Semitool (SMTL) 10-Q 2006 Q3 Quarterly report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

                                                                  (Mark one)

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

For the quarterly period ended June 30, 2006

OR

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

For the transition period from ______________ to ______________

Commission file number 0-25424

Semitool, Inc.
(Exact Name of Registrant as Specified in Its Charter)

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

655 West Reserve Drive
Kalispell, Montana 59901
(Address of principal executive offices, zip code)

Registrant’s telephone number, including area code: (406) 752-2107

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

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

Large accelerated filer [   ] Accelerated filer [ X ] Non-accelerated filer [   ]

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

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practical date:

       Title
Common Stock Outstanding as of July 31, 2006
                31,909,156

Semitool, Inc.
Form 10-Q
Table of Contents

Part I.

  Item 1.
          
          

          
          

          
          

          
          

          

  Item 2.

          

          
          

          

          

          

          

          

          

  Item 3.

  Item 4.

Part II.

  Item 1.

  Item 1A.

  Item 6.
          
          
Signatures
          

Exhibits Financial Information

Condensed Consolidated Financial Statements (Unaudited)

Condensed Consolidated Balance Sheets as of June 30, 2006 and September 30, 2005

Condensed Consolidated Statements of Income for the three and nine months ended June 30, 2006 and
    June 30, 2005

Condensed Consolidated Statements of Cash Flows for the nine months ended June 30, 2006 and
    June 30, 2005

Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended
    June 30, 2006 and June 30, 2005

Notes to Condensed Consolidated Financial Statements

Management's Discussion and Analysis of Financial Condition and Results of Operations

Introduction - Forward-Looking Statements

Documents to Review in Connection with Management's Discussion and Analysis of Financial Condition and
    Results of Operations

Overview

Key Performance Indicators

Results of Operations

Liquidity and Capital Resources

Critical Accounting Policies and Estimates

New Accounting Pronouncements

Quantitative and Qualitative Disclosures About Market Risk

Controls and Procedures

Other Information

Legal Proceedings

Risk Factors

Exhibits

2

PART I — FINANCIAL INFORMATION

Item 1.   Condensed Consolidated Financial Statements

SEMITOOL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in Thousands, Except Share Amounts)

	June 30, 2006		September 30, 2005
	(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	14,364	$	6,557
Restricted cash		1,500		--
Marketable securities		--		475
Trade receivables, less allowance for doubtful accounts of $269 and $270 in 2006 and 2005		53,524		42,165
Inventories		88,968		72,294
Prepaid expenses and other current assets		3,217		4,114
Deferred income taxes		10,866		9,655
Total current assets		172,439		135,260
Property, plant and equipment, net		41,292		35,558
Intangibles, less accumulated amortization of $2,101 and $1,579 in 2006 and 2005		8,577		7,146
Other assets, net		1,352		716
Total assets	$	223,660	$	178,680

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable	$	18,902		$	19,153
Accrued commissions		2,375			2,814
Accrued warranty		6,975			5,521
Accrued payroll and related benefits		8,061			7,469
Income taxes payable		2,628			750
Other accrued liabilities		3,652			3,663
Customer advances		6,941			995
Deferred profit		10,067			10,983
Long-term debt, due within one year		485			292
Total current liabilities		60,086			51,640
Long-term debt, due after one year		4,151			3,111
Deferred income taxes		3,071			3,508
Total liabilities		67,308			58,259
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,
31,908,856 and 28,732,777 shares issued and outstanding in 2006 and 2005		79,984			49,853
Retained earnings		77,035			71,063
Accumulated other comprehensive loss		(667	)		(495	)
Total shareholders' equity		156,352			120,421
Total liabilities and shareholders' equity	$	223,660		$	178,680

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

3

SEMITOOL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(Amounts in Thousands, Except Per Share Amounts)

	Three Months Ended June 30,				Nine Months Ended June 30,
	2006		2005		2006			2005
Net sales	$	59,095	$	47,405	$	178,208		$	142,563
Cost of sales		31,455		22,754		96,251			70,413
Gross profit		27,640		24,651		81,957			72,150
Operating expenses:
Selling, general and administrative		17,992		17,422		54,068			47,832
Research and development		6,186		5,364		18,248			14,632
Total operating expenses		24,178		22,786		72,316			62,464
Income from operations		3,462		1,865		9,641			9,686
Other income (expense), net		212		135		(310	)		3,200
Income before income taxes		3,674		2,000		9,331			12,886
Income tax provision		1,323		532		3,359			3,938
Net income	$	2,351	$	1,468	$	5,972		$	8,948
Earnings per share:
Basic	$	0.07	$	0.05	$	0.19		$	0.31
Diluted	$	0.07	$	0.05	$	0.19		$	0.31
Weighted average common shares outstanding:
Basic		31,906		28,719		30,924			28,702
Diluted		32,230		29,133		31,281			29,099

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

4

SEMITOOL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Amounts in Thousands)

	Nine Months Ended June 30,
	2006			2005
Operating activities:
Net income	$	5,972		$	8,948
Adjustments to reconcile net income to net cash used in operating activities:
Loss on disposition of assets		35			111
Depreciation and amortization		7,054			5,143
Deferred income taxes		(1,652	)		2,173
Compensation expense recognized under employee stock option plans		1,003			199
Change in:
Restricted cash		(1,500	)		--
Trade receivables		(12,467	)		6,650
Inventories		(18,424	)		(13,093	)
Prepaid expenses and other current assets		889			496
Other assets, net		(637	)		(217	)
Accounts payable		(193	)		(5,212	)
Accrued commissions		(438	)		(1,124	)
Accrued warranty		1,456			2,002
Accrued payroll and related benefits		601			1,585
Income taxes payable		1,880			(2,984	)
Other accrued liabilities		(5	)		1,608
Customer advances		5,947			(122	)
Deferred profit		(882	)		(8,412	)
Net cash used in operating activities		(11,361	)		(2,249	)
Investing activities:
Purchases of marketable securities		--			(2,460	)
Proceeds from sale and maturities of marketable securities		475			6,944
Purchases of property, plant and equipment		(10,573	)		(3,854	)
Increases in intangible assets		(1,080	)		(1,031	)
Proceeds from sale of property, plant and equipment		89			538
Net cash provided by (used in) investing activities		(11,089	)		137
Financing activities:
Net proceeds from stock offering		27,930			--
Proceeds from exercise of stock options		1,198			325
Borrowings under line of credit and short-term debt		70,738			--
Repayments of line of credit and short-term debt		(70,738	)		--
Borrowings under long-term debt		1,403			321
Repayments of long-term debt		(248	)		(167	)
Net cash provided by financing activities		30,283			479
Effect of exchange rate changes on cash and cash equivalents		(26	)		(20	)
Net increase (decrease) in cash and cash equivalents		7,807			(1,653	)
Cash and cash equivalents at beginning of period		6,557			16,368
Cash and cash equivalents at end of period	$	14,364		$	14,715

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

5

SEMITOOL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(Amounts in Thousands)

	Three Months Ended June 30,					Nine Months Ended June 30,
	2006		2005			2006			2005
Net income	$	2,351	$	1,468		$	5,972		$	8,948
Net gain (loss) on cash flow hedges		30		168			(110	)		352
Unrealized gain on available-for-sale securities		--		1			--			4
Foreign currency translation adjustments		78		(205	)		(62	)		(209	)
Total comprehensive income	$	2,459	$	1,432		$	5,800		$	9,095

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

6

SEMITOOL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1.  Basis of Presentation

Semitool, Inc. (the Company) prepared the condensed consolidated financial statements included herein, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). Certain information and footnote disclosures, normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America, have been condensed or omitted as permitted by such rules and regulations. These condensed consolidated statements should be read in conjunction with the consolidated financial statements and the notes thereto for the year ended September 30, 2005 previously filed with the SEC on Form 10-K.

In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all of the adjustments (normal and recurring in nature) necessary to present fairly the Company’s condensed consolidated financial position as of June 30, 2006, the condensed consolidated results of operations for the three and nine month periods ended June 30, 2006 and 2005, and the condensed consolidated cash flows for the nine month periods ended June 30, 2006 and 2005. The results of operations for the periods presented may not be indicative of the results that may be expected for the entire fiscal year.

The discussion and analysis of the Company’s financial condition and results of operations is based upon its condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements 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. Routinely, the Company evaluates its estimates, including those related to revenue recognition, bad debts, inventories, stock-based compensation, investments, intangible assets, income taxes, financing operations, warranty obligations, contingencies and litigation. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

Certain prior period balances have been reclassified to conform to the current financial statement presentation. These reclassifications had no impact on previously reported results of operations or shareholders’ equity.

The Company’s condensed consolidated financial statements include the accounts of Semitool, Inc. and its wholly-owned subsidiaries. All significant intercompany accounts and transactions are eliminated in consolidation. Semitool has only one reportable segment.

New Accounting Pronouncements

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

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

In July 2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes-an Interpretation of FASB Statement 109,”(FIN 48) which clarifies the accounting for uncertain tax positions. FIN 48 provides that the tax effects from an uncertain tax position be recognized in the Company’s financial statements, only if the position is more likely than not of being sustained on audit, based on the technical merits of the position. The provisions of FIN 48 are effective for fiscal years beginning after December 15, 2006. Accordingly the Company will adopt FIN 48 in fiscal 2008. The Company is currently evaluating the impact of adopting FIN 48 on its results of operations and financial condition.

7

In March 2004, the Emerging Issues Task Force (EITF) reached a consensus on Issue No. 03-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments.” EITF 03-1 provides guidance on other-than-temporary impairment models for marketable debt and equity securities accounted for under SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities,” and SFAS No. 124, “Accounting for Certain Investments Held in Not-for-Profit Organizations,” and non-marketable equity securities accounted for under the cost method. The EITF developed a basic three-step model to evaluate whether an investment is other-than-temporarily impaired. On September 30, 2004, the FASB approved the issuance of FASB Staff Position (FSP) EITF 03-1-1, which delayed the effective date until additional guidance was issued for the application of the recognition and measurement provisions of EITF 03-1 to investments in securities that are impaired. In November 2005, the FASB Staff issued FSP FASB Statement 115-1, which amends FASB Statement No. 115 and addresses the determination as to when an investment is considered impaired, whether that impairment is other-than-temporary, and the measurement of an impairment loss. It also includes accounting considerations subsequent to the recognition of an other-than-temporary impairment and requires certain disclosures about unrealized losses that have not been recognized as other-than-temporary impairments. The Company adopted these standards as of January 1, 2006 and their adoption has not had a significant impact on the Company’s results of operations or financial position.

In June 2006, the FASB ratified Emerging Issues Task Force (EITF) Issue No. 06-3, “How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement (That Is, Gross Versus Net Presentation)” (EITF 06-3). This standard allows companies to present in their statements of income any taxes assessed by a governmental authority that are directly imposed on revenue-producing transactions between a seller and a customer, such as sales, use, value-added, and some excise taxes, on either a gross (included in revenue and costs) or a net (excluded from revenue) basis. The provisions of this EITF Issue are effective for fiscal years ending after December 15, 2006. Accordingly, the Company will adopt EITF 06-3 in fiscal 2008. The Company is currently evaluating the impact of adopting EITF 06-3 but does not expect its adoption to have a material effect on its results of operations and financial condition.

Stock-Based Compensation

The 2004 Stock Option Plan
In February 2004, the Board of Directors adopted and the shareholders approved the 2004 Stock Option Plan (the Option Plan), replacing the Semitool, Inc. 1994 Stock Option Plan. The total shares reserved for issuance under the Option Plan are 3,300,000 at June 30, 2006. Options granted under the Option 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 may grant options that qualify as incentive stock options to employees and nonqualified stock options to employees, officers and directors, independent contractors and consultants. Options generally have a ten-year term. Option exercises are settled with newly issued common shares.

Effective October 1, 2005, the Company adopted the provisions of SFAS No. 123(R), “Share-Based Payment.” SFAS No. 123(R) establishes accounting for stock-based awards exchanged for employee services. Accordingly, stock-based compensation cost is measured at grant date, based on the fair value of the award and is recognized as expense, amortized on a straight-line basis, over the requisite service period of the individual grants, which generally equals the vesting period.

Prior to the adoption of SFAS No. 123(R)
Prior to the adoption of SFAS No. 123(R), the Company accounted for stock-based employee compensation using the intrinsic value method under Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (APB No. 25) and had adopted the disclosure-only provisions of Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” (SFAS No. 123) as amended by SFAS No. 148, “Accounting for Stock-Based Compensation Transition and Disclosure” (SFAS No. 148). APB No. 25 provided that compensation expense relative to employee stock options be measured based on the intrinsic value of the stock options granted. Compensation expense was recognized in the statement of income in the case where the stock options were granted at exercise prices below fair market value on the date of grant. The Company amortized deferred stock-based compensation cost on the accelerated vesting method described in FASB Interpretation Number 28, “Accounting for Stock Appreciation Rights and Other Variable Stock Option or Award Plans – an Interpretation of APB Opinions No. 15 and 25” over the vesting periods of the applicable stock options (normally five years). If the stock options were granted at market value, no compensation expense was recorded. SFAS No. 123 provided for a fair value based method of accounting for an employee stock option. For stock options, fair value is determined using an option pricing model that takes into account the stock price at the grant date, the exercise price, the expected life of the option, the volatility of the underlying stock and the expected dividends on it, and the risk-free rate over the expected life of the option. SFAS No. 123 required entities that continued to use the intrinsic value based method of accounting prescribed by APB No. 25 to provide pro forma disclosures of net income and earnings per share as if the fair value method of accounting had been used. The pro forma information for the three and nine months ended June 30, 2005 was as follows:

8

	Three Months Ended June 30, 2005			Nine Months Ended June 30, 2005
Net income, as reported	$	1,468		$	8,948
Add: Compensation expense recorded
under APB No. 25, net of tax related effects		43			138
Deduct: Total stock-based compensation expense
determined under fair value based method for
all awards, net of tax related effects		(187	)		(580	)
Pro forma net income	$	1,324		$	8,506
Basic earnings per share:
As reported	$	0.05		$	0.31
Pro forma	$	0.05		$	0.30
Diluted earnings per share:
As reported	$	0.05		$	0.31
Pro forma	$	0.04		$	0.29

Impact of the adoption of SFAS No. 123(R)
The Company elected to adopt the modified prospective application method as provided by SFAS No. 123(R). As a result, the Company’s statements of income as of June 30, 2006 reflect compensation cost for new stock options granted under the Option Plan during the third quarter and first nine months of fiscal 2006 and the unvested portion of previous stock option grants which vested during the third quarter and first nine months of fiscal 2006. Total compensation cost recorded in the third quarter of fiscal 2006 was $344,000 pre-tax, or $221,000 after tax, an impact of approximately $0.01 per basic and diluted share. Total compensation cost recorded in the first nine months of fiscal 2006 was $1,003,000 pre-tax, or $642,000 after tax, an impact of approximately $0.02 per basic and diluted share. As of June 30, 2006, $3.1 million of total unrecognized compensation cost related to non-vested awards is expected to be recognized over a weighted average period of 1.8 years.

The fair value of each 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 options granted is based on analyses of historical employee termination rates, option exercises and other factors. The risk-free rates are based on the U.S. Treasury yield in effect at the time of the grant. The assumptions used in the Black-Scholes model are presented below:

	Three Months Ended June 30,						Nine Months Ended June 30,
	2006			2005			2006			2005
Expected stock price volatility		59.6	%		80.0	%		59.6	%		80.0	%
Risk-free interest rate		5.0	%		3.8	%		4.4	%		3.6	%
Dividend yield		--			--			--			--
Expected life of options (in years)		5.2			4.5			5.2			4.8

9

A summary of the Company’s option activity for the first nine months of fiscal 2006 is as follows:

	Number of Shares			Weighted- average Exercise Price Per Share		Weighted- average Remaining Contractual Term		Aggregate Intrinsic Value
	(In thousands)					(In years)		(In thousands)
Outstanding at September 30, 2005		1,983			$7.36
Options granted		105			8.90
Options exercised		(176	)		6.80
Options forfeited		(8	)		7.61
Outstanding at June 30, 2006		1,904			$7.49		6.3		$2,913
Exercisable at June 30, 2006		1,112			$7.46		4.8		$1,746

The weighted average grant date fair values based on the Black-Scholes option pricing model for options granted in the third quarter and first nine months of fiscal 2006 were $5.15 and $4.98 per share, respectively, and for options granted in the third quarter and first nine months of fiscal 2005 were $5.80 and $5.62 per share, respectively. The total intrinsic value of options exercised during the third quarter and first nine months fiscal 2006 was $20,000 and $926,000, and during the third quarter and first nine months of fiscal 2005 was $75,000 and $224,000.

Computation of Earnings Per Share

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

	Three Months Ended June 30,				Nine Months Ended June 30,
	2006		2005		2006		2005
Numerator:
Net income used for basic and
diluted earnings per share	$	2,351	$	1,468	$	5,972	$	8,948
Denominator:
Weighted average common shares used for
basic earnings per share		31,906		28,719		30,924		28,702
Effect of dilutive stock options		324		414		357		397
Denominator for diluted earnings per share		32,230		29,133		31,281		29,099

Diluted earnings per share excludes the effects of antidilutive stock options of 211,075 and 261,900 for the three months ended June 30, 2006 and 2005, and 204,575 and 312,450 for the nine months ended June 30, 2006 and 2005, respectively.

Shareholders’ Equity

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, after deducting underwriters’ fees and other offering costs of approximately $1.6 million.

10

Note 2.  Cash

Restricted cash consists of a $1.5 million customer advance payment held under a bank guarantee until certain contractual requirements are met.

Note 3.  Inventories

The Company’s inventories are summarized as follows (in thousands):

	June 30, 2006		September 30, 2005
Parts and raw materials	$	46,989	$	37,165
Work-in-process		34,377		26,057
Finished goods		7,602		9,072
	$	88,968	$	72,294

For the nine months ended June 30, 2006, a net $1,699,000 of inventory was transferred to property, plant and equipment for testing and laboratory use.

Note 4.  Note Payable to Bank

The Company currently has a $30 million Credit Agreement with Wells Fargo that bears interest at the bank’s prime lending rate or, at the Company’s option, LIBOR plus 2.25%. As of June 30, 2006, the prime lending rate was 8.25% and the Company had no advances outstanding under the agreement. The Credit Agreement expires on March 31, 2008 and includes financial and non-financial covenants. The Company was in compliance as of June 30, 2006.

Note 5.  Guarantees

The Company, in its Articles of Incorporation, has indemnified its officers and the members of its Board of Directors to the extent permitted by law against any and all liabilities, costs, expenses, amounts paid in settlement and damages incurred in such capacity as a result of any lawsuit, or any judicial, administrative or investigative proceeding in which the officers or directors are named.

The Company has entered into agreements with customers that include limited intellectual property indemnification obligations that are customary in the industry. These guarantees generally require the Company to compensate the other party for certain damages and costs incurred as a result of third party intellectual property claims arising from these transactions. The nature of the intellectual property indemnification obligations prevents the Company from making a reasonable estimate of the maximum potential amount it could be required to pay to its customers. The Company has not made any indemnification payments under such agreements and no amount has been accrued in the accompanying condensed consolidated financial statements with respect to these indemnification obligations.

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

Changes in the Company’s accrued warranty liability were as follows (in thousands):

	Nine Months Ended June 30,
	2006			2005
Accrued warranty balance, beginning of period	$	5,521		$	3,713
Accruals for new warranties issued during the period		9,165			7,212
Expirations and changes in estimates to pre-existing warranties		519			(975	)
Warranty labor and materials provided during the period		(8,230	)		(4,236	)
Accrued warranty balance, end of period	$	6,975		$	5,714

11

Note 6.  Contingencies

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

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

Note 7.  Other Income (Expense), Net

Other income (expense), net for fiscal 2006 includes $440,000 in expense related to a patent infringement lawsuit involving a product representing less than 2% of the Company’s net sales.

Other income (expense), net for fiscal 2005 includes a $2.9 million seed layer enhancement litigation settlement payment received from Novellus Systems, Inc. in October 2004.

Note 8.  Income Taxes

The Company’s effective tax rate was approximately 36% for the three and nine months ended June 30, 2006. The effective tax rate in fiscal 2006 is higher compared to the rate used for fiscal 2005 because the Research Credit (Credit) expired in December 2005. Congress is currently discussing the extension and/or revision of the Credit. As of June 30, 2006, no extension of the Credit has been enacted by Congress.

The Company’s estimated effective full-year tax rate for fiscal 2006 is approximately 36%. The Company’s fiscal year 2006 tax rate is higher than in fiscal 2005 due to the aforementioned expiration of the federal research credit as well as the expensing of stock-based awards in accordance with SFAS No. 123(R) and the limited deductibility of those awards in some jurisdictions which have the effect of increasing the Company’s effective tax rate for fiscal year 2006.

The Company’s recorded tax rate for the first quarter of fiscal 2005 was approximately 30% due to the recognition of approximately $186,000 of Credit, which was generated in the fourth quarter of fiscal 2004. Legislation to extend the Credit through December 2005 was signed into law after September 30, 2004; therefore, the Company was unable to recognize the Credit in fiscal 2004. The effective full-year tax rate for fiscal 2005 was approximately 31%.

The effective tax rate reflects the underlying profitability of the Company, the regions where income and expenses are recorded and the respective tax rates imposed. The Company’s effective tax rate is based on current business outlook, including the Company’s continued and substantial investments in research and development programs qualifying for the Credit (through the expiration in December 2005), and the Company’s expectations of earnings from operations in lower-tax jurisdictions throughout the world.

12

Item 2.   Management's Discussion and Analysis of Financial Condition and Results of Operations

Introduction – Forward–Looking Statements

Statements contained in this Quarterly Report on Form 10-Q which are not purely historical facts are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements are based on management’s estimates, projections and assumptions that underlie such statements at the time they are made. Forward-looking statements may contain words such as “may,” “will,” “should,” “would,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” “continue,” or the negative of these terms or other comparable terminology. Examples of forward-looking statements made in this Quarterly Report on Form 10-Q include statements regarding:

• key trends in the semiconductor industry that are driving growth;
• the continued expansion of our installed base of Raider tools and the ability to recognize more equipment revenue at the time of shipments of Raiders;
• the industry trend toward stronger Asian markets and our expectation that future sales will be weighted toward that region;
• the expectation of lower warranty expense on the Raider platform as compared to our previous automated plating and cleaning tools;
• the expectation of lower transition costs in Taiwan and China related to establishing a direct sales and service presence in those markets;
• the sufficiency of funds and sources of liquidity;
• estimates of capital expenditures;
• the level of research and development expenditures;
• the ability to finance activities;
• our expected effective tax rate;
• accounting policies and estimates; and
• effects of new accounting standards.

Management cautions that forward-looking statements are subject to risks and uncertainties that could cause our actual results to differ materially from those projected in such forward-looking statements. The risks, uncertainties and other important factors that may cause our results to differ materially from those projected in such forward-looking statements are detailed under the heading “Risk Factors” and elsewhere in our Annual Report on Form 10-K for our fiscal year ended September 30, 2005. We undertake no obligation to update forward-looking statements to reflect subsequent events, changed circumstances, or the occurrence of unanticipated events.

Documents to Review in Connection with Management’s Discussion and Analysis of Financial Condition and Results of Operations

This discussion should be read in conjunction with the Condensed Consolidated Financial Statements and Notes presented in this Form 10-Q and the financial statements and notes in our last filed Annual Report on Form 10-K for a full understanding of our financial position and results of operations for the three and nine month periods ended June 30, 2006.

Overview

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

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

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

13

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

Key Performance Indicators

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

A summary of key factors which impacted our financial performance during the third quarter includes:

• Third quarter fiscal 2006 equipment bookings were a record $77.3 million. Year-to-date net bookings are $193.7 million.
  
  
• Shipments in the third quarter of fiscal 2006 were $55.5 million. Year-to-date shipments are $170.5 million.
  
  
• Deferred revenue at June 30, 2006 was $14.7 million.
  
  
• Net income was $2.4 million on revenues of $59.1 million during the third quarter of fiscal 2006 compared to net income of $1.5 million on revenues of $47.4 million in the third quarter of fiscal 2005.
  
  
• Our gross margin was 46.8% of net sales, down from the 52.0% gross margin we reported in the third quarter of fiscal 2005. The fiscal 2006 margin was adversely impacted by up-front investments, including increased cost of sales, on selected tool installations with first-time customers for new applications.
  
  
• Cash, cash equivalents and restricted cash were $15.9 million at June 30, 2006, a decrease of $6.6 million from $22.5 million at March 31, 2006.

Results of Operations

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

	Three Months Ended June 30,						Nine Months Ended June 30,
	2006			2005			2006			2005
Net sales		100.0	%		100.0	%		100.0	%		100.0	%
Cost of sales		53.2			48.0			54.0			49.4
Gross profit		46.8			52.0			46.0			50.6
Operating expenses:
Selling, general and administrative		30.4			36.8			30.3			33.6
Research and development		10.5			11.3			10.2			10.2
Total operating expenses		40.9			48.1			40.5			43.8
Income from operations		5.9			3.9			5.5			6.8
Other income (expense), net		0.3			0.3			(0.2	)		2.2
Income before income taxes		6.2			4.2			5.3			9.0
Income tax provision		2.2			1.1			1.9			2.7
Net income	$	4.0	%	$	3.1	%	$	3.4	%	$	6.3	%

14

Third Quarter and First Nine Months of Fiscal 2006 Compared with Third Quarter and First Nine Months of Fiscal 2005

Net Sales

	Three Months Ended June 30,				Nine Months Ended June 30,
	2006		2005		2006		2005
	(In thousands)
Net sales	$	59,095	$	47,405	$	178,208	$	142,563

Net sales consist of revenues from sales of semiconductor equipment, spare parts and service. Our revenue recognition policy provides that revenue from sales of semiconductor equipment may be recognizable upon shipment if the product is an existing tool to a customer environment in which we have already successfully installed and gained acceptance of our products and the revenue recognition criteria in SAB 104, “Revenue Recognition” have been met. Alternatively, revenue will be deferred and only recognized upon final customer acceptance for tools that are new products or where an existing tool is sold into a new customer environment. Revenue for elements other than equipment, such as installation revenue, is included in tool acceptance revenue.

Net sales increased $11.7 million for the third quarter of fiscal 2006 as compared to the third quarter of fiscal 2005. In general, business activity levels have increased in fiscal 2006 as compared to fiscal 2005. Shipment levels increased 12% from $49.6 million in the third quarter of fiscal 2005 to $55.5 million in the third quarter of fiscal 2006 with a greater number of Raiders being shipped into customer environments in which we have already successfully installed and gained acceptance of our tools. Revenue recognized at the time of shipment increased approximately 32% in the third quarter of fiscal 2006 while revenue from tool acceptances during the quarter declined approximately 3% over the comparable period of fiscal 2005. We recognized more revenue from acceptances in fiscal 2005 because our revenue reflected prior period shipments of Raider platform tools, considered new tools at the time of shipment, that attained final customer acceptance during the quarter. As those tools were accepted, revenues from acceptances exceeded revenues from shipments. Now that our Raider tool base has expanded, we recognize more equipment revenue upon shipment while continuing to defer revenue related to installation until final customer acceptance. Additionally, revenues from spare parts and service increased 14% from third quarter fiscal 2005 levels.

Net sales increased $35.6 million in the first nine months of fiscal 2006 as compared to the first nine months of fiscal 2005 for the same reasons as discussed in the quarterly results analysis. Revenues from shipments increased approximately 61% while revenues from acceptances decreased 29%. Shipments increased approximately 32% to $170.5 million in fiscal 2006 year-to-date from $129.5 million in the comparable period in fiscal 2005. Revenues from spare parts and service sales have increased approximately 30% in the year-to-date comparison, including a 75% increase in revenues from our Rhetech subsidiary.

Geographically, our sales mix year-to-date has been balanced between North America, Europe and Asia. We expect our future geographic sales mix to be weighted toward Asia, corresponding with the overall industry trend toward stronger Asian markets.

Gross Profit

	Three Months Ended June 30,						Nine Months Ended June 30,
	2006			2005			2006			2005
	(Dollars in thousands)
Gross profit	$	27,640		$	24,651		$	81,957		$	72,150
Percentage of net sales		46.8	%		52.0	%		46.0	%		50.6	%

Gross profit increased $3.0 million or 12.1% in the third quarter of fiscal 2006 compared to the third quarter of fiscal 2005 and $9.8 million or 13.6% in the first nine months of fiscal 2006 as compared with fiscal 2005. As a percentage of net sales, gross profit declined 5.2 percentage points to 46.8% in the third quarter of fiscal 2006 from 52.0% in the same period of fiscal 2005 and declined 4.6 percentage points to 46.0% in the first nine months of fiscal 2006 from 50.6% in the first nine months of fiscal 2005.

Gross profit increased in both the quarterly and year-to-date comparative periods in absolute dollar terms because of higher sales volumes. The gross margin percentage in both periods was negatively impacted due to up-front investments on selected tool installations of new applications for first-time customer use. One-time pricing incentives coupled, in certain instances, with increased manufacturing costs, impacted the gross margin by approximately three percentage points in the third quarter of fiscal 2006 and by approximately four percentage points in the first nine months of fiscal 2006. The year-to-date margin was benefited slightly by a one-time order cancellation fee in the second quarter while increased warranty and installation costs also reduced the gross margin by approximately one percentage point in both comparative periods. Our product mix continues to be weighted toward our Raider platform tools. While we expect warranty expense on the Raider platform to be lower than the prior platform for our automated plating and cleaning tools, warranty rates are higher on the more advanced tool lines than on our less complex batch tools.

15

Selling, General and Administrative

	Three Months Ended June 30,						Nine Months Ended June 30,
	2006			2005			2006			2005
	(Dollars in thousands)
Selling, general and administrative $		17,992		$	17,422		$	54,068		$	47,832
Percentage of net sales		30.4	%		36.8	%		30.3	%		33.6	%

Selling, general and administrative (SG&A) expenses include employment costs for sales, marketing, customer support and administrative personnel as well as travel, communications, professional fees and expenses related to sales and service offices at our global locations. SG&A expenses increased $570,000 in absolute dollars in the third quarter of fiscal 2006 as compared to the third quarter of fiscal 2005 but decreased more than six percentage points to 30.4% of net sales in the third quarter of fiscal 2006 from 36.8% of net sales in the third quarter of fiscal 2005. Year-to-date, SG&A expenses increased $6.2 million as compared to the same period in fiscal 2005 but decreased approximately three percentage points to 30.3% of net sales demonstrating our ability to leverage our support costs.

Employment costs increased approximately $1.8 million in the third quarter of fiscal 2006 as compared to the third quarter of fiscal 2005 and $5.1 million in the year-to-date period of fiscal 2006 as compared with fiscal 2005 as we increased staff to support expanded business activity, including our transition to a direct sales and customer service presence in Taiwan and China. The increase in employment costs also reflects accruals for stock-based compensation and profit sharing. Commission expense decreased $1.8 million in the quarterly comparison and by approximately $620,000 in the year-to-date comparison, despite a consistent geographic sales mix in both periods, as a result of our efforts to expand our direct marketing presence in Taiwan and China. The combination of commission expense and direct expenses associated with our transition to a direct sales and service presence in Taiwan and China has resulted in some doubling of expenses. We expect this to decline over the next one or two quarters. Professional Fees increased 35% and 51%, respectively, in both comparative periods reflecting increased audit fees related to compliance with the Sarbanes-Oxley Act of 2002. Travel and other expenses related to expanded business activity and customer support increased in both comparative periods. These increases were partially offset by decreased legal costs in both periods.

Research and Development

	Three Months Ended June 30,						Nine Months Ended June 30,
	2006			2005			2006			2005
	(Dollars in thousands)
Research and development	$	6,186		$	5,364		$	18,248		$	14,632
Percentage of net sales		10.5	%		11.3	%		10.2	%		10.2	%

Research and Development (R&D) expense consists of salaries, project materials, laboratory costs, consulting fees and other costs associated with our product development efforts. R&D expense increased $822,000 in absolute dollars in the third quarter of fiscal 2006 as compared with the third quarter of fiscal 2005 but decreased to 10.5% of net sales from 11.3% of net sales in the third quarter of fiscal 2005. R&D expense increased $3.6 million in the first nine months of fiscal 2006 as compared to fiscal 2005 and remained flat at 10.2% of net sales.

In the third quarter of fiscal 2006, depreciation expense increased by more than $400,000 as we replaced older technology tools in our demonstration laboratories with Raider platform tools. Employment costs also increased approximately $375,000 related to increased staffing levels and merit adjustments in the first quarter of fiscal 2006. Other expenses have increased as a result of increased business activity.

Depreciation expense was also the primary driver in the $3.6 million increase in R&D expense in the first nine months of fiscal 2006, increasing approximately $1.3 million. Employment costs increased by about $1 million in the year-to-date comparison reflecting increased staff levels and accruals for stock-based compensation and profit sharing. Prototype expenses increased by more than $900,000 from the comparable period in fiscal 2005 as we expanded our research and development efforts to more historical levels than in fiscal 2005. In early fiscal 2005, our research and development focus was directed toward meeting new customer requirements for the Raider platform. As in the quarterly comparison, general operating expenses increased reflecting expanded business activity.

Our research and development expense has fluctuated from quarter-to-quarter 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 quarter. We expect to continue to fund research and development expenditures with a multi-year perspective and are committed to technology leadership in our sector of the semiconductor equipment industry.

16

Other Income (Expense), Net

	Three Months Ended June 30,						Nine Months Ended June 30,
	2006			2005			2006			2005
	(In thousands)
Interest income	$	180		$	75		$	358		$	215
Interest expense		(81	)		(29	)		(385	)		(89	)
Foreign exchange loss		(63	)		19			(209	)		(232	)
Other		176			70			(74	)		3,306
Total other income (expense), net	$	212		$	135		$	(310	)	$	3,200

Net other income (expense) increased by approximately $77,000 in the third quarter of fiscal 2006 to a net other income of $212,000 as compared to a net other income of $135,000 in the same period in fiscal 2005 primarily related to increased interest income and increased other income. This income was offset by increased interest expense, primarily on our line of credit.

Net other income (expense) decreased approximately $3.5 million in the first nine months of fiscal 2006 as compared to the first nine months of fiscal 2005 primarily because the first half fiscal 2005 results included a seed layer enhancement litigation settlement payment of $2.9 million from Novellus Systems, Inc. in October 2004. We recorded a $440,000 expense in fiscal 2006 for a patent infringement lawsuit involving a product representing less than 2% of our sales. We also used our bank line of credit in the first and second quarter of fiscal 2006, increasing our interest expense by almost $300,000 year-to-date.

Income Taxes

	Three Months Ended June 30,				Nine Months Ended June 30,
	2006		2005		2006		2005
	(In thousands)
Income tax provision	$	1,323	$	532	$	3,359	$	3,938

Our effective tax rate was approximately 36% for the three and nine months ended June 30, 2006. The effective tax rate in fiscal 2006 is higher compared to the rate used for fiscal 2005 because the Research Credit expired in December 2005. As of June 30, 2006, no extension of the federal research credit has been enacted by Congress.

Our estimated effective full-year tax rate for fiscal 2006 is approximately 36%. Our fiscal year 2006 tax rate is higher than in fiscal 2005 due to the aforementioned expiration of the federal research credit as well as the expensing of stock-based awards in accordance with SFAS No. 123(R) and the limited deductibility of those awards in some jurisdictions which have the effect of increasing our effective tax rate for fiscal year 2006.

Our recorded tax rate for the first quarter of fiscal 2005 was approximately 30% due to the recognition of approximately $186,000 of the federal research credit, which was generated in the fourth quarter of fiscal 2004. Legislation to extend the Research Credit through December 2005 was signed into law after September 30, 2004; therefore, we were unable to recognize the Research Credit in fiscal 2004. The effective full-year tax rate for fiscal 2005 was approximately 31%.

The effective tax rate reflects our underlying profitability, the regions where income and expenses are recorded and the respective tax rates imposed. Our effective tax rate is based on current business outlook, including our continued and substantial investments in research and development programs qualifying for the federal research credit (through the expiration in December 2005), and our expectations of earnings from operations in lower-tax jurisdictions throughout the world.

Backlog and Deferred Revenue

	June 30, 2006			June 30, 2005
	(Dollars in millions)
Backlog	$	84.3		$	36.7
Percentage change in backlog year-over-year		129.7	%		(33.5	)%
Deferred revenue	$	14.7		$	31.0
Percentage change in deferred revenue year-over-year		(52.6	)%		(9.4	)%

17

Approximately 73% of our current backlog is for Raider tools. Deferred revenue decreased $16.3 million at June 30, 2006 as compared with June 30, 2005 primarily because we have obtained customer acceptances of both fully deferred tools and the installation revenue on tools for which we were allowed to recognized equipment revenue upon shipment. This, coupled with increased shipments of Raiders into existing customer environments where Raiders have been previously installed or accepted in accordance with our revenue recognition policy, has resulted in a smaller deferred revenue pool. Current deferrals include all or a part of approximately 30 Raiders at June 30, 2006 as compared with approximately 22 Raiders at June 30, 2005; however, the fiscal year 2005 figure includes a higher percentage of Raiders that represented new tools shipped into new customer environments, requiring full deferral of revenue on those tools.

We include in backlog those customer orders for which we have written customer authorization and for which shipment is scheduled within the next 12 months. Orders are generally 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, the backlog at any particular date and the bookings for any particular period are not necessarily indicative of actual revenue for any succeeding period. In particular, during periods of downturns in the semiconductor industry we have experienced cancellations and significant shipment delays.

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

Stock-Based Compensation

Through fiscal 2005, we accounted for our stock option plans using the intrinsic value method. Effective the beginning of fiscal 2006, we adopted SFAS No. 123(R), “Share-Based Payment,” and elected to adopt the modified prospective application method. SFAS No. 123(R) requires us to use a fair-value based method to account for stock-based compensation. Accordingly, 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. Total compensation cost for our stock plans in the third quarter and first nine months of fiscal 2006 was approximately $344,000 and $1.0 million, respectively.

Liquidity and Capital Resources

In the first nine months of fiscal 2006, cash used by operating activities was $11.4 million. The primary use of cash in fiscal 2006 was a $12.5 million increase in trade receivables related to sales volumes and the timing of tool shipments. Collections of trade receivables were the primary contributor to the $7.9 million cash provided by operations in the third quarter of fiscal 2006. Inventories increased $18.4 million, and included several substantially complete tools, most of which are scheduled to ship in the first part of the fourth quarter. Raw materials inventory has grown to support current and expected shipment volumes and to ensure adequate inventory is available near our customers’ fabs to support their operations. The primary sources of cash from operations in fiscal 2006 were a $5.9 million increase in Customer Advances, net operating income of $6.0 million and other non-cash operating activities of $6.4 million.

Investing activities in the first nine months of fiscal 2006 included $10.6 million in purchases of factory equipment and other property, the construction of a new facility in Austria and the acquisition and remodeling of an additional manufacturing facility near our headquarters. Investing activities also included net cash proceeds of $475,000 from the sale of marketable securities. We invested an additional net $1.7 million in our development and demonstration laboratories by transferring finished goods inventory to property, plant and equipment. We also invested a net $1.1 million in our patent portfolio and acquired intellectual property for a component of one of our ancillary products.

Financing activities in the first nine months of fiscal 2006 consisted primarily of approximately $28.0 million in cash proceeds from an equity offering of three million shares of common stock in December, borrowings under long-term debt of $1.4 million for a new facility being constructed in Austria and $1.2 million from the exercise of stock options.

In the first nine months of fiscal 2005, cash used by operating activities was $2.2 million. We used cash as inventories grew $13.1 million. Work-in-process and finished goods inventories contained five tools, totaling approximately $3.8 million, which were in transit to customers at June 30, 2005 or were substantially complete and which shipped in early July. Net of that $3.8 million, inventories, primarily work-in-process and raw materials, increased to support the shipment volume in fiscal 2005. In addition to the growth in inventories, we also reduced our accounts payable balance by $5.2 million. Deferred profit decreased by $8.4 million from year-end fiscal 2004 levels because acceptances of Raider and other high value tools exceeded deferrals of revenue, and associated cost deferrals in the fiscal 2005 period. The primary source of cash during the period was the collection of trade receivables in the normal course of business. Trade receivables declined by $6.7 million from September 30, 2004. We also received a $1.3 million income tax refund. Other sources of cash during the first nine months of fiscal 2005 included net income of almost $8.9 million and changes in non-cash components of net income, including depreciation, amortization and deferred income taxes.

Investing activities in the first nine months of fiscal 2005 included $3.9 million in purchases of factory equipment and net cash proceeds of $4.5 million from the sale of marketable securities.

18

Financing activities in the first nine months of fiscal 2005 consisted primarily of cash received from stock option exercises of $325,000 and proceeds from long-term debt of $321,000 for a new facility being constructed in Austria. We expect long-term debt for the facility to increase to approximately $3 million with a fixed interest rate of 3.5% for 5 years. Cash proceeds were offset by long-term debt repayments of $167,000 during the first nine months of fiscal 2005.

As of June 30, 2006, our principal sources of liquidity consisted of approximately $15.9 million of cash, cash equivalents and restricted cash and $30.0 million available under our $30 million revolving line of credit. The credit facility is with Wells Fargo and bears interest at the bank’s prime lending rate or, at our option, LIBOR plus 2.25%. As of June 30, 2006, the prime lending rate was 8.25%. The revolving credit line expires on March 1, 2008. 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 ratios. We are in compliance with our debt covenants. We are currently in negotiations with the bank for a long-term loan to finance the acquisition of additional manufacturing facilities in the Kalispell area.

As a result of growing our business, we used cash in operating activities of $11.4 million in the first nine-months of fiscal 2006 and of $9.6 million for the year ended September 30, 2005. Cash provided by operations in the third quarter of fiscal 2006 was $7.9 million, primarily from the collection of trade receivables. We have been able to fulfill our working capital and capital expenditure needs through issuances of equity securities and debt financing arrangements.

We believe that we have sufficient cash and cash equivalents, along with funds expected to be generated from operations to meet operating expenses and planned capital expenditures through fiscal 2006 and into the foreseeable future. However, continued growth in shipments of product may require additional funding. We estimate capital expenditures will be between $10.0 million and $15.0 million during fiscal 2006. We currently have an effective shelf registration statement, which registers the offer and sale of up to an aggregate $47 million of our securities. If additional financial resources are required in the future, we expect either to issue securities from the shelf registration statement or to issue other financial instruments, whichever management deems advisable. Of course, there can be no assurance that in the future we will be able to issue additional common stock or other financial instruments on acceptable terms.

Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of operations is based upon our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent 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, stock-based compensation, financing operations, contingencies and litigation. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

During the first quarter of fiscal 2006, we adopted the following new critical accounting policy.

Stock-Based Compensation. In fiscal 2006, we adopted SFAS No. 123(R) using the modified prospective application method and began accounting for stock-based compensation using a fair-value based recognition method. Under the provisions of SFAS No. 123(R), stock-based compensation cost is estimated at the grant date based on the fair-value of the award and is recognized as expense ratably over the requisite service period of the award. Determining the appropriate fair-value model and calculating the fair value of stock-based awards requires considerable judgment, including estimating stock price volatility, expected option life and forfeiture rates. We develop our estimates based on historical data and market information which can change significantly over time. A small change in the estimates used can have a relatively large change in the estimated valuation.

We use the Black-Scholes option valuation model to value employee stock options, consistent with the provisions of SFAS No. 123(R), SEC SAB No. 107 and our prior period pro forma disclosures of net earnings, including stock-based compensation (determined under a fair value method as prescribed by SFAS No. 123). We estimate stock price volatility based on a blended rate of historical volatility and the implied volatility derived from traded options on our stock. Estimated option life and forfeiture rate assumptions are derived from historical data. For stock-based compensation awards with graded vesting that were granted after fiscal 2005, we recognize compensation expense using the straight-line amortization method.

For further information about other critical accounting policies, please refer to the discussion of critical accounting policies in our Form 10-K for the fiscal year ended September 30, 2005.

19

New Accounting Pronouncements

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

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

In July 2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes-an Interpretation of FASB Statement 109,”(FIN 48) which clarifies the accounting for uncertain tax positions. FIN 48 provides that the tax effects from an uncertain tax position be recognized in our financial statements, only if the position is more likely than not of being sustained on audit, based on the technical merits of the position. The provisions of FIN 48 are effective for fiscal years beginning after December 15, 2006. Accordingly, we will adopt FIN 48 in fiscal 2008. We are currently evaluating the impact of adopting FIN 48 on our results of operations and financial condition.

In March 2004, the Emerging Issues Task Force (EITF) reached a consensus on Issue No. 03-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments.” EITF 03-1 provides guidance on other-than-temporary impairment models for marketable debt and equity securities accounted for under SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities,” and SFAS No. 124, “Accounting for Certain Investments Held in Not-for-Profit Organizations,” and non-marketable equity securities accounted for under the cost method. The EITF developed a basic three-step model to evaluate whether an investment is other-than-temporarily impaired. On September 30, 2004, the FASB approved the issuance of FASB Staff Position (FSP) EITF 03-1-1, which delayed the effective date until additional guidance was issued for the application of the recognition and measurement provisions of EITF 03-1 to investments in securities that are impaired. In November 2005, the FASB Staff issued FSP FASB Statement 115-1, which amends FASB Statement No. 115 and addresses the determination as to when an investment is considered impaired, whether that impairment is other-than-temporary, and the measurement of an impairment loss. It also includes accounting considerations subsequent to the recognition of an other than temporary impairment and requires certain disclosures about unrealized losses that have not been recognized as other-than-temporary impairments. We adopted these standards as of January 1, 2006 and their adoption has not had a significant impact on our results of operations or financial position.

In June 2006, the FASB ratified Emerging Issues Task Force (EITF) Issue No. 06-3, “How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement (That Is, Gross Versus Net Presentation)” (EITF 06-3). This standard allows companies to present in their statements of income any taxes assessed by a governmental authority that are directly imposed on revenue-producing transactions between a seller and a customer, such as sales, use, value-added, and some excise taxes, on either a gross (included in revenue and costs) or a net (excluded from revenue) basis. The provisions of this EITF Issue are effective for fiscal years ending after December 15, 2006. Accordingly, we will adopt EITF 06-3 in fiscal 2008. We are currently evaluating the impact of adopting EITF 06-3 but do not expect its adoption to have a material effect on our results of operations and financial condition.

Item 3.   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 June 30, 2006, we had approximately $4.6 million in long-term debt. Our long-term debt bears interest at a fixed rate. As a result, changes in the fixed rate interest market would change the estimated fair value of the fixed rate long-term debt. However, we believe that a 10% change in the long-term interest rate would not have a material effect on our business, financial condition, results of operations or cash flows.

20

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 June 30, 2006, we held forward contracts to sell Japanese Yen with a total face value of $6.9 million and a total market value of $6.7 million and an unrealized gain of approximately $200,000. The impact of movements in currency exchange rates on forward contracts is offset to the extent of receivables denominated in Japanese Yen. The effect of a 10% change in foreign exchange rates on hedged transactions involving Japanese Yen forward exchange contracts and the underlying transactions would not be material to our financial condition, results of operations or cash flows. We do not hold or issue derivative financial instruments for trading or speculative purposes.

Item 4.   Controls and Procedures

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

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

21

PART II — OTHER INFORMATION

Item 1.   Legal Proceedings

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

Item 1A.   Risk Factors

There are no material changes from risk factors as previously disclosed in our Annual Report on Form 10-K for our fiscal year ended September 30, 2005.

Item 6.   Exhibits

      Exhibits

      31.1
      31.2
      32.1
    
      32.2
    
      16.1 Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
     Section 906 of the Sarbanes-Oxley Act of 2002
Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
     Section 906 of the Sarbanes-Oxley Act of 2002
Changes in Registrant's Certifying Accountant, dated June 12, 2006. (1)

(1)    Incorporated herein by reference to Exhibit 16.1 to the Company’s Report on Form 8-K, date of report June 12, 2006.

22

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Date: August 8, 2006 SEMITOOL, INC.
    (Registrant)


By:/s/Larry A. Viano
——————————————
Larry A. Viano
Vice President and Chief Financial Officer
(Principal Accounting and Financial Officer)

23