaries of Registrant
|---- | --------------------------

|23.1 | Consent of Independent Auditors
|---- | -------------------------------

|31.1 | Certification of Raymon F. Thompson, Chief Executive Officer, pursuant to Rule 13a-14(a)/15d-14(a)
|---- | --------------------------------------------------------------------------------------------------

|31.2 | Certification of Larry A. Viano, Chief Financial Officer, pursuant to Rule 13a-14(a)/15d-14(a)
|---- | ----------------------------------------------------------------------------------------------

Additional Exhibits:

In accordance with the Securities and
Exchange Commission, Exhibits 32.1 and 32.2 are to be treated as accompanying
this report rather than filed as part of this report.

|32.1 | Certification of Raymon F. Thompson, Chief Executive Officer, pursuant to 18 U.S.C. Section 1350 as adopted
              pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|---- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|32.2 | Certification of Larry A. Viano, 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 Annual Report on Form 10-K, date of report September 30, 2002.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(5) | Incorporated herein by reference to Exhibit 3(ii) to the Companys
               Quarterly Report on Form 10-Q, date of report March 31, 2003.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------

|(6) | 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.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------

|(7) | Incorporated herein by reference to Exhibit 99.2 to the Company's Quarterly Report
               on Form 10-Q, date of report March 31, 1998.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------

|* | Denotes a management contract or compensator plan or arrangement
|- | ----------------------------------------------------------------

|(b) | Reports on Form 8-K.
|--- | --------------------

Current Report on Form 8-K dated
September 15, 2003, announcing a write-down of inventory and revised fourth quarter fiscal
2003 guidance.

Current Report on Form 8-K dated
October 6, 2003, announcing appointment of Charles P. Grenier to the Board of Directors of
Semitool, Inc.

Current Report on Form 8-K dated
October 20, 2003, announcing settlement of patent litigation with Tokyo Electron, Ltd.

Current Report on Form 8-K dated November
4, 2003, announcing fiscal 2003 fourth quarter and year end results.

|(c) | 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.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------

|(d) | 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.

SEMITOOL, INC.

|Date:  December 26, 2003 | By:    /s/ Raymon F. Thompson                                                                  
|------------------------ | -----------------------------------------------------------------------------------------------
|                         | Raymon F. Thompson
Chariman, President 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. ThompsonRaymon F. Thompson       |       |     
|                                              |       |     
|/s/Larry A. VianoLarry A. Viano               |       |     
|                                              |       |     
|/s/Howard E. BatemanHoward E. Bateman         |       |     
|                                              |       |     
|/s/Donald P. BaumannDonald P. Baumann         |       |     
|                                              |       |     
|/s/Robert G. ChamberlainRobert G. Chamberlain |       |     
|                                              |       |     
|/s/Richard A. DasenRichard A. Dasen           |       |     
|                                              |       |     
|/s/Timothy C. DodkinTimothy C. Dodkin         |       |     
|                                              |       |     
|/s/Daniel J. EigemanDaniel J. Eigeman         |       |     
|                                              |       |     
|/s/Charles P. GrenierCharles P. Grenier       |       |     

SCHEDULE II ---- VALUATION AND QUALIFYING ACCOUNTS
                                         For The Years Ended September 30, 2003, 2002 and 2001
                                                        (Amounts in Thousands)

|                                           |  | Additions |   |      
|------------------------------------------ |  | --------- | - | -----
|
|
|
|Year ended September 30, 2003:             |  |           |   |      
|Deducted from asset accounts:              |  |          
|Allowance for doubtful accounts            |  |           | $ | 394  
|Inventory allowance                        |  |           |   | 6,739
|Allowance for deferred tax asset valuation |  |           |   | --   
|                                           |  |          
|Year ended September 30, 2002:             |  |          
|Deducted from asset accounts:              |  |          
|Allowance for doubtful accounts            |  |           |   | 289  
|Inventory allowance                        |  |           |   | 3,755
|Allowance for deferred tax asset valuation |  |           |   | 528  
|                                           |  |          
|Year ended September 30, 2001:             |  |          
|Deducted from asset accounts:              |  |          
|Allowance for doubtful accounts            |  |           |   | 314  
|Inventory allowance                        |  |           |   | 3,566
|Allowance for deferred tax asset valuation |  |           |   | 617  

a)    
          Reduction of allowance for doubtful accounts and related receivable account to
          reflect allowances for doubtful accounts of Semy Engineering, Inc., a
          wholly-owned subsidiary sold to Brooks Automation, Inc. on February 16, 2001.

EXHIBIT 21.1

# SUBSIDIARIES OF REGISTRANT

|Name                                      | Jurisdiction of Incorporation
|----------------------------------------- | -----------------------------
|
|Semitool Europe Ltd.                      |                              
|Semitool Halbleitertechnik Vertriebs GmbH |                              
|Semitool France SARL                      |                              
|Semitool Italia SRL                       |                              
|Semitool Japan Inc.                       |                              
|Semitool Korea, Inc.                      |                              
|Semitool FSC, Inc.                        |                              
|Semitool (Asia) Pte Ltd.                  |                              
|Rhetech, Inc.                             |                              

Exhibit 23.1

# CONSENT OF INDEPENDENT
AUDITORS

We hereby consent to the
incorporation by reference in the Registration Statements on Form S-3 (Nos. 333-39492 and
333-46348) and Form S-8 (No. 333-62474) of Semitool, Inc. of our report dated December 22,
2003, relating to the financial statements and financial statement schedule, which appears
in this Form 10-K.

/s/PricewaterhouseCoopers,
LLP

Seattle, WashingtonDecember
22, 2003

Exhibit 31.1

# Certification

I, Raymon F. Thompson, certify that:

|1. | I have reviewed this annual report on Form 10-K of Semitool, Inc.;
|-- | ------------------------------------------------------------------

|2. | Based on my knowledge, this report does not contain any untrue statement of a
          material fact or omit to state a material fact necessary to make the statements
          made, in light of the circumstances under which such statements were made, not
          misleading with respect to the period covered by this report;
|-- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|3. | Based on my knowledge, the financial statements, and other financial information
          included in this report, fairly present in all material respects the financial
          condition, results of operations and cash flows of the registrant as of, and
          for, the periods presented in this report;
|-- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4. | The registrants other certifying officer and I are responsible for
          establishing and maintaining disclosure controls and procedures (as defined in
          Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
|-- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | a) | designed such disclosure controls and procedures, or caused such disclosure
               controls and procedures to be designed under our supervision, to ensure that
               material information relating to the registrant, including its consolidated
               subsidiaries, is made known to us by others within those entities, particularly
               during the period in which this report is being prepared;
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | b) | evaluated the effectiveness of the registrants disclosure controls and
               procedures and presented in this report our conclusions about the effectiveness
               of the disclosure controls and procedures, as of the end of the period covered
               by this report based on such evaluation; and
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | c) | disclosed in this report any change in the registrants internal control
               over financial reporting that occurred during the registrants most recent
               fiscal quarter (the registrant's fourth quarter in the case of an annual report)
               that has materially affected, or is reasonably likely to
               materially affect, the registrants internal control over financial
               reporting;
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|5. | The registrants other certifying officer and I have disclosed, based on
          our most recent evaluation of internal control over financial reporting, to the
          registrants auditors and the audit committee of registrants board of
          directors (or persons performing the equivalent functions):
|-- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | a) | all significant deficiencies and material weaknesses in the design or operation
               of internal control over financial reporting which are reasonably likely to
               adversely affect the registrants ability to record, process, summarize and
               report financial information; and
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | b) | any fraud, whether or not material, that involves management or other employees
               who have a significant role in the registrants internal control over
               financial reporting.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Dated: December 26, 2003 | By:      /s/ RAYMON F. THOMPSON     
|------------------------ | ------------------------------------
|                         | Raymon F. Thompson                  
|                         | Chairman and Chief Executive Officer

Exhibit 31.2

# Certification

I, Larry A. Viano, certify that:

|1. | I have reviewed this annual report on Form 10-K of Semitool, Inc.;
|-- | ------------------------------------------------------------------

|2. | Based on my knowledge, this report does not contain any untrue statement of a
          material fact or omit to state a material fact necessary to make the statements
          made, in light of the circumstances under which such statements were made, not
          misleading with respect to the period covered by this report;
|-- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|3. | Based on my knowledge, the financial statements, and other financial information
          included in this report, fairly present in all material respects the financial
          condition, results of operations and cash flows of the registrant as of, and
          for, the periods presented in this report;
|-- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4. | The registrants other certifying officer and I are responsible for
          establishing and maintaining disclosure controls and procedures (as defined in
          Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
|-- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | a) | designed such disclosure controls and procedures, or caused such disclosure
               controls and procedures to be designed under our supervision, to ensure that
               material information relating to the registrant, including its consolidated
               subsidiaries, is made known to us by others within those entities, particularly
               during the period in which this report is being prepared;
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | b) | evaluated the effectiveness of the registrants disclosure controls and
               procedures and presented in this report our conclusions about the effectiveness
               of the disclosure controls and procedures, as of the end of the period covered
               by this report based on such evaluation; and
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | c) | disclosed in this report any change in the registrants internal control
               over financial reporting that occurred during the registrants most recent
               fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report)
               that has materially affected, or is reasonably likely to
               materially affect, the registrants internal control over financial
               reporting;
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|5. | The registrants other certifying officer and I have disclosed, based on
          our most recent evaluation of internal control over financial reporting, to the
          registrants auditors and the audit committee of registrants board of
          directors (or persons performing the equivalent functions):
|-- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | a) | all significant deficiencies and material weaknesses in the design or operation
               of internal control over financial reporting which are reasonably likely to
               adversely affect the registrants ability to record, process, summarize and
               report financial information; and
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | b) | any fraud, whether or not material, that involves management or other employees
               who have a significant role in the registrants internal control over
               financial reporting.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Dated:  December 26, 2003 | By:      /s/ LARRY A. VIANO               
|------------------------- | ------------------------------------------
|                          | Larry A. Viano                            
|                          | Vice President and Chief Financial Officer

Exhibit 32.1

CERTIFICATION PURSUANT
TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE
SARBANES-OXLEY ACT OF 2002

In connection with the annual report
of Semitool, Inc. (the Company) on Form 10-K for the fiscal year ended
September 30, 2003 as filed with the Securities and Exchange Commission (the
Report), I, Raymon F. Thompson, Chief Executive Officer of the Company, hereby
certify as of the date hereof, solely for purposes of Title 18, Chapter 63, Section 1350
of the United States Code, that to my knowledge:

| | (1) | the Report fully complies with the requirements of Section 13(a) or 15(d), as
               applicable, of the Securities Exchange Act of 1934, and
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------

| | (2) | the information contained in the Report fairly presents, in all material
               respects, the financial condition and results of operations of the Company at
               the dates and for the periods indicated.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

A signed original of this written statement
required by Section 906, or other document authenticating the signature that appears in
typed form within the electronic version of this written statement required by Section 906, has
been provided to Semitool, Inc. and will be retained by Semitool, Inc. and furnished to the Securities
and Exchange Commission or its staff upon request.

This Certification has not been, and
shall not be deemed, filed with the Securities and Exchange Commission.

|Dated: December 26, 2003 | By:      /s/ Raymon F. Thompson
|------------------------ | -------------------------------
|                         | Raymon F. Thompson             
|                         | Chief Executive Officer        

Exhibit 32.2

CERTIFICATION PURSUANT
TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE
SARBANES-OXLEY ACT OF 2002

In connection with the annual report
of Semitool, Inc. (the Company) on Form 10-K for the fiscal year ended
September 30, 2003 as filed with the Securities and Exchange Commission (the
Report), I, Larry A. Viano, Chief Financial Officer of the Company, hereby
certify as of the date hereof, solely for purposes of Title 18, Chapter 63, Section 1350
of the United States Code, that to my knowledge:

| | (1) | the Report fully complies with the requirements of Section 13(a) or 15(d), as
               applicable, of the Securities Exchange Act of 1934, and
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------

| | (2) | the information contained in the Report fairly presents, in all material
               respects, the financial condition and results of operations of the Company at
               the dates and for the periods indicated.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

A signed original of this written statement
required by Section 906, or other document authenticating the signature that appears in
typed form within the electronic version of this written statement required by Section 906, has
been provided to Semitool, Inc. and will be retained by Semitool, Inc. and furnished to the Securities
and Exchange Commission or its staff upon request.

This Certification has not been, and
shall not be deemed, filed with the Securities and Exchange Commission.

|Dated: December 26, 2003 | By:      /s/ Larry A. Viano
|------------------------ | ---------------------------
|                         | Larry A. Viano             
|                         | Chief Financial Officer