UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the Fiscal Year Ended September 30, 2009

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the Transition Period From ___ to ___

Commission File Number 0-25424

SEMITOOL, INC.

(Exact Name of Registrant as Specified in Its Charter)

Montana	81-0384392
(State or Other Jurisdiction of	(I.R.S. Employer
Incorporation or Organization)	Identification No.)

Semitool, Inc.

655 West Reserve Drive, Kalispell, Montana 59901

(406) 752-2107

(Address, including zip code, and telephone number, including

area code, of registrant’s principal executive offices)

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class	Name of Each Exchange on Which Registered
Common Stock, no par value	NASDAQ Global Select Market

Securities registered pursuant to Section 12(g) of the Act:

None

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

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

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files. Yes o No o

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. o

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

Large accelerated filer o

Accelerated filer x

Non-accelerated filer o

Smaller reporting company o

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

The approximate aggregate market value of the voting stock held by non-affiliates of the registrant on March 31, 2009 (based on the last reported sale price on the NASDAQ Global Select Market as of such date) was $63,113,197.

The number of shares of the registrant’s Common Stock, no par value, outstanding as of December 1, 2009 was 32,873,266.

DOCUMENTS INCORPORATED BY REFERENCE

None

SEMITOOL, INC.

Index to Annual Report on Form 10-K

Year Ended September 30, 2009

PART I
		PAGE

	INTRODUCTION – FORWARD-LOOKING STATEMENTS	3

ITEM 1.	BUSINESS	4

	EXECUTIVE OFFICERS OF THE REGISTRANT	11

ITEM 1A.	RISK FACTORS	11

ITEM 1B.	UNRESOLVED STAFF COMMENTS	19

ITEM 2.	PROPERTIES	20

ITEM 3.	LEGAL PROCEEDINGS	20

ITEM 4.	SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS	20

PART II

ITEM 5.	MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES	21

ITEM 6.	SELECTED FINANCIAL DATA	22

ITEM 7.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	23

ITEM 7A.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	35

ITEM 8.	FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA	36

ITEM 9.	CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE	63

ITEM 9A.	CONTROLS AND PROCEDURES	63

ITEM 9B.	OTHER INFORMATION	63

PART III

ITEM 10.	DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE	64

ITEM 11.	EXECUTIVE COMPENSATION	65

ITEM 12.	SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED SHAREHOLDER MATTERS	74

ITEM 13.	CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE	75

ITEM 14.	PRINCIPAL ACCOUNTING FEES AND SERVICES	76

PART IV

ITEM 15.	EXHIBITS AND FINANCIAL STATEMENT SCHEDULES	77

	SIGNATURES	80

Table of Contents

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 all statements other than those of historical fact, and sometimes can be identified by the use of prospective or presumptive language such as “intend,” “plan,” “expect,” “will,” “may,” “should,” “could,” and words of similar meaning or context. These forward-looking statements are based on management’s estimates, projections and assumptions based on information known to management at the time the statements are made. Forward-looking statements in the discussion of our business, properties and legal matters include, without limitation, statements regarding:


	•	trends in the semiconductor industry that are driving demand for our products, including the adoption of single-wafer 300mm processing, adoption of copper as an interconnect material, spray processing supplanting immersion technologies and the continued expansion of the wafer level packaging market;
	•	Semitool’s solutions and strategies for electrochemical deposition, surface preparation and wafer level packaging, including our intent to continue investing in research and development to maintain and expand our position as a technology leader in those markets;
	•	our plan to develop new technologies, including porous silicon, 3-D packaging, wafer thinning and solar market applications for our processes and equipment, to enable us to enter emerging markets and provide innovative solutions;
	•	our plan to leverage our Raider platform with both our current and potential new customers and in new markets and our expectation that revenue from our Raider platform will continue to account for a significant portion of our revenue;
	•	our plan to enhance our relationships with our major customers and identify opportunities to develop similar relationships with other semiconductor device manufacturers;
	•	our intent to match our sales and support organization to market opportunities in Asia, and the potential for growth in those markets;
	•	the performance and acceptance of our products, including the continued technological improvement of our tools and the success of our Raider platform;
	•	manufacturing strategy, including our vertical manufacturing structure and manufacturing strategies for increasing performance reliability and yields while reducing the cost of ownership of our tools;
	•	competition, including our ability to compete favorably with companies significantly larger than we are;
	•	our efforts to protect our intellectual property portfolio and intent to continue to file patent applications to protect that intellectual property;
	•	the adequacy of our existing manufacturing facilities;
	•	the ability to maintain our worldwide sales, service and customer support organizations;
	•	the impact of litigation on our business, including patent disputes; and
	•	the impact of the recent turmoil in the world’s economies on our business.

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


	•	accounting policies and estimates and the effects of new accounting standards;
	•	research and development expenses, including expected fluctuations in such expenses in absolute dollar amounts and as a percentage of net sales, and our expectation of continued funding of research and development to attain technology leadership in our industry;
	•	estimates of capital expenditures and the sufficiency of funds and sources of financing to make expected capital expenditures through fiscal 2010;
	•	the sufficiency of funds and the ability to finance activities, including sources of liquidity and the availability of the funds for borrowing under the debt covenants contained in our revolving credit line;
	•	our expectation that existing debt financing arrangements and cash flows generated from operating activities will be sufficient to fund operations and planned capital expenditures through fiscal 2010; and
	•	our estimated effective tax rate.

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. Some of these risks and uncertainties are described under the heading “Risk Factors” (refer to Part I, Item 1A) 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.

Important Note

On November 16, 2009, Semitool, Inc., entered into a definitive agreement to be acquired by Applied Materials, Inc. If the transactions contemplated by the agreement are completed, the Company’s status as a reporting company will cease and the Company will have merged into a wholly-owned subsidiary of Applied Materials. Except as otherwise expressly noted, all statements and information in this filing presume our continuation as an independent company which will not be the case if we are acquired by Applied Materials.

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Item 1. Business

Overview

We design, manufacture, install and service highly-engineered equipment for use in the fabrication of semiconductor devices. Our products are focused on the wet chemical process steps in integrated circuit, or IC, manufacturing and include systems for wafer surface preparation and electrochemical deposition, or ECD, applications. Our surface preparation systems are designed for Front End of Line (FEOL), Back End of Line (BEOL) and wafer level packaging of ICs processes. Our single-wafer FEOL surface preparation systems are used for photoresist stripping, post etch and pre-diffusion cleans. Our BEOL surface preparation systems are used for polymer removal and packaging applications. Our ECD systems are used to plate copper and other metals, which are used for the IC’s internal wiring, or interconnects; to plate solder and lead free solder bumps for wafer level packaging applications; and to plate other metals for various semiconductor and related applications. Also, our surface preparation systems are used for cleaning and etching processes for wafer level packaging. Our primary product for all of these processes is the Raider platform, which is a multi-chamber single-wafer tool. Our products address critical applications within the semiconductor manufacturing process, and help enable our customers to manufacture more advanced semiconductor devices that feature higher levels of performance. The fabrication of semiconductor devices typically requires several hundred manufacturing steps, with the number of steps continuing to increase for advanced devices. Due to the breadth of our product portfolio and advanced technology capabilities, our solutions address over 150 of these manufacturing steps.

Semitool, Inc., a Montana corporation, was founded in 1979 and is headquartered in Kalispell, Montana. Our mailing address is 655 West Reserve Drive, Kalispell, MT 59901 and our telephone number is 406-752-2107. Additional information about the Company is available on our website at http://www.semitool.com. On our Investor Relations page on our website, we post our filings as soon as practicable after they are electronically filed with or furnished to the Securities and Exchange Commission (SEC). All such filings on our own Investor Relations web page are available to be viewed free of charge. Information contained on our website is not part of, and is not incorporated into, this annual report on Form 10-K or our other filings with the Securities and Exchange Commission. Our filings also are available at the Securities and Exchange Commission’s website at http://www.sec.gov. Any materials the Company files with the SEC may be read and copied at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. Information on the operation of the Public Reference Room is available by calling the SEC at 1-800-SEC-0330.

Industry Background

Growth in the semiconductor industry is driven by the global demand for semiconductor devices that are incorporated in an ever increasing array of electronic devices such as netbooks, smart phones, network servers, digital televisions, MP3 players, video game players, GPS devices and digital cameras to name a few. The market for semiconductor equipment used to fabricate semiconductor devices has also experienced significant growth, driven by greater demand for, and increasingly higher performance of, semiconductor devices. Though subject to a high degree of cyclicality due to periods of excess supply or demand for semiconductor equipment, semiconductor devices and semiconductor fab capacity utilization, the market for semiconductor equipment is characterized by rapid technological development and product innovation. As a result, to meet new technological advancements, semiconductor device manufacturers may purchase new semiconductor equipment despite the timing of the market cycle. Likewise, capital expenditures can be delayed or cancelled quickly due to market or macro-economic conditions.

Semiconductor Manufacturing Process Overview

Semiconductor devices can consist of over a billion nanometric transistors and other components that electronically store information and allow the execution of instructions used to operate electronic devices. Fabrication of ICs involves hundreds of complex and repetitive process steps, involving an array of sophisticated manufacturing equipment, chemical media, and materials. The fabrication process includes, among others, the deposition of multiple layers of dielectric or insulating films and electrically conducting metal films. After the deposition of each film layer, the fabrication process continues with repeated cleaning, stripping and etching processes to prepare the surface for the next process. When completed, the wafer may contain several hundred ICs, which, traditionally, are then separated by a dicing process. The ICs are then packaged by connecting them to pins using metal wire contacts and encapsulated in a polymer plastic case. In an effort to reduce the size of packaged ICs, some manufacturers are using newer wafer level packaging techniques, which allow for attaching each IC to its package prior to dicing the wafer. With the use of Through Silicon Vias (TSVs), chips can be stacked upon each other to provide more computing process in a compact space. Once diced, the packaged semiconductor device can then be used in electronic products, such as cellular phones or other electronic devices.

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

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An IC’s interconnect wiring provides the means for electric current to flow from the IC’s transistors to external devices. Interconnects are formed by the deposition of metal film layers, such as copper, into trenches and vias on the surface of a wafer. The deposition step occurs numerous times throughout the manufacturing process, with advanced ICs possessing ten or more metal film layers. As device dimensions continue to shrink, the connections between transistors add noticeably more delay to IC processing speeds, due to the intrinsic resistance and capacitance of the interconnect material. Copper is the material of choice in such situations and practically all 300mm fabs use copper plating equipment. However, copper, unlike aluminum, is difficult to handle and must be kept from direct contact with the silicon wafer as it will diffuse into the silicon. This will ruin the devices on the wafer and could potentially contaminate an entire fab. As a result, copper-based manufacturing requires more critical surface preparation steps and special processing techniques to provide complete isolation of the copper material.

Trends in Semiconductor Manufacturing

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

Smaller Device Features for Lower Cost and Higher Performance. Semiconductor devices have historically followed Moore’s Law which states that approximately every two years the amount of transistors on a device doubles, allowing semiconductor manufacturers to build twice the computing power into the same space. The inexorable goal of creating more advanced electronics applications drives the industry’s transition to smaller device features, enabling lower cost, as more ICs can be fabricated on each wafer. As the industry moves to 32 nanometer feature sizes and below, the IC fabrication process becomes significantly more complex, requiring more stringent manufacturing specifications and reducing acceptable margins of error. In particular, the fabrication process becomes more susceptible to ever smaller particles, requiring the use of more advanced surface preparation equipment to reach acceptable yields. Also, manufacturing smaller IC interconnects requires the use of equipment specifically designed for copper deposition.

New Materials to Fabricate More Advanced Semiconductor Devices. The need to fabricate increasingly advanced semiconductor devices has led to more complex manufacturing processes that use new materials, such as low-k dielectrics and copper to form an IC’s interconnect wiring. The use of copper, in particular, presents significant processing challenges to prevent copper contamination which reduces yield even when measured in parts per billion. To address these challenges, specialized processes have been developed to provide better isolation of copper materials on the wafer, including dual-damascene, barrier layer formation, and new cleaning processes to remove unwanted copper. These complex processes require the use of computerized automated equipment for the precise deposition of copper material. Additionally, the introduction of new materials requires a higher number of surface preparation steps to provide high yields.

Move to Single-Wafer Processing Technologies for Enhanced Surface Preparation. The industry shift toward smaller device dimensions, new materials and 300mm wafer processing has driven the need for more advanced surface preparation technologies and process equipment. In particular, 300mm is causing a move to single-wafer processing as the process can be controlled more precisely compared to wet bench technology. For example, single-wafer spray processing is increasingly being used instead of wet benches due to its greater process control, reduced footprint, reduced manufacturing cycle time, reduced chemical consumption and now greater throughput. Fab BEOL processes, where the interconnect wiring is placed on the wafer, have already made the transition from being primarily batch processes to single-wafer processes for the more advanced devices. FEOL processes, which fabricate the devices’ transistors, are starting to transition from batch to single wafer.

Wafer Level and Other Advanced Packaging Enable Smaller Portable Products. Wafer level packaging, is being deployed by the industry for the manufacture of smaller portable products such as GPS devices, MP3 players and mobile phones to name a few. This advanced packaging is an enabling technology for the semiconductor industry, as it allows the integration of more computing and information processing power in a smaller space than conventional packaging technology. Advanced packaging uses fabrication processes similar to IC fabrication and includes, among others, ECD for connective solder or gold bumps, photoresist stripping and under-bump metal etching. The packaging method allows for more efficient 3-D device mounting, or chipstacking, to further reduce the device’s footprint.

Emerging Need for 3D Chipstacking Driven by the Demand for Smaller Portable Devices. The desire for smaller, lighter and more power efficient devices has led to stacking in the same package. The devices are electrically connected to provide an integrated, multi-functional device in a small footprint.

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Semitool’s Solution

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

Technology Leadership. We are able to leverage our extensive expertise in wet chemical processing and over 30 years of experience building and supporting production-proven semiconductor manufacturing equipment. We utilize advanced modeling techniques in the design of our process chambers to address an increasingly complex manufacturing process. We have a strong intellectual property portfolio with 374 U.S. patents issued and approximately 101 U.S. patents pending.

Comprehensive Product Portfolio. We provide a broad suite of advanced and innovative processing chambers for surface preparation and ECD application. These chambers are incorporated into our single-wafer platform and into our batch processing tools. We design a variety of chambers to optimize performance of each of the different processes we address.

Raider Platform. Our Raider platform is a high-precision, multi-chamber, single-wafer platform that supports surface preparation and ECD applications. Our proprietary platform is configured in a linear design, coupled with our own robotic technology, allowing for up to 14 interchangeable process chambers. The Raider platform also features no-teach robotic technology which results in reduced installation and maintenance costs.

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

Strategy

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

Target Innovative, High-Margin, High-Growth Opportunities with Differentiated Products. Our strategy is to be the first to enter new, high-growth markets with differentiated products. This strategy has provided us with early market and technology leadership and enabled us to achieve strong gross margins. For example, we were among the first to target the rapidly-growing wafer level packaging and ECD markets and will continue to do so as we develop processes and equipment for 3D chipstacking.

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

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

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

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Leverage Strategic Relationships. For over 30 years, we have focused on satisfying the needs of worldwide semiconductor device manufacturers and establishing long-term relationships with our customers. We work with select customers and other suppliers to the semiconductor equipment industry at the concept and design stages to identify and respond to customer requests for current and future generations of products. These close working relationships allow us to understand and address the performance and cost expectations of our customers. We plan to enhance our relationships with our major customers and identify opportunities to develop similar relationships with additional semiconductor device manufacturers.

Asian Market Presence. During the past several years we have expanded our presence in Asia. We currently have sales organizations in Singapore, Japan, Taiwan, Korea and China, and long-term, we intend to match our sales and applications support organization to market opportunities in that region. We believe that Asia has the potential for additional significant long-term growth. Our sales, marketing and service strategy is to expand our installed base of equipment with existing and potential new customers in this region.

Technology

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

Our surface preparation systems incorporate our innovative cleaning technology, such as our HiDRIS cleaning chamber used to remove high dose ion implant photoresist from the surface of the wafer. We have also developed porous silicon chambers for use in nano-technology mems devices and solar applications.

For electroplating applications, we leverage our advanced modeling techniques in the design of our proprietary copper pellet anode assemblies and membrane technology to provide low cost copper to the flash and memory device markets. Our multiple anode assemblies enable radially controlled current density during the electroplating process, leading to a more controllable process for depositing copper film on the surface of a wafer allowing the optimal match of the copper film to the planarization characteristics of the downstream CMP process step. For the smallest structure size devices, our seed layer enhancement process enables excellent via fill to fix nonconformities encountered during the PVD copper seed Iayer process.

Products

Our broad product suite of innovative processing systems leverages our core wet chemical processing expertise and our years of experience in manufacturing and supporting production-proven semiconductor manufacturing equipment. Our primary wet chemical processing solutions are multi-chamber single-wafer and batch cleaning, stripping and etching equipment and single-wafer plating equipment, primarily for the deposition of copper, lead or lead-free solder. We operate in one segment with net sales of $139.0 million, $238.6 million and $215.2 million for fiscal 2009, 2008 and 2007, respectively. Additional information regarding our income and assets can be found in the financial statements included under Item 8 below.

Surface Preparation Products

Our multi-chamber, single-wafer processing systems for wet cleaning, stripping and etching are designed with a linear arrangement of the processing chambers for high volume production and, like our ECD chambers, utilize the Raider platform. The platform modularity reduces downtime and increases wafer throughput providing the customer with an overall lower cost of ownership. These systems are available to accommodate 200mm and 300mm wafer sizes. Selling prices for these single-wafer surface preparation products range from approximately $900,000 to $2.4 million.

Our batch systems for wet cleaning, stripping and etching applications include semi- and fully-automated systems and use our proprietary spray technology to deliver chemicals, de-ionized water and gases to the wafer surface in an enclosed chamber. The wafers are rotated, on axis, and are showered by a sequenced spray of chemicals and de-ionized water followed by heated nitrogen gas to dry the wafers. This technology enables precise and uniform application of process chemicals and enhances process reliability and cost effectiveness through reduced particle contamination and process cycle time. Our cost-effective ozone and de-ionized water-based cleaning process, called HydrOzone, is available on selected systems. This environmentally friendly process can replace traditional processes using sulfuric acid and other hazardous chemicals resulting in lower costs, reduced process cycle time, reduced water consumption, and can minimize chemical disposal costs. These systems are available to accommodate 150mm, 200mm and 300mm wafer sizes in up to 50 wafer batches. Selling prices for these systems range from approximately $20,000 to over $1.6 million.

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RAIDER SP

Our Raider platform is a multi-chamber, single-wafer platform that provides a high degree of control over surface preparation applications. Our proprietary platform is designed in a linear configuration, coupled with our robotic technology, allowing for up to 14 interchangeable process chambers. The flexibility of its linear design makes it one of the most versatile wet cleaning, stripping and etching platforms in the industry. The tool can be equipped with our proprietary Capsule chambers, which allows side-selectable processing. In addition, the system can also be equipped with spray, immersion, megasonic, or vapor process chambers. Applications include wafer backside, bevel-edge clean for removal of unwanted copper and other contaminates, post-etch polymer removal, critical pre-deposition cleans, metal etching and FEOL cleans. The Raider SP is available to accommodate 200mm and 300mm wafer sizes.

SPECTRUM

The Spectrum is an advanced automated batch processing system for cleaning, stripping and etching applications. Its compact modular design features high throughput, flexible process formats and precise control combining to provide 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 acids, solvents or our proprietary HydrOzone-based processes for polymer removal, photoresist strip and critical cleaning applications. The Spectrum is available to accommodate both 200mm and 300mm wafer sizes.

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

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

Electrochemical Deposition Systems

Our single-wafer ECD systems incorporate proprietary electroplating technology on a multi-chamber Raider platform typically populated with 10 to 14 chambers. ECD applications include copper interconnect for logic and memory ICs, gold bumps for high speed communication ICs, lead and lead-free solder bumps for advanced wafer level packaging and Through Silicon Via plating for 3-D chipstacking applications. Our leading single-wafer design is modular, with process chambers arranged in a linear orientation, providing flexibility in system configuration. These systems generally include a combination of ECD and surface preparation process chambers to address a customer’s specific application. These systems are available to accommodate wafer diameters from 100mm to 300mm and can be scaled for customers’ capacity requirements. Selling prices of these typically range from approximately $500,000 to $5.0 million.

RAIDER ECD

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

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Customers, Sales and Marketing

Our customers include leading global semiconductor manufacturers. The following is a representative list of our largest customers in fiscal 2009:

Advanced Semiconductor Engineering	FormFactor	NEC
Amkor	Global Foundries/AMD	Samsung
Anadigics	IMEC	Seagate
Bosch	Inotera	Silex
CEA Leti	Micron	STATS ChipPAC
Elpida Memory	Nanya Technology	Taiwan Semiconductor Mfg. Co.
Fairchild Semiconductor	National Semiconductor	Texas Instruments

Our top ten customers accounted for 48.2%, 56.0% and 67.8% of net sales in fiscal 2009, 2008 and 2007, respectively. Seagate and Amkor accounted for 11.6% and 10.4%, respectively, of net sales in fiscal 2008. Advanced Micro Devices and Micron/IM Flash accounted for 23.8% and 10.2%, respectively of net sales in fiscal 2007. No single customer accounted for 10% or more of net sales in fiscal 2009.

International sales, primarily in Europe and Asia, including Japan, accounted for approximately 74.5%, 71.4 % and 62.5% of net sales for fiscal 2009, 2008 and 2007, respectively. We have direct sales and customer support organizations located in the United States, Europe, Japan, Singapore, Korea, Taiwan, China and Philippines and for some products, we utilize on a selective basis both independent representatives and distributors.

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

Backlog and Deferred Revenue

Consolidated orders backlog was $69.8 million as of September 30, 2009 and $54.5 million as of September 30, 2008. We include in backlog those customer orders for which we have written customer authorization and for which shipment is scheduled within the next 12 months. Orders are subject to cancellation or rescheduling by customers with limited or no cancellation fees. During periods of downturns in the semiconductor industry, we have experienced significant customer cancellations and requested delays in delivery.

Our deferred revenue primarily relates to equipment shipped to customers that has not been accepted by the customer. Revenue on those shipments is recognized as sales when acceptance is received. As of September 30, 2009, deferred revenue was $4.8 million.

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

Manufacturing

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

In fiscal 2006, we increased our manufacturing capacity with the purchase of a 72,000 square foot facility near Kalispell. This building contains our fabrication departments and provides more space for the assembly area in our main facility. In fiscal 2006, we also completed our facility in Salzburg, Austria which has space for manufacturing and upgrading used products. In fiscal 2007, we completed a 10,000 square foot expansion of a refurbishing facility at our Rhetech subsidiary.

Research and Development (R&D)

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

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Research and development, which is expensed as incurred, was approximately $25.6 million, $30.4 million and $27.1 million in fiscal 2009, 2008 and 2007, respectively. As a percentage of our net sales, these expenses represented approximately 18.4%, 12.8% and 12.6% in each of these fiscal years, respectively. We continue to work on a number of leading edge projects including on-going development of porous silicon for the solar industry, flow batteries, FEOL cleaning applications, wafer edge cleaning processes, deep via and Through Silicon Via applications, high volume Through Silicon Via and wafer level packaging production and others.

Competition

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

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

Patents and Other Intellectual Property

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

We place a strong emphasis on the innovative features of our products and, where available, we generally seek patent protection for those features. We currently hold 374 U.S. patents, some with pending foreign counterparts, have approximately 101 U.S. patent applications pending and intend to file additional patent applications, as we deem appropriate. We have had an active patent program since the Company’s inception; consequently, the duration of our patent portfolio is staggered due to various initial filing dates for individual patents. Our patent portfolio is not dominated by any particular patents. We consider the strength of the overall portfolio to be more important than the strength of any particular patent. In fact, many patents are part of our “patent families” and it is difficult, if not impossible, to make any assessment regarding the “materiality” of one patent in that family over another. Even if a patent is not used offensively to prevent a competitor from practicing the same art, it may still provide a deterrent against a competitor’s potential patent infringement claim against us.

Employees

As of September 30, 2009, we had 826 full-time and temporary employees worldwide. Our employees are not represented by a labor union, and we have never experienced a work stoppage or strike. We consider our employee relations to be good.

Environmental Matters

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

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Executive Officers of the Registrant

The following table identifies the current executive officers of Semitool, the positions in which they serve, and the year in which they began serving in their respective capacities.

Name	Age	Position
			Since
Raymon F. Thompson (1)	68	Chairman and Chief Executive Officer	1979
Larry E. Murphy (2)	50	President and Chief Operating Officer	2004
Larry A. Viano (3)	55	Vice President and Chief Financial Officer	2003
Timothy C. Dodkin (4)	60	Executive Vice President	2003
Richard C. Hegger (5)	53	Vice President, General Counsel and Secretary	2005
Herbert Oetzlinger (6)	42	Vice President, Sales (Europe)	2008
Klaus H. Pfeifer (7)	51	Vice President, Copper Interconnect and BEOL Cleans	2009
Richard P. Schuster (8)	53	Vice President, Global Service	2002
Paul M. Siblerud (9)	50	Vice President, Advanced Packaging	2005
James L. Wright (10)	46	Vice President, Manufacturing	2006

___________

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

(2) Larry E. Murphy joined us in May 2004 as our Chief Operating Officer and has served as our President since April 2005.

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

(4) Timothy C. Dodkin has been employed by us since 1985 and has served on our Board of Directors since 1998. Mr. Dodkin has held a number of sales-related positions including Senior Vice President, Global Sales and Marketing and, since June 2003, has served as Executive Vice President.

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

(6) Herbert Oetzlinger joined us in 1988 and has held various positions with the Company since then. Mr. Oetzlinger has served as our Vice President of Sales (Europe) since March 2008.

(7) Klaus H. Pfeifer joined us in 2006 as our general manager of Copper Interconnect. In June 2009, Mr. Pfeifer was promoted to the position of Vice President of the Copper Interconnect and Back End of Line Cleans division. Prior to joining the Company, Mr. Pfeifer was a program manager for copper low-k integration with the interconnect division of SEMATECH and spent 18 years with Philips Semiconductors where he worked with the SEMATECH consortium as program manager of interconnect in advanced dielectrics and metallization.

(8) Richard P. Schuster joined us in 1997 as Director of Global Customer Support. Since 2002, Mr. Schuster has served in the role of Vice President, Global Service.

(9) Paul M. Siblerud joined us in 1998 and has held various positions with the Company since then. Mr. Siblerud has served as our Vice President, Marketing since 2005 and our Vice President, Advanced Packaging since 2008.

(10) James L. Wright joined us in 2003 as our Director of Operations and has served as our Vice President of Manufacturing since March 2006.

The executive officers are elected each year by the Board of Directors to serve for a one-year term of office. Each of the executive officers identified above is a party to a change of control agreement, and Mr. Murphy is a party to a letter agreement relating to his employment with the Company. Otherwise, none of the executive officers has a contract providing for a term of employment. See Part III for further details on these agreements and arrangements.

Item 1A. Risk Factors

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

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We have announced our intention to be acquired by Applied Materials and if that transaction is not concluded successfully we may face challenges in growing our business and remaining competitive.

On November 17, 2009 we announced that we had entered into an agreement with Applied Materials, pursuant to which Applied Materials would acquire Semitool, Inc. in a combination tender offer and merger. We expect the transactions to close in the first or second fiscal quarters of fiscal 2010. However, the transactions are subject to a number of closing conditions, including our shareholders having tendered more than two-thirds of our outstanding common stock in the tender offer, the receipt of certain U.S. and foreign governmental approvals, and that there be no legal impediment to completing the transactions. Were any of these conditions to fail, and a party were to terminate the merger agreement and abandon the transactions, we would expect to face an immediate and significant reduction in the market price of our common stock. Moreover, we may face difficulties in establishing and maintaining long-term relationships with our key customers and suppliers, who may question our long-term willingness and ability to remain independent. Additionally, we may face difficulties in attracting financing on terms we deem reasonable, or at all. Any one or more of these events could have a material adverse effect upon our results of operations, financial condition, and cash flows.

We are facing legal challenges over our decision to enter into the acquisition transactions with Applied Materials.

On or about November 19, 2009, November 30, 2009 and December 4, 2009, three purported class action lawsuits related to the tender offer and the merger, captioned Stationary Engineers Local 39 Pension Trust Fund vs. Semitool, Inc., et al. (Cause No. DV-09-1461(B)), Stern vs. Thompson, et al. (Cause No. DV-09-1513(C)), and Marvel v. Thompson, et al., respectively, were filed in the Montana Eleventh Judicial District Court, County of Flathead, against Semitool, each of Semitool’s directors, Applied Materials and Jupiter Acquisition Sub, Inc. (the plaintiff in the Stationary Engineers Local action then filed an amended complaint on or about November 25, 2009). Motions for expedited proceedings were filed by the plaintiffs in the first and second actions, respectively, on November 23, 2009 and December 1, 2009, in each case requesting, among other things, that the Court expedite discovery and schedule a hearing on such plaintiff’s proposed motion for a preliminary injunction no later than December 17, 2009, the currently scheduled Expiration Date of the tender offer. A hearing on the motion for expedited proceedings in the Stationary Engineers Local action took place on December 9, 2009 and, on December 10, 2009, the court issued an order denying the plaintiff’s motion for expedited discovery and issued another order scheduling a hearing on December 15, 2009 in respect of plaintiff’s motion for a preliminary injunction.

The actions, each brought by a purported shareholder of Semitool, seek certification of a class of all holders of Semitool common stock (except the defendants and their affiliates) and allege, among other things, that Semitool’s directors breached their fiduciary duties by (i) failing to maximize shareholder value; (ii) securing benefits for certain defendants at the expense or to the detriment of Semitool’s public shareholders; (iii) discouraging and/or inhibiting alternative offers to purchase control of Semitool or its assets; and (iv) failing to disclose material non-public information, and that Applied Materials aided and abetted such alleged breaches. The actions seek, among other things, injunctive relief enjoining the defendants from consummating the tender offer and the merger and damages, as well as recovery of the costs of the action, including reasonable attorneys’ and experts’ fees. Semitool believes the claims alleged against it in the actions to be without merit and intends to defend against them vigorously. In addition, Applied Materials has informed the Company that it also believes the allegations against it in the actions to be without merit, and that it intends to defend against the claims vigorously. However, were a court to disagree with our contention, it may delay the Applied Materials transaction or may award damages to plaintiff shareholders. We also can offer no assurances that other such lawsuits will not be brought, or that if brought, such suits can be timely and effectively defended. Further, the merger agreement contains among other customary conditions a provision that would allow either Semitool or Applied Materials to abandon the tender offer or terminate the merger agreement if any temporary or permanent injunction has been entered that would have the effect of making the transactions unlawful. Because we believe the combination with Applied Materials will enhance Semitool’s ability to compete and expand into new product lines, and that the best value for our shareholders can be obtained by completing these transactions, the delay of or setting aside of these transactions or the abandonment of these transactions by the parties would likely have a material adverse impact upon the market price of our common stock, and may otherwise materially and adversely affect our business strategy and our franchise value. Additionally, shareholder litigation is time-consuming, expensive, and potentially distracting to management, which may cause adverse impacts upon our results of operations or business during the pendency of this lawsuit.

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

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

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

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The Company has a $30 million Credit Agreement, renewable annually, with Wells Fargo Trade Bank (Trade Bank) with an expiration date of March 1, 2010 with $15 million in advances outstanding as of September 30, 2009. There is no assurance that this facility will be sufficient to meet our cash needs. In addition, the credit facility contains financial covenants which must be met for the availability of funds. We have been in discussions with the Trade Bank regarding our compliance with the Funded Debt to EBITDA covenant. There exists an ambiguity in interpretation which is unresolved, but which if interpreted as noncompliance with the covenant, would allow the Trade Bank to notify us that the non-compliance constitutes an event of default under the facility that (i) prevents further borrowings and (ii) gives them the right to accelerate the payment of all amounts outstanding under the loan. The bank has not provided us with any notice of default (which is also subject to a right of cure within twenty calendar days of the notice). In view of this ambiguity in interpretation, we do not anticipate being able to request further advances under the Credit Agreement until this matter is resolved. If interpreted in favor of the Trade Bank, there would be a Funded Debt to EBIDTA ratio requirement of not more than 2:1 as of September 30, 2009 (EBITDA for the trailing twelve-month period ending September 30, 2009 was a negative number). We continue to discuss credit facility requirements with the Trade Bank with a view toward arranging a facility that resolves any issues regarding borrowing limits and outstanding advances.

Further, we do not currently have a plan to replace the Trade Bank credit facility when it matures in March 2010. If the Applied Materials transaction has not been consummated prior to that time, we may require additional borrowing capacity in order to meet our working capital needs and to fund certain capital expenditures. If we cannot secure adequate borrowing capacity on acceptable terms, we may face limitations on our ability to grow our business or expand into other product lines, and we may face shortfalls in working capital, which could require us to reduce our sales, slow down our product development, or take other measures that would be harmful to our results of operation or financial condition.

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

We have incurred significant net losses in the past. Our operating results for future periods are subject to numerous uncertainties, and we cannot assure that we will be able to maintain profitability. It is possible that in future quarters our operating results will decrease from the previous quarter or fall below the expectations of securities analysts and investors. In this event, the trading price of our common stock could significantly decline. Further, exacerbated or continuing declines in net income or increases in net losses could affect our liquidity, results of operations, or financial conditions.

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

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

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

During any quarter, a significant portion of our net sales may be derived from the sale of a relatively small number of high priced systems. The selling prices of our systems range from approximately $20,000 to in excess of $5.0 million. Accordingly, a small change in the number and/or mix of tools we sell may cause significant changes in our operating results.

Our results also may fluctuate because of the terms on which we deliver certain of our systems, which in some instances allow customers an extended period of acceptance before becoming obligated to pay for products we have delivered. We follow authoritative accounting guidance regarding revenue recognition for sales that involve contractual customer acceptance provisions and product installation commitments. Timing of revenue recognition from the sale of new systems, sales to new customers and installation services is subject to the length of time required to achieve customer acceptance after shipment, which could cause our operating results to vary from period to period.

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

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

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

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

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

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

We have experienced periods of significant growth and decline in net sales. Our net sales decreased approximately 41.7% from $238.6 million in fiscal 2008 to $139.0 million in fiscal 2009 and increased approximately 11.0% from $215.2 million in fiscal 2007 to $238.6 million in fiscal 2008. However, there have been periods of even more significant declines in net sales; for example, our net sales decreased 51.8% from approximately $256.5 million for fiscal 2001 to approximately $123.7 million for fiscal 2002. In addition, our consolidated orders backlog decreased 30.9% from approximately $85.3 million at September 30, 2006 to $58.9 million at September 30, 2007. If we are unable to effectively manage periods of rapid decline or sales growth, our business, financial condition, results of operations and cash flows could be significantly harmed.

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

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

Order backlog does not necessarily include all sales needed to achieve net revenue expectations for a subsequent period. We schedule the production of our systems based in part upon order backlog. Due to possible customer changes in delivery schedules and cancellations of orders, our backlog at any particular date is not necessarily indicative of actual sales for any succeeding period. In addition, while we evaluate each customer order to determine qualification for inclusion in backlog, there can be no assurance that amounts included in backlog will ultimately result in future sales. A reduction in backlog during any particular period, or the failure of our backlog to result in future sales, could harm our business, financial condition, results of operations and cash flows. For example, in the fourth quarter of fiscal 2008, we experienced an abnormally high amount of customer cancellations.

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

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

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

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

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

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

In addition, customer cancellations and requests for delayed deliveries can create a material adverse effect on our business, financial condition, results of operations and cash flows. During the recent economic turmoil affecting the world’s economies, we experienced a significantly higher amount of customer cancellations and requests for delays in delivery. While in some cases we have contractual protections against such cancellations or requests for delayed shipments, there is no assurance in the future that we will be able to collect amounts due under those provisions.

Our ten largest customers accounted for approximately 48.2%, 56.0% and 67.8% of net sales in fiscal 2009, 2008 and 2007, respectively. There are a limited number of large companies operating in the highly concentrated, capital intensive semiconductor industry. Accordingly, we expect that we will continue to depend on a relatively small number of large companies for a significant portion of our net sales. Although the composition of the group of largest customers may change from year to year, the loss of, or a significant curtailment of purchases by, one or more of our key customers or the delay or cancellation of a large order could cause our net sales to decline significantly, which would harm our business, financial condition, results of operations and cash flows. Similarly, delays in payments by large customers could have a significant impact on our cash flows.

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

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

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

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

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

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

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

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

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

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

We have leveraged our Raider platform to address both surface preparation and ECD applications. In fiscal year 2009, the Raider platform accounted for approximately 80% of our tool revenues. We expect that revenue from our Raider platform will continue to account for a significant portion of our revenue. Accordingly, if the Raider platform were adversely affected by its own performance, price or total cost of ownership, or the availability, functionality and price of competing products and technologies, that could have a material adverse impact on our business, financial condition, results of operations and cash flows.

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

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

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

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

To achieve commercial success with our products, we need to manage our inventory of component parts and finished goods effectively to meet changing customer product and volume requirements. Some of our products and supplies, have in the past and may in the future, become obsolete, while in inventory, due to rapidly changing customer specifications or slowdowns in demand for existing products ahead of new product introductions by us or our competitors. If we are not successfully able to manage our inventory, including our spare parts inventory, we may need to write off unsaleable or obsolete inventory, which would adversely affect our results of operations. For example, in the fourth quarter of fiscal 2007, we wrote down inventory by approximately $3.0 million primarily due to product enhancements that changed the usage of certain component parts, making them obsolete. We have pursued a vertically-integrated manufacturing model and therefore a significant portion of our supply chain is manufactured by Semitool. Consequently, we may be more exposed to having significantly greater inventory on hand than competing companies which rely more heavily on outsourced supply chains.

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.

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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 74.5%, 71.4% and 62.5% for fiscal 2009, 2008 and 2007. 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 currency exchange translations;
	•	political and economic instability, including terrorism;
	•	unexpected changes in regulatory requirements;
	•	tariffs and other market barriers;
	•	potentially adverse tax consequences;
	•	outbreaks of hostilities, particularly in Israel, Korea, Taiwan or China;
	•	difficulties in managing foreign sales representatives and distributors; and
	•	difficulties in staffing and managing foreign branch operations.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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 374 U.S. patents, some with pending foreign counterparts, have approximately 101 U.S. patent applications pending and intend to file additional patent applications, as we deem appropriate. There can be no assurance that patents will issue from any of our pending applications or that existing or future patents will be sufficiently broad to protect our technology. While we attempt to protect our intellectual property rights through patents, copyrights and non-disclosure agreements, there can be no assurance that we will be able to protect our technology, or that competitors will not be able to develop similar technology independently. In addition, the laws of certain foreign countries do not protect our intellectual property to the same extent as the laws of the United States. Furthermore, certain types of intellectual property are country-specific; for example, U.S. patents provide protection in the U.S. but generally do not provide protection outside the U.S. Moreover, there can be no assurance that our existing or future patents will not be challenged, invalidated or circumvented, or that the rights granted thereunder will provide meaningful competitive advantages to us. In any of such events, our business, financial condition, results of operations and cash flows could be harmed.

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

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

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

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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 2009, approximately 74.5% of our net sales were derived from sales in foreign countries, including certain countries in Asia such as Singapore, Taiwan, Japan, China and Korea. The laws of some foreign countries do not protect our proprietary rights to as great an extent as do the laws of the United States, and many U.S. companies have encountered substantial problems in protecting their proprietary rights against infringement in such countries, some of which are countries in which we have sold and continue to sell systems. For example, in many countries other than the U.S., the public disclosure of an invention prior to the filing of a patent application for the invention would invalidate the ability of a company to obtain a patent. Similarly, in contrast to the United States where the contents of patent applications may remain confidential during the patent prosecution process in certain cases, the contents of a patent application may be published before a patent is granted, which provides competitors an advanced view of the contents of applications prior to the establishment of patent rights. For these and other reasons, we also have not filed patent applications in these countries to the same extent that we file in the U.S. There is a risk that our means of protecting our proprietary rights may not be adequate in these countries. Our competitors in these countries may independently develop similar technology or duplicate our systems. If we fail to adequately protect our intellectual property in these countries, it would be easier for our competitors to sell competing products in those countries.

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

Our Articles of Incorporation authorize our Board of Directors to issue preferred stock in one or more series and to fix the rights, preferences, privileges and restrictions granted to or imposed upon any unissued shares of preferred stock and to fix the number of shares constituting any series and the designations of such series, without further vote or action by the shareholders. We have no present plans to issue any preferred stock in order to deter a takeover and/or adopt additional anti-takeover measures. If such actions are taken in the future, they may make a change of control difficult, even if a change of control would be beneficial to our shareholders. Further, our Agreement and Plan of Merger with Applied Materials, Inc., dated November 16, 2009, prohibits our soliciting or, with certain exceptions, entertaining, discussions which could lead to a merger with or acquisition by a person other than Applied Materials. Further, the merger agreement provides for certain fees and liquidated damages payments in the event we abandon the merger or take other actions inconsistent with its completion, in the event our board of directors determines in the exercise of their fiduciary duties that the transactions no longer can be considered to be in the best interests of the Company and our shareholders. These provisions may have the effect of discouraging competing offers to acquire the Company.

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

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

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

Item 1B. Unresolved Staff Comments

None.

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Item 2. Properties

We own two manufacturing facilities located on sites near Kalispell, Montana with approximately 251,000 square feet in the aggregate. Additionally, we own two manufacturing facilities located in Libby, Montana housing approximately 20,000 square feet in the aggregate. We also own a facility located in Coopersburg, Pennsylvania, which serves as a manufacturing facility for our Rhetech, Inc. subsidiary, which we expanded by 10,000 square feet in fiscal 2007 for a total of 32,000 square feet. We constructed and own a 29,000 square-foot production and office building in Salzburg, Austria. We believe that our existing manufacturing facilities will be adequate to meet our requirements for the foreseeable future and that suitable additional or substitute space will be available as needed. We own an office building in Cambridge, UK, which serves as our European headquarters for sales and customer support. We also lease 13 other smaller facilities worldwide, which are used as sales and customer service centers.

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

Item 3. Legal Proceedings

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

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

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

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PART II

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

Our Common Stock is traded under the symbol “SMTL” on the NASDAQ Global Select Market. The approximate number of shareholders of record at December 1, 2009 was 112 and the reported last sale price on that date of our common stock on the NASDAQ Global Select Market was $10.99. The high and low sales prices for our common stock reported by the NASDAQ Global Select Market are shown below.

	Common Stock Price Range
	Fiscal Year
	Ended September 30,
	2009				2008
	High		Low		High		Low

First Quarter	$	7.86	$	2.35	$	9.95	$	7.95
Second Quarter	$	3.75	$	1.91	$	8.86	$	7.40
Third Quarter	$	5.35	$	2.85	$	9.05	$	7.51
Fourth Quarter	$	8.72	$	4.21	$	9.64	$	6.76

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. Moreover, our merger agreement with Applied Materials, Inc. restricts our ability to pay dividends without the consent of Applied Materials, which consent may be withheld in Applied Materials’ sole discretion.

Information regarding securities issued by us under our equity compensation plans may be found below in Part III under Item 11 and Item 12.

STOCK PERFORMANCE GRAPH

The following graph compares the percentage change in the cumulative total shareholder return on the Company’s Common Stock from September 30, 2004 through the end of the Company’s fiscal year ended September 30, 2009, with the percentage change in the cumulative total return for the NASDAQ Composite Index and the RDG Semiconductor Composite Index. The comparison assumes an investment of $100 on September 30, 2004 in the Company’s Common Stock and in each of the foregoing indices and assumes reinvestment of dividends. The stock performance shown on the graph below is not necessarily indicative of future price performance.

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Item 6. Selected Financial Data

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

Summary Consolidated Financial Information

(in thousands, except per share data)

	Year Ended September 30,
	2009			2008		2007		2006		2005

Statement of Operations Data:
Net sales	$	139,040		$	238,604	$	215,220	$	243,218	$	190,373
Gross profit (1)		59,088			117,395		101,491		112,919		96,969
Income (loss) from operations (2)		(18,907	)		10,026		2,633		14,770		10,714
Net income (loss)		(11,428	)		6,037		5,231		9,836		10,050
Diluted earnings (loss) per share		(0.35	)		0.19		0.16		0.31		0.35

Balance Sheet Data:
Cash, cash equivalents and marketable securities		44,642			12,821		16,090		17,347		7,032
Working capital (1)		125,359			135,515		123,370		114,863		83,620
Total assets		231,014			252,812		226,329		232,396		178,680
Short-term debt		1,214			4,437		1,158		3,680		292
Long-term debt and capital leases		9,260			10,417		10,027		4,699		3,111
Shareholders’ equity (3)		169,370			178,357		168,853		161,024		120,421

)

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

)

Includes downsizing costs of $2.6 million in fiscal 2009 and $677,000 in fiscal 2007.

)

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

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

Overview

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


	•	smaller device features for lower cost and higher performance;
	•	new materials to fabricate more advanced semiconductor devices;
	•	move to single-wafer processing technologies for enhanced surface preparation;
	•	wafer level and other advanced packaging to enable smaller portable products; and
	•	emerging need for 3D chipstacking driven by the demand for smaller portable devices.

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

Key Performance Indicators

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

Our results of operations in fiscal 2009 were impacted by the weak global economy. Many of our customers slowed their capital spending with the onset of the credit crisis and the resulting uncertainty in the worldwide economy. Customers delayed capital expenditure decisions and also pushed out delivery dates for tools already ordered. Our results of operations were also impacted by the announcement that a customer owing approximately $3.5 million filed for insolvency in a German court in late January 2009. We responded to the current economic crisis by reducing our workforce by approximately 35% and implementing other cost cutting measures. In the fourth quarter of fiscal 2009, the economy showed signs of improvement as our customers placed orders to meet capacity requirements with bookings reaching $71.7 million as compared with $32.6 million in the third quarter of fiscal 2009 and $24.6 million in the second quarter of fiscal 2009.

On November 16, 2009, we entered in a definitive agreement to be acquired by Applied Materials, Inc., a Delaware corporation. Pursuant to the merger agreement, Applied Materials commenced a tender offer to purchase all of the outstanding shares of the Company’s common stock at a price of $11 per share, net to seller in cash, without interest thereon and less any required withholding tax. The tender offer was commenced on November 19, 2009 and the initial expiration date is 12:00 midnight, Eastern Standard Time, on December 17, 2009, subject to extension as described in the offer materials and the related merger agreement. Subsequent to the completion of the tender offer and the satisfaction of certain other conditions set forth in the merger agreement, the Company will merge with a wholly-owned subsidiary of Applied Materials.

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A summary of key factors that impacted our financial performance during fiscal year 2009 includes:

	•	Our fiscal 2009 bookings were $151.0 million and include $104.6 million in bookings for our Raider platform. Fourth quarter fiscal 2009 net bookings were $71.7 million. Our consolidated orders backlog of $69.8 million and deferred revenue of $4.8 million resulted in a revenue backlog of $74.6 million at September 30, 2009.

	•	Shipments in fiscal 2009 were $135.8 million including $84.0 million from Raider shipments.

	•	Net loss was $11.4 million on net sales of $139.0 million in fiscal 2009 compared with net income of $6.0 million on net sales of $238.6 million in fiscal 2008.

	•	Our gross margin decreased to 42.5% of net sales, down from 49.2% in fiscal 2008.

	•	Cash and cash equivalents, including restricted cash, were $44.6 million at September 30, 2009, an increase of $31.8 million from $12.8 million at September 30, 2008.

Results of Operations

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

	Year Ended September 30,
	2009		2008		2007

Net sales	100.0	%	100.0	%	100.0	%
Cost of sales	57.5	%	50.8	%	52.8	%
Gross profit	42.5	%	49.2	%	47.2	%

Operating expenses:
Selling, general and administrative	36.1	%	32.2	%	33.3	%
Research and development	18.4	%	12.8	%	12.6	%
Downsizing costs	1.8	%	--	%	0.3	%
Gain on sale of assets	(0.3	)%	--	%	(0.3	)%
Total operating expenses	56.0	%	45.0	%	45.9	%

Income (loss) from operations	(13.5	)%	4.2	%	1.2	%
Other income (expense)	(0.8	)%	(0.5	)%	0.3	%
Income (loss) before income taxes	(14.3	)%	3.7	%	1.5	%
Income tax provision (benefit)	(6.1	)%	1.2	%	(0.9	)%

Net income (loss)	(8.2	)%	2.5	%	2.4	%

Fiscal 2009 Compared with Fiscal 2008 and Fiscal 2007

Net Sales

	Year Ended September 30,
		2009			2008			2007
	(Dollars in millions)

Net Sales		$	139.0		$	238.6		$	215.2

By Product Line:
Semiconductor equipment		$	138.4		$	237.4		$	214.0
License fees		$	0.6		$	1.2		$	1.2

By Geographical Distribution, percentage of net tool sales:
North America			18.4	%		22.6	%		30.4	%
Europe			31.0	%		22.9	%		43.5	%
Asia, including Japan			50.6	%		54.5	%		26.1	%

Net sales consist of revenues from sales of semiconductor equipment, spare parts and service and royalties. Our revenue recognition policy provides that a portion of revenue from sales of semiconductor equipment may be recognizable upon shipment if the tool incorporates proven technology (“existing tool”) and is shipped to a customer environment in which we have already successfully installed and gained acceptance of our products and other revenue recognition criteria in authoritative accounting guidance have been met. Alternatively, revenue will be 100% deferred and only recognized upon final customer acceptance for tools that are new technology products (“new tools”) or where an existing tool is sold into a new customer environment. Revenue for elements other than equipment, such as installation revenue, is included in tool acceptance revenue. License fee revenue represents royalties generated from our anode technology.

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Our products are highly customized. Each customer has specific technical requirements for the performance of the equipment in the fabrication of semiconductor devices. Consequently, the specific terms of the acceptance provisions are negotiated with each customer on a tool-specific basis in order to reflect the technical specifications that will be used to determine whether the tool passes the applicable acceptance tests. These acceptance specifications are lengthy, technically complex and vary greatly from customer to customer and product to product.

We have a proven track record of obtaining customer acceptances within a reasonable timeframe. In the rare event when acceptance does not occur because the customer does not believe that the tool has met the applicable technical specifications, the parties treat the matter as a contractual issue that needs to be resolved before the customer accepts the equipment. That resolution can take many different forms, including re-testing the equipment, making technical modifications to resolve the disagreement or extending the warranty to accommodate a delayed acceptance. Whether or not a customer may have any further remedy where a resolution cannot be agreed between the parties, including any right of return of the equipment, would be a question of contract interpretation that ultimately would have to be adjudicated in accordance with applicable law.

Net sales decreased $99.6 million or approximately 42%, in fiscal 2009 as compared with fiscal 2008. Fiscal 2009 revenues were significantly impacted by the current worldwide economic crisis, which resulted in customer delays in placing orders and customers pushing out delivery dates for tools already ordered and scheduled for delivery. Raiders contributed almost 60% to net sales in fiscal 2009. Wafer level packaging, BEOL and FEOL Raider revenues declined from fiscal 2008 levels while revenues from copper damascene Raiders improved slightly in the year-over-year comparison. Approximately 60% of Raider revenues in fiscal 2009 were related to wafer level packaging applications while copper damascene Raiders accounted for almost 20% of Raider revenues. Spare parts, service and revenue from our Rhetech subsidiary contributed approximately 25% to net sales.

Net sales increased $23.4 million, or approximately 11% in fiscal 2008 as compared with fiscal 2007 levels. Despite the downturn in the semiconductor industry, our business activity levels increased in the second quarter of fiscal 2008 and those higher levels continued through the duration of the fiscal year with average quarterly revenues of approximately $63 million per quarter in the last three quarters of the fiscal year. Revenues from Raiders for wafer level packaging applications improved more than 90% from fiscal 2007 levels as customers made capacity purchases and we penetrated key customers in Asia and North America. Spending for ECD Raiders for copper interconnect declined 64% in fiscal 2008 from fiscal 2007 levels and revenue from our BEOL surface preparation Raiders declined 38% as customers for those applications cut back their capital spending. Sales of our single-wafer surface preparation Raiders for FEOL applications more than doubled as the industry continued to benefit from the move away from batch processing to single-wafer processing to enable cleaning applications for sub-nanometer structures. The revenue contribution from spare parts, service and from our Rhetech subsidiary was approximately 20% of our net sales.

Geographically, our sales mix was weighted toward Asia in both fiscal 2009 and fiscal 2008. In late fiscal 2009, buying activities increased as the Asian market began making capacity purchases in the wafer level packaging market. European tool sales increased 8.1 percentage points, contributing 31.0% to total tool sales as one of our key customers in Europe resumed limited capital spending after a significant cutback in fiscal 2008. North American tool sales declined 4.2 percentage points in fiscal 2009 as compared with fiscal 2008 and contributed 18.4% to total tool sales.

Gross Profit

	Year Ended September 30,
		2009			2008			2007
	(Dollars in thousands)

Gross profit		$	59,088		$	117,395		$	101,491
Percentage of net sales			42.5	%		49.2	%		47.2	%

Gross profit decreased $58.3 million in absolute dollars or 49.7% in fiscal 2009 as compared to fiscal 2008. Gross profit increased $15.9 million or 15.7% in fiscal 2008 compared to fiscal 2007 gross profit.

Gross profit decreased in absolute dollars in fiscal 2009 because of lower sales volumes brought on by the worldwide economic downturn. On a percentage basis, gross margin declined 6.7 percentage points. Higher than normal levels of under-absorbed overhead costs because of under-utilized plant capacity and increased inventory reserves taken in response to the current economic slowdown were the primary drivers of the decrease in gross margin percentage. Installation revenue which typically carries high margins decreased in fiscal 2009 and the contribution to the gross margin from lower margin tools increased. Partially offsetting these decreases, spare parts and services margins, which historically carry higher gross margins than tools, contributed more to the overall gross margin than in fiscal 2008. Gross margin also benefited from reduced warranty costs as warranty expirations exceeded warranty additions.

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Gross profit increased in absolute dollars in fiscal 2008 because of higher sales volumes. On a percentage basis, gross margin improved two percentage points. Tool margins declined slightly year-over-year but contributed approximately one percentage point to the margin increase because of higher sales volumes. Warranty and installation expense decreased in fiscal 2008, contributing approximately one percentage point to the margin increase. Margins improved on wafer level packaging tools primarily due to a higher percentage of installation revenue than in fiscal 2007 but declined on BEOL Raiders due to product mix and on copper interconnect tools. Geographically, margins improved in North America but declined slightly in Asia, primarily due to product mix.

Selling, General and Administrative

	Year Ended September 30,
		2009			2008			2007
	(Dollars in thousands)

Selling, general and administrative		$	50,271		$	76,929		$	71,749
Percentage of net sales			36.2	%		32.2	%		33.3	%

Selling, general and administrative (SG&A) expenses include employment costs for sales, marketing, customer support and administrative personnel as well as travel, communications, professional fees and expenses related to sales and service offices at our global locations. SG&A expenses decreased $26.7 million in fiscal 2009 as compared with fiscal 2008 and increased $5.2 million in fiscal 2008 as compared to fiscal 2007.

Throughout fiscal 2009, we took measures to realign our cost structure to expected business levels by reducing our staffing worldwide and implementing management pay cuts and mandatory leave. In the first quarter of fiscal 2009, we also shut down our facilities for three weeks. Because of these cost management measures, net employment costs decreased approximately $16.5 million in fiscal 2009 as compared with fiscal 2008 and travel expenses declined $5.4 million in fiscal 2009 from fiscal 2008 levels. Primarily as a result of decreased sales volume, commission expense decreased $3.4 million in the annual comparison. All other major expense categories have also declined year-over-year as a result of our cost saving measures. These savings were somewhat offset by the write-off of two customer accounts receivable, totaling approximately $3.5 million and which included the write-off of a major tool sale to a customer that filed for insolvency protection in a German court.

Employment costs and travel expense increased approximately $4.4 million in fiscal 2008 as compared with fiscal 2007. In fiscal 2008, we increased our service support staff in Asia to better support our increasing Asian customer base. Employment costs in certain of these regions are typically higher than in the United States. Travel expense related to supporting our Asian customers also increased year-over-year. Commission expense increased approximately $1.5 million in the annual comparison related to increased revenues in fiscal 2008.

Research and Development

	Year Ended September 30,
		2009			2008			2007
	(Dollars in thousands)

Research and development		$	25,563		$	30,440		$	27,080
Percentage of net sales			18.4	%		12.8	%		12.6	%

Research and Development (R&D) expense consists of salaries, project materials, laboratory costs, consulting fees and other costs associated with our product development efforts. R&D expense decreased $4.9 million in fiscal 2009 as compared with fiscal 2008 and increased $3.4 million in fiscal 2008 as compared with fiscal 2007.

Employment costs decreased approximately $4.3 million in fiscal 2009 as compared with fiscal 2008 as we implemented cost savings measures in response to the worldwide economic crisis and our corresponding declines in production and sales. Depreciation expense increased by approximately $1.3 million in the year-over-year comparison as we replaced older technology tools in our demonstration laboratories with new technology tools in order to support our customers’ development efforts. Prototype expense increased by approximately $369,000 in fiscal 2009 as we wrote-down two experimental tools from our work-in-process inventory. We continue to work on a number of leading edge projects including on-going development of porous silicon for the solar industry, flow batteries, FEOL cleaning applications, wafer edge cleaning processes, deep via and Through Silicon Via applications, high volume Through Silicon Via and wafer level packaging production and others.

Employment costs increased approximately 16% in fiscal 2008 as compared with fiscal 2007 as we increased our staff to improve our wafer process engineering capabilities for our customers and due to merit increases, stock-based compensation and recruiting costs. Depreciation expense increased by approximately $700,000 as we updated our demonstration laboratories with new technology tools to support our customers’ development efforts. Other expenses increased because of developmental work being completed at our Austrian facility to develop Cintillio, a batch tool designed for electroless plating applications. We continued to work on a number of leading edge projects including on-going development of porous silicon for the solar industry, FEOL cleaning applications, wafer edge cleaning processes, deep via and Through Silicon Via applications and others.

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

Downsizing Costs

	Year Ended September 30,
		2009			2008			2007
	(Dollars in thousands)

Downsizing costs		$	2,566		$	--		$	677
Percentage of net sales			1.8	%		--	%		0.3	%

In November 2008 and January 2009, we announced and implemented plans to align our cost structure closer to then-current business activity levels. On a combined basis, the cost reduction plans consisted primarily of a 35% reduction in our worldwide work force, salaried staff pay cuts, reduced working hours and overtime, mandatory leave, temporary suspension of company-paid 401(k) plan matching and a three-week facilities shutdown in December 2008. One-time involuntary termination costs of $2.6 million were reported as a separate component of operating expenses in our fiscal 2009 operating results. All costs related to the downsizing plan have been incurred and paid.

Compared to the fourth quarter of fiscal 2008, we are saving approximately $13 million to $14 million per quarter. Net of downsizing costs, we have realized savings of approximately $44 million in fiscal 2009. These cost savings are reported in gross margin and operating expenses in the Condensed Consolidated Statements of Operations. We will continue to monitor the need for additional cost savings and implement cost reduction measures as needed.

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

Gain on Sale of Assets

	Year Ended September 30,
		2009			2008			2007
	(Dollars in thousands)

Gain on sale of assets		$	(405	)	$	--		$	(648	)
Percentage of net sales			(0.3	)%		--	%		(0.3	)%

We sold an aircraft during the third quarter of fiscal 2009 for approximately $1.5 million and recognized a gain on the sale of approximately $253,000. We also sold a storage facility located near Kalispell, Montana during the third quarter of fiscal 2009 for approximately $200,000 and recognized a gain on the sale of approximately $152,000.

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

Other Income (Expense)

	Year Ended September 30,
	2009			2008			2007
	(In thousands)

Interest income	$	101		$	240		$	352
Interest expense		(790	)		(488	)		(649	)
Foreign exchange gain (loss)		(347	)		(414	)		233
Other		(46	)		(381	)		770

Total other income (expense)	$	(1,082	)	$	(1,043	)	$	706

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In the fourth quarter of fiscal 2008, based on an analysis that considered general economic conditions and company-specific conditions, we determined that the one million shares acquired as an investment security in exchange for certain thermal assets in the first quarter of fiscal 2008, had experienced an other-than-temporary impairment under authoritative accounting guidance and accordingly, we revised our cost basis in the investment by writing off $900,000 to Other expense. In fiscal 2009, based on similar analyses, we wrote off the remaining $380,000 related to the investment. In both years, these losses were partially offset by recycling income from our Kalispell facilities and rental income from a portion of our Cambridge facility.

Interest income declined to $101,000 from $240,000 in fiscal 2008 and $352,000 in fiscal 2007 because of lower investment levels. Interest expense increased to $790,000 in fiscal 2009 because of increased use of our line of credit. Interest expense had declined in fiscal 2008 because of lower bank interest rates and decreased use of our line of credit.

We reported a foreign exchange loss of $347,000 in fiscal 2009 as compared with a foreign exchange loss of $414,000 in fiscal 2008 and an exchange gain of $233,000 in fiscal 2007 related to foreign exchange gains and losses on unhedged intercompany sales with our Japanese, Korean, Austrian and other subsidiaries.

Beginning in April 2007, due to a change in how we conduct business and following an evaluation of the scope of our operations and business practices, we concluded that the Euro is the currency of the primary economic environment in which Semitool Austria operates and, consequently, changed the functional currency for Semitool Austria to the Euro. Semitool Austria invoices its customers in Euros and its financing and operating activities are denominated in the Euro. Accordingly, from April 1, 2007, all assets and liabilities of Semitool Austria are translated at period-end exchange rates and all revenues and expenses are re-measured at average rates prevailing during the period. Translation adjustments are reported as a separate component of accumulated other comprehensive income (loss).

Income Taxes

	Year Ended September 30,
		2009			2008			2007
	(Dollars in thousands)

Income tax provision (benefit)		$	(8,561	)	$	2,946		$	(1,892	)
Effective tax rate			(43	)%		33	%		(57	)%

Our estimated effective tax rate for fiscal 2009 is a benefit of 43% as compared to a provision of 33% for fiscal 2008. The fiscal year 2009 tax rate is lower than in fiscal 2008 based on a combination of the extension of the Federal Research and Experimentation Credit (R&E Credit) in fiscal 2009 for fiscal 2008 and the decline in our net income before taxes from a net income of approximately $9 million in fiscal 2008 to a net loss before taxes of approximately $20 million in fiscal 2009. The R&E Credit (which had previously expired) was extended on October 3, 2008 and accordingly no benefit was realized in fiscal year 2008 for the portion attributable to expenses incurred after December 31, 2007. This portion of the R&E Credit was realized in the first quarter of fiscal 2009 and resulted in a discrete benefit of approximately $1 million that quarter.

Our estimated effective tax rate for fiscal 2008 was 33% as compared to a benefit of 57% as of September 30, 2007. Our fiscal year 2008 tax rate was higher than in fiscal 2007 due to the expiration of the R&E Credit on December 31, 2007 which reduced the R&E Credit realized in fiscal year 2008.

Our future effective tax rate is based on our continued investments in research and development programs qualifying for the R&E Credit and our expectation of earnings from operations in jurisdictions with lower tax rates throughout the world.

Effective October 1, 2007, we recognize and measure our uncertain income tax positions following the two-step approach defined in authoritative accounting literature. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon ultimate settlement.

As a result of the implementation of its accounting for uncertain income tax positions, we increased our estimate of net unrecognized tax benefits and accounted for the increase as a cumulative effect of a change in accounting principle that resulted in a $671,000 decrease to beginning retained earnings. Total unrecognized tax benefits at October 1, 2007, if recognized, would impact our tax rate. We anticipate that the amount of unrecognized tax benefits could change in the next twelve months but do not expect those changes to have a significant impact on our results of operations or financial position.

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During fiscal 2009 and fiscal 2008 the total amount of unrecognized tax benefits was as follows:

	Year Ended September 30,
		2009			2008
	(In thousands)

Unrecognized tax benefits and interest, beginning of year		$	2,223		$	2,421
Year-to-date net changes for unrecognized benefits and interest			(161	)		(198	)
Unrecognized tax benefits and interest, end of year		$	2,062		$	2,223

As of September 30, 2009, we are potentially subject to U.S. federal income tax examinations for the fiscal tax years 2005 through 2008 and to non-U.S. income tax examinations for fiscal tax years 2003 through 2008. In addition, we are potentially subject to state income tax examinations for fiscal tax years 2005 through 2008. Although they have not been assessed, we included potential interest and penalties related to unrecognized tax benefits within our provision for taxes. The accrued potential interest and penalties related to unrecognized tax benefits were approximately $24,000 as of September 30, 2009.

As of September 30, 2008, we were potentially subject to U.S. federal income tax examinations for the fiscal tax years 2005 through 2007 and to non-U.S. income tax examinations for fiscal tax years 2002 through 2007. In addition, we were potentially subject to state income tax examinations for fiscal tax years 2004 through 2007. We included potential interest and penalties related to unrecognized tax benefits within our provision for taxes, although they have not been assessed. As of the date of implementation, we had $283,000 of accrued potential interest and penalties related to unrecognized tax benefits. The accrued potential interest and penalties related to unrecognized tax benefits decreased approximately $170,000 in the year ended September 30, 2008

Backlog and Deferred Revenue

	Year Ended September 30,
	2009			2008			2007
	(Dollars in millions)

Backlog	$	69.8		$	54.5		$	58.9
Percentage change in backlog
year over year		28.1	%		(7.5	)%		(30.9	)%


Deferred revenue	$	4.8		$	13.6		$	15.4
Percentage change in deferred revenue
year over year		(64.7	)%		(11.7	)%		6.9	%

Approximately 87% of our backlog at September 30, 2009 was for Raider tools. Deferred revenue decreased $8.8 million at September 30, 2009 as compared with September 30, 2008 primarily due to lower business volumes and because there were no deferrals of Raider shipments into new customer environments as of September 30, 2009. Shipments into new customer environments require full deferral of tool revenue until final customer acceptance in accordance with our revenue recognition policy. One SAT tool was fully deferred at the end of fiscal 2009 due to extended payment terms. Current deferrals include all or a part of 28 Raiders as compared with 30 Raiders at September 30, 2008 and 17 Raiders at September 30, 2007.

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

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

	Year Ended September 30,
	2009			2008
	(Dollars in thousands)

Deferred revenue	$	4,833		$	13,570
Deferred cost of sales – manufacturing costs		(379	)		(4,605	)
Deferred cost of sales – warranty and installation costs		(905	)		(1,125	)
Deferred SG&A expense – commissions		--			(114	)
Deferred profit	$	3,549		$	7,726

Stock-Based Compensation

Stock-based compensation cost is measured at the grant date, based on the fair value of the award and is recognized as expense over the employees’ requisite service period. The fair value of each stock option grant is estimated using the Black-Scholes option pricing model. This model was developed for use in estimating the value of publicly traded options that have no vesting restrictions and are fully transferable. Our employee stock options have characteristics that differ from those of publicly traded options.

Total compensation cost recorded in fiscal 2009, 2008 and 2007 was $1.1 million, $1.8 million and $1.1 million pre-tax, respectively, or $678,000, $1.2 million and $1.1 million after tax, respectively, in each period, an impact of approximately $0.02, $0.04 and $0.03 per basic and diluted share.

Liquidity and Capital Resources

As of September 30, 2009, our principal sources of liquidity consisted of approximately $44.6 million of cash and cash equivalents, including $15.0 million drawn on our $30.0 million revolving line of credit. The credit facility is with Wells Fargo Trade Bank (Trade Bank) and bears interest at the bank’s prime lending rate, 3.25% as of September 30, 2009, or at our option, LIBOR plus 2.25%, or 2.54% as of that date. The credit agreement has various restrictive covenants including a prohibition against pledging real, fixed or intangible assets during the term of the agreement and the maintenance of various financial covenants. If we were to default on the credit agreement, the bank could accelerate payment of any advances outstanding under the credit agreement. In addition, the availability of funds requires compliance with certain financial covenants, including a maximum borrowing limit based on a Funded Debt to Earnings before Interest, Taxes, Depreciation and Amortization (EBITDA) ratio, and a maximum borrowing limit based on trade receivables.

However, although we have received no notice of default, an ambiguity in the credit agreement may be construed to suggest that we are in compliance with the loan’s funded-debt-to-EBITDA covenant, and until this ambiguity is resolved, we do not anticipate being able to make additional draws on the Trade Bank loan. We have been in discussions with the Trade Bank regarding our compliance with this covenant. If interpreted as noncompliance with the covenant, Trade Bank may notify us that the non-compliance constitutes an event of default under the facility that (i) prevents further borrowings and (ii) gives them the right to accelerate the payment of all amounts outstanding under the loan. If interpreted in favor of the Trade Bank, there would be a Funded Debt to EBIDTA ratio requirement of not more than 2:1 as of September 30, 2009 (EBITDA for the trailing twelve-month period ending September 30, 2009 was a negative number). We continue to discuss credit facility requirements with the Trade Bank with a view toward arranging a facility that resolves any issues regarding borrowing limits and outstanding advances. Were the Trade Bank to assert that we were in violation of the covenant and begin to exercise its remedies, we could be required to retire the entire balance of the loan, and while our working capital is more than adequate to repay the entire debt, repayment would limit our ability to deploy our resources as we might otherwise consider desirable or appropriate. Further, the revolving credit line now expires on March 1, 2010, and we do not anticipate that the loan will be extended or renewed.

We believe that we have sufficient cash and cash equivalents, along with funds expected to be generated from operations with or without amounts drawn on the line of credit to meet operating expenses and planned capital expenditures through the next twelve months. Historically we have generated sufficient funds from operations during industry downturns to meet our liquidity needs. If the bank could accelerate the current balance due on the loan, our liquidity could be adversely impacted. To the extent that timing of the collection of trade receivables does not meet our cash outflow requirements, we could require access to credit arrangements, which may or may not be available at the desired times or on terms that management would deem appropriate or acceptable. In the past, we have typically required access to a credit facility when our business is growing. As discussed above, we are working with the Trade Bank to resolve any issues regarding our borrowing limits and outstanding advances prior to the time we have a need to access the credit facility. We estimate capital expenditures will be between $6.0 million and $8.0 million during the next twelve months. If additional financial resources are required in the future, we may need to issue additional common stock or other financial instruments whichever management deems advisable. There can be no assurance that in the future we will be able to issue additional common stock or other financial instruments on acceptable terms or that, if so issued, the sale of our common stock would not be dilutive to existing shareholders.

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Fiscal 2009

Cash provided by operating activities was $22.0 million in fiscal 2009. The key components of the change in cash provided by operating activities were as follows:

Sources of Cash:

•••

Trade receivables provided $31.7 million in cash as collections outpaced shipments; and

•••

Inventories declined $19.4 million as we focused our efforts on using on-hand inventory and slowed down spending for raw materials in response to current business volumes.

Uses of Cash:

•••

Accounts payable decreased $9.3 million as we continued our regular pay down of payables while also slowing down our inventory purchases. Inventory purchases increased in the fourth quarter as result of increased business activity;

•••

Net loss and non-cash operating activities, including depreciation and deferred income taxes totaled $7.5 million;

•••

Deferred profit decreased $4.2 million as a result of lower business volumes and because there were no deferrals of Raider shipments into new customer environments at September 30, 2009;

•••

Accrued payroll and related benefits decreased $3.3 million as a result of our cost reduction measures; and

•••

Accrued warranty decreased $2.9 million as a result of lower business volumes.

Investing activities in fiscal 2009 included $735,000 in purchases of factory equipment and other property. We also invested an additional $4.0 million in our development and demonstration laboratories by transferring finished goods inventory to property, plant and equipment. We sold an aircraft for approximately $1.5 million and a building for approximately $200,000 in fiscal 2009. We also invested a net amount of $425,000 in our patent portfolio, primarily related to pending patent applications.

Financing activities provided $10.4 million in fiscal 2009 and included a net $11.8 million draw on our revolving line of credit which was partially offset by repayments on long-term debt of $1.4 million.

Fiscal 2008

Cash used by operating activities was $4.8 million in fiscal 2008. The key components of the change in cash used by operating activities were as follows:

Sources of Cash:

•••

Net income and non-cash operating activities, including depreciation and stock-based compensation expenses were $6.0 million and $11.2 million, respectively; and

•••

Accounts payable increased $5.4 million although our inventory spending levels decreased in response to lower fourth quarter bookings.

Uses of Cash:

•••

Inventory grew $16.2 million primarily related to an increase in the number of tools placed with customers for evaluation and with technology partners. Work-in-process grew to support higher order volumes; and

•••

Trade receivables increased $15.3 million primarily related to a $17.1 million increase in shipments, the timing of those shipments and the timing of customer payments in fiscal 2008. In October and early November 2008, we collected approximately $36 million in trade receivables.

Investing activities included $5.1 million in purchases of factory and laboratory equipment and the acquisition of land adjacent to our Salzburg, Austria facility. Additionally, we invested $6.2 million in our development and demonstration laboratories by transferring finished goods inventory to property, plant and equipment. We also invested approximately $790,000 in our patent portfolio, primarily related to pending patent applications.

Financing activities provided $6.0 million in cash in fiscal 2008 and consisted primarily of $1.6 million in borrowings under long-term debt to purchase land adjacent to our Salzburg, Austria facility and a net $3.2 million draw on our revolving line of credit. Stock option exercises provided $2.1 million in fiscal 2008. Offsetting these sources of cash, we repaid $1.2 million on our long-term debt.

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

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The following commitments as of September 30, 2009, incurred in the normal course of business, have been included in the consolidated financial statements with the exception of purchase order commitments and operating lease obligations, which are properly excluded under accounting principles generally accepted in the United States of America.

	Payments Due by Period
				Less Than		1 – 3		4 – 5		After
		Total		1 Year		Years		Years		5 Years
	(In thousands)

Long-term debt		$	10,474	$	1,215	$	2,550	$	2,648	$	4,061
Operating leases			1,854		1,150		639		65		--
Purchase order commitments			8,988		8,988		--		--		--

Total commitments		$	21,316	$	11,353	$	3,189	$	2,713	$	4,061

Semitool has agreements with limited liability companies wholly-owned by Mr. Raymon F. Thompson, the Company’s chairman and chief executive officer, to lease aircraft and an aircraft hangar. Under these agreements, rent expense was approximately $1.9 million for the year ended September 30, 2009, $2.4 million for the year ended September 30, 2008 and $2.8 million for the year ended September 30, 2007. The rental rate for fiscal 2010 is currently $34,100 per month for both the aircraft and the hangar; the lease terms are month-to-month. The lease amounts were reduced in response to market conditions affecting our need for the aircraft. The amended rates are below-market for the aircraft leased and, consequently, are on terms more favorable to us than could have been obtained from an unaffiliated party. Because the term of the leases are month-to-month, it is not expected that we will be able to continue leasing the aircraft at those below-market rates as economic conditions improve.

Critical Accounting Policies and Estimates

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

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

Revenue Recognition. Revenue recognition is significant because revenue is a key component of our results of operations. 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 collectability is reasonably assured. Our product sales generally contain substantive customer acceptance provisions. Sales of new products to new or existing customers are not recognized until customer acceptance. Likewise, sales of existing products to new customer environments are not recognized until customer acceptance. For sales of existing products into existing customer environments, if multiple elements exist, the amount of revenue recognized is the lesser of the fair value of the equipment or the contracted amount that was due or payable upon title transfer. The revenue for elements other than equipment is recorded in deferred profit and is recognized when the remaining goods and/or services are delivered or performed. Revenue related to service is recognized upon completion of performance of the service or ratably over the life of the related service contract. Spare parts sales are recognized upon shipment when title and risk of loss pass to the customer. Unearned revenue from service contract agreements is included in Customer Advances in the current liabilities section of the Consolidated Balance Sheets.

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

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

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

Allowance for Doubtful Accounts. We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. We record expense as a component of Selling, General and Administrative within the Consolidated Statements of Operations. If the financial condition of our customers were to deteriorate, due to the cyclicality of the industries we serve or for other reasons, resulting in an impairment of their ability to make payments, additional allowances and expense may be required as occurred in fiscal 2009 when we wrote off approximately $3.5 million to Selling, General and Administrative expense for two customer accounts receivable, including a write off of a major tool sale to a customer who filed for insolvency protection in a German court. Likewise, if we are successfully able to collect on an amount presumed to be uncollectible, the allowance for doubtful accounts and the related expense may be reduced. In general, it takes longer to collect payment in the capital equipment industry than in certain other industries.

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

Stock-Based Compensation. Stock-based compensation cost is estimated at the grant date based on the fair-value of the award and is recognized as expense ratably over the requisite service period of the award. Determining the appropriate fair-value model and calculating the fair value of stock-based awards requires considerable judgment, including estimating stock price volatility, expected option life and forfeiture rates. We develop our estimates based on historical data and market information which can change significantly over time. A small change in the estimates used can have a relatively large change in the estimated valuation.

Consistent with authoritative accounting guidance, we use the Black-Scholes option valuation model to value employee stock options. We estimate stock price volatility based on a blended rate of historical volatility and the implied volatility derived from traded options on our stock. Estimated option life and forfeiture rate assumptions are derived from historical data. For stock-based compensation awards with graded vesting that were granted after fiscal 2005, we recognize compensation expense using the straight-line amortization method. Beginning in fiscal 2008, most stock-based compensation awards have been in the form of restricted stock awards. As of September 30, 2009, $437,000 of total unrecognized compensation cost related to non-vested stock option awards is expected to be recognized over a weighted average period of 0.9 years. Additionally as of September 30, 2009, $857,000 of total unrecognized compensation cost related to restricted stock awards is expected to be recognized over a weighted average period of 1.3 years. All stock options, whether vested or unvested, and restricted stock units, to the extent not previously vested and settled in full, that are outstanding immediately prior to the first time of acceptance of shares for payment in Applied Materials’ tender offer, or the acceptance time, will be cancelled, with the holder thereof being entitled to receive a lump sum cash payment per share based on the $11 per share tender offer consideration in accordance with the merger agreement with Applied Materials. All restricted stock awards that are outstanding prior to such acceptance time will vest in full as of such acceptance time, with the holder thereof being entitled to receive a lump sum cash payment per share equal to the $11 per share tender offer consideration.

Litigation

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

New Accounting Pronouncements

In June 2009, the Financial Accounting Standards Board (FASB) issued authoritative guidance to establish the FASB Accounting Standards Codification (ASC) as the source of authoritative accounting principles and the framework for selecting the principles used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles in the United States. This guidance is effective for us in the fiscal year reporting period ended on September 30, 2009 and only impacts references for accounting guidance.

In October 2009, the FASB’s Emerging Issues Task Force (EITF) issued authoritative guidance addressing revenue arrangements with multiple deliverables. The authoritative guidance eliminates the criterion for objective and reliable evidence of fair value for the undelivered products or services. Instead, revenue arrangements with multiple deliverables should be divided into separate units of accounting provided the deliverables meet certain criteria. This guidance also eliminates the use of the residual method of allocation and requires that the arrangement consideration be allocated at the inception of the arrangement to all deliverables based on their relative selling price. The guidance provides a hierarchy for estimating the selling price of each of the deliverables. The guidance is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. Early adoption is permitted. Accordingly, we will adopt this guidance in fiscal 2011. We are currently evaluating the impact of adopting this guidance on our results of operations and financial condition.

In April 2009, the FASB issued authoritative guidance to address application issues on initial recognition and measurement, subsequent measurement and accounting and disclosure of assets and liabilities arising from contingencies in a business combination. We are required to adopt this guidance in the first annual reporting period beginning on or after December 15, 2008. Accordingly, we have adopted this guidance effective at the beginning of fiscal 2010, although it will only impact us if we are involved in a business combination as an acquirer.

In April 2008, the FASB issued authoritative guidance amending the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset. The intent of this guidance is to improve the consistency between the useful life of a recognized intangible asset and the period of expected cash flows used to measure the fair value of the asset as provided for under separate accounting guidance topics. This guidance is effective for fiscal years beginning after December 15, 2008 and for interim periods within those years with early adoption prohibited. Accordingly, we will adopt this guidance in fiscal 2010 and it will only impact us if we acquire assets for which we need to develop renewal or extension assumptions to determine the useful life of a recognized intangible asset

In December 2007, the FASB issued authoritative guidance retaining the purchase method of accounting for acquisitions, but requiring a number of changes, including changes in the way assets and liabilities are recognized in purchase accounting. It also changes the recognition of assets acquired and liabilities assumed arising from contingencies, requires the capitalization of in-process research and development at fair value, and requires the expensing of acquisition-related costs as incurred. This guidance applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008 and early adoption is prohibited. Accordingly, we will adopt this guidance in the first quarter of fiscal 2010 and the guidance will only impact us if we are involved in a business combination as an acquirer.

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In September 2006, the FASB issued authoritative guidance clarifying the definition of fair value and establishing a framework for measuring fair value in generally accepted accounting principles and expanding disclosures about fair value measurements. We adopted this guidance for financial assets and liabilities in the first quarter of fiscal 2009 and as permitted by the authoritative guidance, we expect to adopt its provisions for non-financial assets and liabilities in the first quarter of fiscal 2010. In August 2009, the FASB issued additional guidance providing clarification for measuring fair value when a quoted price in an active market for the identical liability is not available. This supplemental guidance also clarifies that when estimating the fair value of a liability, a reporting entity is not required to include a separate input or adjustment to other inputs relating to the existence of a restriction that prevents the transfer of the liability. The supplemental guidance is effective for fiscal periods beginning with the first reporting period after issuance. Accordingly, we will adopt this guidance in the first quarter of fiscal 2010. We do not expect the adoption of this guidance to materially impact our results of operations or financial condition.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Market Risks

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

As of September 30, 2009, we had approximately $10.5 million in long-term debt and $15.0 million in short-term debt. As of September 30, 2008, we had approximately $11.6 million in long-term debt and $3.2 million in short term debt. Our long-term debt bears interest at a fixed rate. As a result, changes in the fixed rate interest market would change the estimated fair value of the fixed rate long-term debt. Our short-term debt bears interest at the bank’s prime lending rate, 3.25% as of September 30, 2009, or at our option, LIBOR plus 2.25%, or 2.54% as of that date. We believe that a 10% change in the long-term or the short-term interest rates would not have a material effect on our business, financial condition, results of operations or cash flows. See Note 9 – Long-Term Debt and Capital Leases.

All of our international operations are subject to inherent risks in conducting business abroad, including fluctuation in the relative value of currencies. We manage this risk and attempt to reduce such exposure through an economic hedge using short-term forward exchange contracts. At September 30, 2008, we held forward contracts to sell Japanese Yen with a total face value of $5.5 million and a total market value of $5.6 million and a total unrealized future loss of approximately $100,000. At September 30, 2009, we held no forward contracts. 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.

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Item 8. Financial Statements and Supplementary Data

SEMITOOL, INC.

CONSOLIDATED BALANCE SHEETS

September 30, 2009 and 2008

(Amounts in Thousands, Except Share Amounts)


	2009		2008

ASSETS

Current assets:
Cash and cash equivalents	$	44,617	$	11,624
Restricted cash		25		817
Marketable securities		--		380
Trade receivables, less allowance for doubtful accounts of $259 in both periods		44,266		73,695
Inventories		65,810		88,773
Income tax refund receivable		1		472
Prepaid expenses and other current assets		3,602		4,371
Deferred income taxes		14,888		14,175
Total current assets		173,209		194,307
Property, plant and equipment, net		43,255		49,909
Intangibles, less accumulated amortization of $5,398 and $4,341 in 2009 and 2008		6,625		7,861
Other assets		7,925		735

Total assets	$	231,014	$	252,812


LIABILITIES AND SHAREHOLDERS’ EQUITY

Current liabilities:
Accounts payable	$	10,876	$	19,007
Note payable to bank		15,000		3,215
Accrued commissions		1,828		1,972
Accrued warranty		6,961		9,786
Accrued payroll and related benefits		4,937		8,033
Income taxes payable		246		2,601
Other accrued liabilities		1,174		3,294
Customer advances		2,065		1,936
Deferred profit		3,549		7,726
Long-term debt due within one year		1,214		1,222
Total current liabilities		47,850		58,792
Long-term debt due after one year		9,260		10,417
Deferred and long-term income taxes		4,534		5,246
Total liabilities		61,644		74,455

Commitments and contingencies

Shareholders’ equity:
Preferred stock, no par value, 5,000,000 shares authorized,
no shares issued and outstanding		--		--
Common stock, no par value, 75,000,000 shares authorized,
32,740,176 and 32,719,276 shares issued and outstanding in 2009 and 2008		88,397		87,293
Retained earnings		80,068		91,496
Accumulated other comprehensive income (loss)		905		(432	)
Total shareholders’ equity		169,370		178,357

Total liabilities and shareholders’ equity	$	231,014	$	252,812

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

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SEMITOOL, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

For the years ended September 30, 2009, 2008 and 2007

(Amounts in Thousands, Except Per Share Amounts)

	2009			2008			2007

Net sales	$	139,040		$	238,604		$	215,220
Cost of sales		79,952			121,209			113,729

Gross profit		59,088			117,395			101,491

Operating expenses:
Selling, general and administrative		50,271			76,929			71,749
Research and development		25,563			30,440			27,080
Downsizing costs		2,566			--			677
Gain on sale of assets		(405	)		--			(648	)
Total operating expenses		77,995			107,369			98,858
Income (loss) from operations		(18,907	)		10,026			2,633

Other income (expense):
Interest income		101			240			352
Interest expense		(790	)		(488	)		(649	)
Other, net		(393	)		(795	)		1,003
Total other income (expense)		(1,082	)		(1,043	)		706

Income (loss) before income taxes		(19,989	)		8,983			3,339
Income tax provision (benefit)		(8,561	)		2,946			(1,892	)

Net income (loss)	$	(11,428	)	$	6,037		$	5,231

Earnings (loss) per share:
Basic	$	(0.35	)	$	0.19		$	0.16

Diluted	$	(0.35	)	$	0.19		$	0.16

Weighted average common shares outstanding:
Basic		32,555			32,347			32,034
Diluted		32,555			32,534			32,450

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

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SEMITOOL, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

For the years ended September 30, 2009, 2008 and 2007

(Amounts in Thousands)

	Common Stock
								Accumulated
	Number							Other
	Of				Retained			Comprehensive
	Shares		Amount		Earnings			Income (Loss)			Total

Balance September 30, 2006		31,925	$	80,738	$	80,899		$	(613	)	$	161,024
Net income		--		--		5,231			--			5,231
Issuance of common stock under
employee compensation plans		182		1,177		--			--			1,177
Income tax effect of stock option
transactions		--		247		--			--			247
Compensation expense recognized under
employee stock incentive plans		--		1,053		--			--			1,053
Other comprehensive income (loss)		--		--		--			121			121

Balance September 30, 2007		32,107		83,215		86,130			(492	)		168,853
Net income		--		--		6,037			--			6,037
Cumulative effect of adoption of new accounting
literature related to uncertain income tax positions		--		--		(671	)		--			(671	)
Issuance of common stock under
employee compensation plans		612		2,061		--			--			2,061
Income tax effect of stock option
transactions		--		235		--			--			235
Compensation expense recognized under
employee stock incentive plans		--		1,782		--			--			1,782
Other comprehensive income (loss)		--		--		--			60			60

Balance September 30, 2008		32,719		87,293		91,496			(432	)		178,357
Net loss		--		--		(11,428	)		--			(11,428	)
Issuance of common stock under
employee compensation plans		21		19		--			--			19
Compensation expense recognized under
employee stock incentive plans		--		1,085		--			--			1,085
Other comprehensive income (loss)		--		--		--			1,337			1,337

Balance September 30, 2009		32,740	$	88,397	$	80,068		$	905		$	169,370

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

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SEMITOOL, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the years ended September 30, 2009, 2008 and 2007

(Amounts in Thousands)

	2009			2008			2007

Operating activities:
Net income (loss)	$	(11,428	)	$	6,037		$	5,231
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
(Gain) loss on disposition of assets		216			329			(398	)
Depreciation and amortization		11,604			11,341			10,703
Deferred income taxes		(7,621	)		(650	)		(2,308	)
Income tax benefit received on the exercise of stock-based awards		--			--			29
Stock-based compensation		1,085			1,782			1,053
Non-cash assets acquired in sales transaction		(1,382	)		(370	)		--
Marketable securities acquired in sales transaction		--			(1,280	)		--
Change in:
Restricted cash		792			(817	)		--
Trade receivables		31,679			(15,345	)		(492	)
Inventories		19,417			(16,206	)		6,604
Income tax refund receivable		471			(472	)		135
Prepaid expenses and other current assets		1,540			(785	)		(646	)
Other assets		(67	)		141			42
Accounts payable		(9,261	)		5,395			(10,355	)
Accrued commissions		(169	)		397			(764	)
Accrued warranty		(2,859	)		1,994			407
Accrued payroll and related benefits		(3,308	)		1,088			(1,964	)
Income taxes payable		(2,441	)		3,902			(3,036	)
Other accrued liabilities		(2,205	)		(393	)		1,591
Customer advances		122			318			(2,945	)
Deferred profit		(4,186	)		(1,165	)		41

Net cash provided by (used in) operating activities		21,999			(4,759	)		2,928

Investing activities:
Purchases of property, plant and equipment		(735	)		(5,060	)		(8,726	)
Increases in intangible assets		(425	)		(787	)		(1,055	)
Proceeds from sale of property, plant and equipment		1,639			9			1,885

Net cash providing by (used in) investing activities		479			(5,838	)		(7,896	)

Financing activities:
Proceeds from exercise of stock options		19			2,061			1,177
Excess tax benefits received on the exercise of stock-based awards		--			235			218
Borrowings under line of credit and short-term debt		15,246			25,286			20,538
Repayments of line of credit and short-term debt		(3,461	)		(22,071	)		(23,647	)
Borrowings under long-term debt		--			1,648			6,466
Repayments of long-term debt and capital leases		(1,417	)		(1,155	)		(1,105	)

Net cash provided by financing activities		10,387			6,004			3,647

Effect of exchange rate changes on cash and cash equivalents		128			127			64
Net increase (decrease) in cash and cash equivalents		32,993			(4,466	)		(1,257	)
Cash and cash equivalents at beginning of year		11,624			16,090			17,347

Cash and cash equivalents at end of year	$	44,617		$	11,624		$	16,090

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SEMITOOL, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED

For the years ended September 30, 2009, 2008 and 2007

(Amounts in Thousands)

	2009		2008			2007

Supplemental disclosures of cash flow information:
Cash paid (received) during the year for:
Interest	$	751	$	490		$	664
Income taxes		1,142		(366	)		3,330

Supplemental disclosures of non-cash financing and investing activity:
Inventory transferred to property, plant and equipment	$	4,010	$	6,175		$	5,732
Other-than-temporary impairment of marketable securities		380		900			--

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

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SEMITOOL, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

For the years ended September 30, 2009, 2008 and 2007

(Amounts in Thousands)

	2009			2008		2007

Net income (loss)	$	(11,428	)	$	6,037	$	5,231
Net gain (loss) on cash flow hedges		160			22		(363	)
Foreign currency translation adjustments		1,177			38		484

Total comprehensive income (loss)	$	(10,091	)	$	6,097	$	5,352

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

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SEMITOOL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Company Organization and Summary of Significant Accounting Policies:

Semitool, Inc. (Semitool or the Company) designs, manufactures, installs and services highly-engineered equipment for use in the fabrication of semiconductor devices. Semitool’s products are focused on the wet chemical process steps in integrated circuit, or IC, manufacturing and include systems for wafer surface preparation and electrochemical deposition, or ECD, applications. The Company’s surface preparation systems are designed for Front End of Line (FEOL), Back End of Line (BEOL) and wafer level packaging of ICs processes. Semitool’s single-wafer FEOL surface preparation systems are used for photoresist stripping, post etch and pre-diffusion cleans. The Company’s BEOL surface preparation systems are used for polymer removal and packaging applications. Semitool’s ECD systems are used to plate copper and other metals, which are used for the IC’s internal wiring, or interconnects; to plate solder and lead free solder bumps for wafer level packaging applications; and to plate other metals for various semiconductor and related applications. Also, the Company’s surface preparation systems are used for cleaning and etching processes for wafer level packaging. Semitool’s primary product for all of these processes is the Raider platform, which is a multi-chamber single-wafer tool. The Company’s products address critical applications within the semiconductor manufacturing process, and help enable Semitool’s customers to manufacture more advanced semiconductor devices that feature higher levels of performance. The fabrication of semiconductor devices typically requires several hundred manufacturing steps, with the number of steps continuing to increase for advanced devices.

Significant accounting policies followed by the Company are:

Principles of Consolidation

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

All significant intercompany accounts and transactions are eliminated in consolidation.

Estimates

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

Cash Equivalents

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

Trade Receivables and Allowance for Doubtful Accounts

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

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Derivatives

From time to time the Company uses derivative instruments to manage some of its exposures to certain 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 authoritative accounting guidance to account for hedges. At the inception of the hedge, the hedging relationship to a forecasted transaction, the risk management objective and the strategy for undertaking the hedge is documented. Quarterly, forward rates are used to evaluate hedging effectiveness. For effective hedges, unrealized gains and losses are included in accumulated other comprehensive income (loss) (Accumulated OCI). If the derivative no longer meets hedge accounting criteria, or the terms of the hedged item change so the derivative no longer qualifies for hedge accounting, the derivative is marked-to-market. Any amounts in Accumulated OCI relating to a derivative that no longer qualifies for hedge accounting are transferred out of Accumulated OCI and reported in earnings during the period in which hedge accounting no longer applies. At maturity or termination the gain or loss on the derivative is calculated and reported in earnings.

Certain forecasted transactions and assets are exposed to foreign currency risk. The Company monitors foreign currency exposures regularly to maximize the overall effectiveness of the foreign currency hedge positions. The only currency hedged is the Japanese Yen. Forward contracts used to hedge forecasted international sales on credit for up to 18 months in the future are designated as cash flow hedging instruments. Derivative gains and losses included in Accumulated OCI are reclassified when forecasted transactions become receivables. During the fiscal years ended September 30, 2009 and 2008, the amount transferred from Accumulated OCI to Other income (expense) was not material. The Company held no forward contracts as of September 30, 2009.

All derivatives, whether designated in hedging relationships or not, are recorded on the Consolidated Balance Sheets 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 Accumulated 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 authoritative accounting guidance, had no impact on earnings for the fiscal years ended September 30, 2009, 2008 and 2007.

Inventories

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

Property, Plant and Equipment

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

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

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

Long-Lived Assets

The Company evaluates the carrying value of its long-lived assets whenever events or changes in circumstances indicate that the carrying value of the asset may be impaired. An impairment loss is recognized when estimated future cash flows expected to result from the use of the asset including disposition, are less than the carrying value of the asset.

Intangible Assets

Intangible assets primarily include legal costs associated with obtaining patents. The cost of granted patents is amortized on a straight-line basis over the lesser of the estimated economic life or seven years.

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Revenue Recognition

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 collectability is reasonably assured. The Company’s product sales generally contain substantive customer acceptance provisions. Sales of new products to new or existing customers are not recognized until customer acceptance. Likewise, sales of existing products to new customer environments are not recognized until customer acceptance. If multiple elements exist, sales of existing products into existing customer environments are treated as such in accordance with current authoritative accounting guidance. 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.

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

Warranty Obligations

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

Foreign Currency

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

Semitool Japan uses the Yen as its functional currency and invoices its customers in Yen. All assets and liabilities of Semitool Japan are translated at period-end exchange rates and all revenues and expenses are re-measured at average rates prevailing during the period. Translation adjustments are reported as a separate component of Accumulated OCI. Transaction gains and losses are included in the Consolidated Statements of Operations.

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

Advertising Costs

The Company expenses advertising costs as incurred. Advertising costs were not material in all of the periods presented in the Consolidated Statements of Operations.

Research and Development Costs

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

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Stock-Based Compensation

Stock-based compensation cost is measured at grant date, based on the fair value of the award and is recognized as expense, amortized on a straight-line basis, over the requisite service period of the individual grants, which generally equals the vesting period.

The Company elected to adopt the modified prospective application method as provided under authoritative accounting guidance. As a result, the Company’s Consolidated Statements of Operations as of September 30, 2009, 2008 and 2007 reflect compensation cost for new stock awards granted under the stock incentive plans during fiscal 2009, 2008 and 2007 and the nonvested portion of stock options granted prior to October 1, 2005 which vested during fiscal 2009, 2008 and 2007. Total compensation cost recorded in fiscal 2009, 2008 and 2007, respectively, was $1.1 million, $1.8 million and $1.1 million pre-tax, or $678,000, $1.2 million and $1.1 million after tax, an impact of approximately $0.02, $0.04 and $0.03 per basic and diluted share.

The Company elected to adopt the alternative transition method for calculating the tax effects of stock-based compensation. The alternative transition method includes computational guidance to establish the beginning balance of the additional paid-in capital pool (APIC Pool) related to the tax effects of employee stock-based compensation awards that were vested and outstanding upon initial adoption of the authoritative accounting guidance.

Computation of Earnings (Loss) Per Share

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

	2009			2008		2007
Numerator:
Net income (loss) used for basic and diluted
earnings (loss) per share	$	(11,428	)	$	6,037	$	5,231

Denominator:
Weighted average common shares used for
basic earnings (loss) per share		32,555			32,347		32,034
Effects of dilutive stock options		--			187		416

Denominator for diluted earnings (loss) per share		32,555			32,534		32,450

Diluted earnings (loss) per share excludes the effects of antidilutive stock options to purchase 1,346,024, 903,113 and 577,719 shares of common stock in fiscal 2009, 2008 and 2007, respectively.

Reclassifications

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

New Accounting Pronouncements

In June 2009, the Financial Accounting Standards Board (FASB) issued authoritative guidance to establish the FASB Accounting Standards Codification (ASC) as the source of authoritative accounting principles and the framework for selecting the principles used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles in the United States. This guidance is effective for the Company in the fiscal year reporting period ended on September 30, 2009 and only impacts references for accounting guidance.

In October 2009, the FASB’s Emerging Issues Task Force (EITF) issued authoritative guidance addressing revenue arrangements with multiple deliverables. The authoritative guidance eliminates the criterion for objective and reliable evidence of fair value for the undelivered products or services. Instead, revenue arrangements with multiple deliverables should be divided into separate units of accounting provided the deliverables meet certain criteria. This guidance also eliminates the use of the residual method of allocation and requires that the arrangement consideration be allocated at the inception of the arrangement to all deliverables based on their relative selling price. The guidance provides a hierarchy for estimating the selling price of each of the deliverables. The guidance is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. Early adoption is permitted. Accordingly, the Company will adopt this guidance in fiscal 2011. The Company is currently evaluating the impact of adoption of this guidance its results of operations and financial condition.

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In April 2009, the FASB issued authoritative guidance to address application issues on initial recognition and measurement, subsequent measurement and accounting and disclosure of assets and liabilities arising from contingencies in a business combination. The Company is required to adopt this guidance in the first annual reporting period beginning on or after December 15, 2008. Accordingly, the Company has adopted this guidance effective at the beginning of fiscal 2010, although it will only impact the Company if it is involved in a business combination as an acquirer.

In April 2008, the FASB issued authoritative guidance amending the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset. The intent of this guidance is to improve the consistency between the useful life of a recognized intangible asset and the period of expected cash flows used to measure the fair value of the asset as provided for under separate accounting guidance topics. This guidance is effective for fiscal years beginning after December 15, 2008 and for interim periods within those years with early adoption prohibited. Accordingly, the Company will adopt this guidance in fiscal 2010 and it will only impact the Company if the Company acquires assets for which it needs to develop renewal or extension assumptions to determine the useful life of a recognized intangible asset

In December 2007, the FASB issued authoritative guidance retaining the purchase method of accounting for acquisitions, but requiring a number of changes, including changes in the way assets and liabilities are recognized in purchase accounting. It also changes the recognition of assets acquired and liabilities assumed arising from contingencies, requires the capitalization of in-process research and development at fair value, and requires the expensing of acquisition-related costs as incurred. This guidance applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008 and early adoption is prohibited. Accordingly, the Company will adopt this guidance in the first quarter of its fiscal 2010 and the guidance will only impact the Company if it is involved in a business combination as an acquirer.

In September 2006, the FASB issued authoritative guidance clarifying the definition of fair value and establishing a framework for measuring fair value in generally accepted accounting principles and expanding disclosures about fair value measurements. The Company adopted this guidance for financial assets and liabilities in the first quarter of fiscal 2009 and as permitted by the authoritative guidance, the Company expects to adopt its provisions for non-financial assets and liabilities in the first quarter of fiscal 2010. In August 2009, the FASB issued additional guidance providing clarification for measuring fair value when a quoted price in an active market for the identical liability is not available. This supplemental guidance also clarifies that when estimating the fair value of a liability, a reporting entity is not required to include a separate input or adjustment to other inputs relating to the existence of a restriction that prevents the transfer of the liability. The supplemental guidance is effective for fiscal periods beginning with the first reporting period after issuance. Accordingly, the Company will adopt this guidance in the first quarter of fiscal 2010. The Company does not expect the adoption of this guidance to materially impact its results of operations or financial condition.

2. Restricted Cash:

Restricted cash consists primarily of security deposits held under bank guarantees for three rental properties.

3. Financial Instruments:

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. The fair value hierarchy is based on the three levels of inputs and gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurements) and lowest priority to unobservable inputs (level 3 measurements). The three levels of the fair value hierarchy are described below:

Level 1 - Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.

Level 2 - Inputs reflect quoted prices for identical assets or liabilities in markets that are not active; quoted prices for similar assets or liabilities in active markets; inputs other than quoted prices that are observable for the asset or the liability; or inputs that are derived principally from or corroborated by observable market data by correlation or other means.

Level 3 - Unobservable inputs reflecting the Company’s own assumptions incorporated in valuation techniques used to determine fair value. These assumptions are required to be consistent with market participant assumptions that are reasonably available.

The determination of where an asset or liability falls in the hierarchy requires significant judgment. The Company evaluates its hierarchy disclosures quarterly and based on various factors, it is possible that an asset or liability may be classified differently from quarter to quarter. However, the Company expects changes in classifications between different levels to be rare.

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The Company measures its cash equivalents and foreign currency forward contracts at fair value. Cash equivalents and forward contracts are primarily classified within Level 1 or Level 2 because they are valued primarily using quoted market prices, alternative pricing sources or models utilizing market observable inputs as provided to the Company by its brokers for foreign currency forward contracts. The quotes used for valuing the forward contracts are non-binding on the broker providing the quote. Assets and liabilities measured at fair value on a recurring basis are as follows as of September 30, 2009:

	Fair Value Measurement at Reporting Date Using:

		Quoted Prices		Significant
		in Active		Other
		Markets for		Observable
		Identical Assets		Inputs
		(Level 1)		(Level 2)		Total
	(In thousands)

Certificates of deposit (1)		$	35	$	--	$	35

Total		$	35		--	$	35

(1)

Included in cash and cash equivalents on the Company’s Consolidated Balance Sheets.

In addition to financial instruments that the Company is required to recognize at fair value on the Consolidated Balance Sheets, the Company has certain financial instruments that are recognized at historical cost. The Company has estimated the fair value of those financial instruments including cash and cash equivalents, restricted cash, marketable securities, 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.

For those financial instruments, the following table provides the value recognized on the Consolidated Balance Sheets and the approximate fair value at September 30, 2009 and September 30, 2008.

	September 30,					September 30,
	2009					2008
		Carrying		Fair			Carrying		Fair
		Amount		Value			Amount		Value
	(In thousands)

Cash and cash equivalents, excluding certificates of
deposits of $35 and $63 in 2009 and 2008		$	44,617	$	44,617		$	11,561	$	11,561
Restricted cash			25		25			817		817
Marketable securities			--		--			380		380
Note payable to bank			15,000		15,000			3,215		3,215
Long-term debt			10,474		10,617			11,639		11,895

The carrying value of cash, cash equivalents and restricted cash approximates fair value due to the nature of the cash, cash investments and restricted cash. The carrying value of the marketable securities in fiscal 2008 approximates fair value because the security was marked-to-market. The carrying value of the note payable to the bank approximates fair value because the instrument bears a negotiated variable interest rate. The fair value of the long-term debt is based on the discounted value of expected cash flows using an estimated discount rate of 3.25% and 5.0% at September 30, 2009 and September 30, 2008, which the Company could currently obtain for debt with similar remaining maturities.

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Marketable securities consists of 1 million shares of common stock acquired in a sales transaction. Unrealized gains or losses in the security are recorded in Accumulated OCI, unless the Company determines that a decline in the fair value of the security is other-than-temporary. If a decline in the fair value of a security is determined to be other-than-temporary, then the cost basis of the security must be written down to the current fair value and the adjustment must be recorded as a component of earnings. Many factors go into the determination of whether a decline in value of a given security represents a temporary or other-than-temporary loss. In the fourth quarter of fiscal 2008, the Company determined that the investment had incurred an other-than-temporary impairment and wrote off $900,000. In the third quarter of fiscal 2009, the issuer of the security filed a voluntary petition under Chapter 11 of the U.S Bankruptcy Code and was subject to delisting from the NASDAQ Stock Market. As a result, the Company determined that the impairment of the investment was other-than-temporary and wrote down the remaining balance of $380,000 to zero, recording the loss in Other expense. The fair value of the security as of September 30, 2008 was as follows (in thousands):

			Gross		Gross
			Unrealized		Unrealized		Estimated
	Cost		Gain		Loss		Fair Value

September 30, 2008	$	380	$	--	$	--	$	380

The Company did not hold any other marketable securities as of September 30, 2009. There is no contractual maturity date for the equity investment held by the Company.

4. Derivative Instruments and Hedging Activities:

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 authoritative accounting guidance to account for hedges. At the inception of the hedge, the hedging relationship to a forecasted transaction, the risk management objective and the strategy for undertaking the hedge is documented. Quarterly, forward rates are used to evaluate hedging effectiveness. For effective hedges, unrealized gains and losses are included in Accumulated OCI. If the derivative no longer meets hedge accounting criteria, or the terms of the hedged item change so the derivative no longer qualifies for hedge accounting, the derivative is marked-to-market. Any amounts in Accumulated OCI relating to a derivative that no longer qualifies for hedge accounting are transferred out of Accumulated 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.

All derivatives are recorded on the Consolidated Balance Sheets 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 Accumulated 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.

Foreign exchange contracts used to hedge forecasted international intercompany sales on credit for up to 18 months in the future are designated as cash flow hedging instruments. Derivative gains and losses included in Accumulated OCI are reclassified to earnings when forecasted transactions become receivables. As of September 30, 2009, the Company had no foreign exchange contracts designated as cash flow hedges and therefore had no net derivative gains or losses being reported as a separate component of Accumulated OCI.

The Company does not employ hedges against foreign currency exposures of its net investment in foreign subsidiaries. Results of operations may be impacted by changing foreign exchange rates to the extent that exchange rates fluctuate from period to period. Combined translation and transaction gains (losses) of ($347,000), ($414,000), and $233,000 are included in Other income (expense) in the Consolidated Statements of Operations.

When present, the foreign exchange contracts are reported on the Company’s Consolidated Balance Sheets in prepaid expenses and other current assets or in other accrued liabilities. As of September 30, 2009, the Company had no foreign exchange contracts.

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During fiscal 2009, the Company recognized the following gains (losses) related to foreign exchange contracts (in thousands):

	Year Ended
	September 30, 2009

Cash Flow Hedges
Effective portion
Gain (loss) recognized in OCI	$	(292	)
Gain (loss) reclassified from Accumulated OCI into net sales	$	452

Ineffective portion
Gain (loss) recognized in Other income (expense), net	$	--

Fair Value Hedges
Gain (loss) recognized in Other income (expense), net	$	(213	)

5. Inventories:

Inventories at September 30, 2009 and 2008 are summarized as follows (in thousands):

	2009		2008

Parts and raw materials	$	37,493	$	44,762
Work-in-process		14,332		27,100
Finished goods		13,985		16,911

	$	65,810	$	88,773

6. Property, Plant and Equipment:

Property, plant and equipment at September 30, 2009 and 2008 are summarized as follows (in thousands):

	2009			2008

Buildings and improvements	$	33,755		$	32,463
Machinery and equipment		52,981			48,712
Furniture, fixtures and leasehold improvements		10,498			11,682
Vehicles and aircraft		7,606			10,035
		104,840			102,892
Less accumulated depreciation and amortization		(69,291	)		(60,430	)
		35,549			42,462
Land and land improvements		7,706			7,447

	$	43,255		$	49,909

Depreciation expense was $10.5 million, $10.3 million and $9.8 million for fiscal 2009, 2008 and 2007, respectively.

The Company sold an aircraft during the third quarter of fiscal 2009 for approximately $1.5 million and recognized a gain on the sale of approximately $253,000. The Company also sold a storage facility located near Kalispell, Montana during the third quarter of fiscal 2009 for approximately $200,000 and recognized a gain on the sale of approximately $152,000.

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7. Intangible Assets:

Amortization expense for intangible assets was $1.1 million, $1.1 million and $936,000 for fiscal 2009, 2008 and 2007, respectively. Based primarily on patent rights granted and recorded at September 30, 2009, 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

2010		$931
2011		710
2012		476
2013		369
2014		254
Thereafter		109

Accumulated amortization was $5.4 million and $4.3 million at September 30, 2009 and 2008, respectively.

As part of a routine review of its patent portfolio, the Company abandoned patents and patent applications valued at historical cost of $338,000, $311,000 and $366,000 in fiscal 2009, 2008 and 2007, respectively. Patent abandonments are reported as part of Research and Development expense.

8. Line of Credit:

The Company has a $30 million Credit Agreement, renewable annually, with Wells Fargo Trade Bank (Trade Bank) with an expiration date of March 1, 2010. Borrowings are collateralized by certain assets of the Company and bear interest at the bank’s prime lending rate, 3.25% as of September 30, 2009, or at the Company’s option, LIBOR plus 2.25%, or 2.54% as of that date. The agreement requires monthly interest payments only, until March 1, 2010, when the then outstanding principal balance is due and payable in full. The agreement provides for a non-refundable annual commitment fee equal to 0.10% of the credit limit, commencing March 1, 2008. Additionally, the agreement contains various restrictive financial and non-financial covenants. The financial covenants include measurements of tangible net worth, total liabilities divided by tangible net worth and a maximum borrowing limit based on a Funded Debt to Earnings before Interest, Taxes, Depreciation and Amortization (EBITDA) ratio and a maximum borrowing limit based upon total accounts receivable. At September 30, 2009, there was $15.0 million in advances outstanding under the agreement, which is reported as a current liability.

The Company has been in discussions with the Trade Bank regarding its compliance with the Funded Debt to EBITDA covenant. There exists an ambiguity in interpretation which is unresolved, but which if interpreted as noncompliance with the covenant, would allow the Trade Bank to notify the Company that the non-compliance constitutes an event of default under the facility that (i) prevents further borrowings and (ii) gives them the right to accelerate the payment of all amounts outstanding under the loan. The bank has not provided the Company with any notice of default (which is also subject to a right of cure within twenty calendar days of the notice). In view of this ambiguity in interpretation, the Company does not anticipate being able to request further advances under the Credit Agreement until this matter is resolved. If interpreted in favor of the Trade Bank, there would be a Funded Debt to EBIDTA ratio requirement of not more than 2:1 as of September 30, 2009 (EBITDA for the trailing twelve-month period ending September 30, 2009 was a negative number). The Company continues to discuss credit facility requirements with the Trade Bank with a view toward arranging a facility that resolves any issues regarding borrowing limits and outstanding advances.

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9. Long-Term Debt:

Long-term debt at September 30, 2009 and September 30, 2008 is summarized as follows (in thousands):

	2009		2008

Mortgage term note payable in monthly installments of
$23, including interest at a blended rate of 5.5%, maturing on
September 1, 2014. (A)	$	1,120	$	1,328

Mortgage term note payable in monthly installments of $49,
including interest at a blended rate of 3.81% up to January 2012
when it will change to $53, including interest at a blended rate of
6.81%, maturing on January 1, 2017. (B)		3,765		4,206

Mortgage term note payable to the Pennsylvania Industrial
Development Authority (PIDA) in monthly installments of $6,
including interest at 4.25%, maturing on December 1, 2008. (C)		--		12

Mortgage term note payable to Sovereign Bank in monthly
installments of $15, including interest at 4.5%, maturing
August 15, 2021. (D)		1,602		1,705

Mortgage term note payable to the Raiffeisenbank Hallein
in monthly installments of EUR 25, including interest at 3.5%,
maturing on March 5, 2016. (E)		2,517		2,748

Mortgage term note payable to the Raiffeisenbank Hallein
in quarterly installments of EUR 14 plus interest at 5.75%,
maturing July 5, 2016. (F)		1,470		1,640
		10,474		11,639
Less current portion		1,214		1,222

	$	9,260	$	10,417

(A)

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

(B)

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

(C)

The mortgage term note payable to PIDA was collateralized by a first lien upon the premises in Coopersburg, Pennsylvania upon which the Rhetech, Inc. office and manufacturing facility resides. The net book value of assets pledged under the agreement was $4.4 million at September 30, 2008.

(D)

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

(E)

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

(F)

The mortgage term note payable to Raiffeisenbank Hallein is collateralized by a second lien on the Salzburg, Austria premises. The loan agreement provides the option of converting the loan to a foreign currency. For loans converted to U.S. dollars, the interest rate is LIBOR, rounded to the nearest 1/8% + 0.875%. In September 2008, the Company converted the loan to U.S. dollars at an interest rate of 3.625% and is currently making payments of $50,000 per quarter with the intent of settling the loan in 2018.

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Principal maturities for long-term debt at September 30, 2009, are summarized as follows (in thousands):

Year Ending	Notes
September 30,	Payable

2010		$ 1,214
2011		1,261
2012		1,289
2013		1,342
2014		1,307
Thereafter		4,061

		$10,474

10. Accumulated Other Comprehensive Income (Loss):

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

Accumulated other comprehensive income (loss) at September 30, 2009 and 2008 consisted of the following components (in thousands):

	2009		2008

Unrealized loss on derivative instruments qualifying as cash flow hedges	$	--	$	(160	)
Cumulative translation adjustments		905		(272	)

	$	905	$	(432	)

11. Employee Benefit and Stock-Based Compensation 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. As of January 1, 2009, the company temporarily suspended the matching portion of the 401K plan as part of its downsizing efforts (See Note 12). Total contribution cost for this plan was approximately $1.1 million for both fiscal years ended September 30, 2008 and 2007.

Semitool Europe Ltd. maintains a defined contribution pension agreement. This pension agreement is open to all employees with more than three months of service. The employer and employee contributions are invested in each individual member’s personal pension plan. The employer has an obligation to make contributions at one-half of the contribution rate paid by the employee, subject to a rate between 2.5% and 5.0% of the employee’s salary. The total pension cost for this plan for the years ended September 30, 2009, 2008 and 2007 approximated $33,000, $36,000 and $40,000, respectively.

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

In February 2004, the Board of Directors adopted and the shareholders approved the 2004 Stock Option Plan (the 2004 Plan), replacing the expiring 1994 Stock Option Plan. Upon approval of the 2007 Stock Incentive Plan (the 2007 Plan) in March 2007, the 2007 Plan immediately replaced the 2004 Plan. Options that were granted under the 2004 Plan generally become exercisable at a rate of 5% per quarter commencing three months after the grant date and have a requisite service period of five years. The Company has granted options that qualify as incentive stock options to employees (including officers and employee directors) and nonqualified stock options to employees, directors and consultants. The options generally have a ten-year term, unless earlier terminated by the discontinuation of service by the grantee. Option exercises are settled with newly issued common shares.

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The total shares reserved for issuance under the 2007 Plan are 3,207,730 at September 30, 2009, which includes an initial 1,000,000 shares plus all shares that remained available for grants of options under the 2004 Plan as of the date the 2007 Plan was approved plus any shares that would otherwise return to the 2004 Plan as a result of forfeiture of options previously granted under the 2004 Plan. The 2007 Plan provides for the grant of various awards including stock options, stock appreciation rights and restricted stock awards. As of September 30, 2009, only stock options and restricted stock awards have been awarded under the 2007 Plan. The Company may grant options that qualify as incentive stock options only to employees. Awards other than incentive stock options may be granted to employees, directors and consultants. Restricted stock awards granted under the 2007 Plan generally vest at a rate of 20% per year with 20% vesting immediately upon issuance and have a requisite service period of four years. Stock options granted under the 2007 Plan generally have a ten-year term, unless earlier terminated by the discontinuation of service by the grantee. Stock option exercises and restricted stock are settled with newly issued common shares.

Stock-based compensation expense recognized during the fiscal years ending September 30, 2009, 2008 and 2007 was $1.1 million, $1.8 million and $1.1 million, respectively.

Stock Options

The fair value of each stock option grant is estimated on the date of grant using the Black-Scholes option pricing model. Expected volatilities are based on a blended rate of historical and implied volatilities from the traded options on the Company’s stock. The expected term of stock options granted is based on analyses of historical employee termination rates, option exercises and other factors. The risk-free rates are based on the U.S. Treasury yield in effect at the time of the grant. The assumptions used in the Black-Scholes model for fiscal 2008 and 2007are presented below. There were no stock options granted in fiscal 2009.

	2008		2007

Expected stock price volatility	51.6	%	51.6	%
Risk-free interest rate	4.4	%	4.6	%
Dividend yield	0.0	%	0.0	%
Expected life of options (in years)	5.1		5.1

The weighted average grant date fair values based on the Black-Scholes option pricing model for stock options granted in fiscal 2008 and 2007 were $4.77 and $5.58 per share, respectively.

The following summary shows stock option activity for the three years ended September 30, 2009:

	2009					2008					2007
				Weighted					Weighted					Weighted
				Average					Average					Average
				Exercise					Exercise					Exercise
Stock Option Activity	Shares			Price		Shares			Price		Shares			Price

Outstanding, beginning of year		1,401,856		$	8.11		1,779,750		$	7.69		1,922,426		$	7.53
Granted		--			--		5,000		$	9.49		62,000		$	11.05
Exercised		(2,750	)	$	6.62		(354,719	)	$	5.81		(169,676	)	$	6.94
Forfeited		(106,325	)	$	7.85		(28,175	)	$	10.63		(35,000	)	$	8.65

Outstanding, end of year		1,292,781		$	8.14		1,401,856		$	8.11		1,779,750		$	7.69

Exercisable, end of year		1,173,996		$	8.07		1,102,081		$	7.99		1,246,956		$	7.52

As of September 30, 2009, $437,000 of total unrecognized compensation cost related to non-vested stock options is expected to be recognized over a weighted average period of 0.9 years. The weighted average remaining contractual term for options outstanding and exercisable at September 30, 2009 was 4.2 years and 4.0 years, respectively. The aggregate intrinsic value for options outstanding and exercisable at September 30, 2009 was $1.3 million and $1.3 million, respectively. The total intrinsic value of stock options exercised during fiscal 2009, 2008 and 2007 was $4,000, $968,000 and $900,000, respectively.

The Company granted a total of 5,000 stock options during fiscal 2008 with exercise prices equal to the market price of the stock on the grant date. The weighted-average exercise price and weighted-average fair market value of these awards were $9.49 and $4.77, respectively.

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The Company granted a total of 62,000 stock options during fiscal 2007 with exercise prices equal to the market price of the stock on the grant date. The weighted-average exercise price and weighted-average fair market value of these awards were $11.05 and $5.58, respectively.

The following table summarizes information about stock options outstanding at September 30, 2009:

		Options Outstanding						Options Exercisable
				Weighted						Weighted
				Average		Weighted Average				Average
		Number		Exercise		Remaining		Number		Exercise
Range of Exercise Prices		of Shares		Price		Contractual Life		of Shares		Price
						(In years)

	$ 3.98 - $ 4.84		191,091	$	4.27		3.7		191,091	$	4.27
	$ 6.95 - $ 10.27		913,565	$	8.17		4.3		802,980	$	8.13
	$ 10.55 - $ 14.19		169,625	$	11.27		4.8		161,425	$	11.19
	$ 15.88 - $ 19.25		18,500	$	17.76		0.4		18,500	$	17.76

			1,292,781	$	8.14		4.2		1,173,996	$	8.07

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 $235,000, $247,000 in fiscal 2008 and 2007, respectively, which were recorded as additional capital. The Company recorded no benefits in fiscal 2009.

Restricted Stock Awards

The following summary shows restricted stock activity for the three years ended September 30, 2009:

	2009					2008					2007
				Weighted					Weighted					Weighted
				Average					Average					Average
				Grant Date					Grant Date					Grant Date
Restricted Stock Activity	Shares			Fair Value		Shares			Fair Value		Shares			Fair Value

Nonvested, beginning of year		204,690		$	9.02		12,250		$	9.64		--		$	--
Granted		14,500		$	4.23		271,700		$	9.01		13,000		$	9.68
Vested		(55,660	)	$	8.65		(61,420	)	$	9.01		(750	)	$	10.04
Forfeited		(14,590	)	$	9.12		(17,840	)	$	9.33		--		$	--

Nonvested, end of year		148,940		$	8.69		204,690		$	9.02		12,250		$	9.64

The fair value of the restricted stock was calculated based upon the fair market value of the Company’s stock at the date of the grant. As of September 30, 2009, $

SEMITOOL INC 10-K