Semitool (SMTL) 10-Q 2008 Q2 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 March 31, 2008

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 April 30, 2008
                32,637,407

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 4.

   Item 6.
           
           
 Signatures
           

 Exhibits Financial Information

Condensed Consolidated Financial Statements

Condensed Consolidated Balance Sheets as of March 31, 2008 and September 30, 2007

Condensed Consolidated Statements of Income for the three and six months ended March 31, 2008 and
    March 31, 2007

Condensed Consolidated Statements of Cash Flows for the six months ended March 31, 2008 and
    March 31, 2007

Condensed Consolidated Statements of Comprehensive Income for the three and six months ended
    March 31, 2008 and March 31, 2007

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

Submission of Matters to a Vote of Security Holders

Exhibits

2

PART I — FINANCIAL INFORMATION

Item 1.   Condensed Consolidated Financial Statements

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

	March 31, 2008		September 30, 2007
	(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	11,893	$	16,090
Restricted cash		696		--
Marketable securities		380		--
Trade receivables, less allowance for doubtful accounts of $259 in both periods		83,323		56,999
Inventories		87,044		78,017
Prepaid expenses and other current assets		3,740		3,574
Deferred income taxes		13,143		13,301
Total current assets		200,219		167,981
Property, plant and equipment, net		48,260		49,148
Intangibles, less accumulated amortization of $3,793 and $2,845 in 2008 and 2007		8,065		8,336
Other assets, net		852		864
Total assets	$	257,396	$	226,329

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable	$	20,286		$	12,958
Note payable to bank		9,000			--
Accrued commissions		1,826			1,568
Accrued warranty		8,453			7,781
Accrued payroll and related benefits		7,937			6,859
Income taxes payable		--			247
Other accrued liabilities		3,915			3,688
Customer advances		5,584			1,617
Deferred profit		12,922			8,736
Long-term debt and capital leases, due within one year		1,175			1,158
Total current liabilities		71,098			44,612
Long-term debt and capital leases, due after one year		9,767			10,027
Long-term income taxes payable		2,625			--
Deferred income taxes		2,663			2,837
Total liabilities		86,153			57,476
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,
32,577,117 and 32,055,932 shares issued and outstanding in 2008 and 2007		85,763			83,215
Retained earnings		86,828			86,130
Accumulated other comprehensive loss		(1,348	)		(492	)
Total shareholders' equity		171,243			168,853
Total liabilities and shareholders' equity	$	257,396		$	226,329

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 March 31					Six Months Ended March 31,
	2008		2007			2008		2007
Net sales	$	62,958	$	53,474		$	111,550	$	121,439
Cost of sales		32,886		27,093			57,306		62,293
Gross profit		30,072		26,381			54,244		59,146
Operating expenses:
Selling, general and administrative		20,070		18,721			38,766		38,330
Research and development		6,947		7,266			13,926		13,747
Gain on sale of building		--		--			--		(648	)
Total operating expenses		27,017		25,987			52,692		51,429
Income from operations		3,055		394			1,552		7,717
Other income, net		459		6			906		261
Income before income taxes		3,514		400			2,458		7,978
Income tax provision (benefit)		1,369		(670	)		1,089		1,215
Net income	$	2,145	$	1,070		$	1,369	$	6,763
Earnings per share:
Basic	$	0.07	$	0.03		$	0.04	$	0.21
Diluted	$	0.07	$	0.03		$	0.04	$	0.21
Weighted average common shares outstanding:
Basic		32,300		32,016			32,227		31,985
Diluted		32,481		32,539			32,445		32,510

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)

	Six Months Ended March 31,
	2008			2007
Operating activities:
Net income	$	1,369		$	6,763
Adjustments to reconcile net income to net cash used in operating activities:
(Gain) loss on disposition of assets		233			(515	)
Depreciation and amortization		5,530			5,415
Deferred income taxes		46			(504	)
Stock-based compensation		1,054			555
Marketable securities acquired in sales transaction		(1,280	)		--
Change in:
Restricted cash		696			--
Trade receivables		(25,115	)		(3,297	)
Inventories		(10,274	)		(5,791	)
Prepaid expenses and other current assets		(103	)		50
Other assets, net		28			70
Accounts payable		5,667			(7,120	)
Accrued commissions		243			(751	)
Accrued warranty		631			659
Accrued payroll and related benefits		901			(1,124	)
Income taxes payable		1,681			(1,716	)
Other accrued liabilities		143			405
Customer advances		3,557			(3,899	)
Deferred profit		3,621			2,374
Net cash used in operating activities		(12,764	)		(8,426	)
Investing activities:
Purchases of property, plant and equipment		(942	)		(4,491	)
Increases in intangible assets		(349	)		(626	)
Proceeds from sale of property, plant and equipment		9			1,885
Net cash used in investing activities		(1,282	)		(3,232	)
Financing activities:
Proceeds from exercise of stock options		1,493			947
Borrowings under line of credit and short-term debt		11,961			19,414
Repayments of line of credit and short-term debt		(2,961	)		(19,523	)
Borrowings under long-term debt		--			6,465
Repayments of long-term debt		(927	)		(357	)
Net cash provided by financing activities		9,566			6,946
Effect of exchange rate changes on cash and cash equivalents		283			5
Net decrease in cash and cash equivalents		(4,197	)		(4,707	)
Cash and cash equivalents at beginning of period		16,090			17,347
Cash and cash equivalents at end of period	$	11,893		$	12,640

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 March 31,						Six Months Ended March 31,
	2008			2007			2008			2007
Net income	$	2,145		$	1,070		$	1,369		$	6,763
Net loss on cash flow hedges		(139	)		(31	)		(301	)		(214	)
Unrealized loss on available-for-sale securities		(900	)		--			(900	)		--
Foreign currency translation adjustments		176			40			345			(18	)
Total comprehensive income	$	1,282		$	1,079		$	513		$	6,531

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. The year-end condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America. These condensed consolidated statements should be read in conjunction with the consolidated financial statements and the notes thereto for the year ended September 30, 2007 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 financial position, results of operations and cash flows for the interim periods presented. 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. On an on-going basis, 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, 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.

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 March 2008, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 161, “Disclosures about Derivative Instruments and Hedging Activities – an amendment of SFAS No. 133” (SFAS No. 161). This statement changes the disclosure requirements for derivative instruments and hedging activities. SFAS No. 161 requires the Company to provide enhanced disclosures about (a) how and why it uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” and its related interpretations, and (c) how derivative instruments and related hedged items affect the Company’s financial position, financial performance, and cash flows. SFAS No. 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. SFAS No. 161 encourages, but does not require, comparative disclosures for earlier periods at initial adoption. Accordingly, the Company will adopt SFAS No. 161 in its interim period beginning January 1, 2009. The Company is currently evaluating the potential impact of adoption of SFAS No. 161 on its consolidated financial statement disclosures.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (SFAS No. 157). SFAS No. 157 clarifies the definition of fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. SFAS No. 157 applies under other accounting pronouncements that require or permit fair value measurements. In February 2008, the FASB adopted FASB Staff Position SFAS No. 157-2 “Effective Date of FASB Statement No. 157” (FSP 157-2) delaying the effective date of SFAS No. 157 for one year for all non-financial assets and non-financial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). FSP 157-2 is effective for fiscal years beginning after November 15, 2008 and interim periods within those fiscal years for items falling within the scope of FSP 157-2. Accordingly, Semitool will adopt SFAS No. 157 in the first quarter of fiscal 2010. The Company is currently evaluating the impact this statement will have on its results of operations and financial condition.

7

In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations” (SFAS No. 141(R)) which replaces SFAS No 141. The statement retains the purchase method of accounting for acquisitions, but requires 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. SFAS No. 141(R) 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 SFAS No. 141(R) in the first quarter of fiscal 2010. SFAS No. 141(R) will only impact the Company if it is involved in a business combination.

Stock-Based Compensation

The Company accounts for stock-based compensation in accordance with 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.

Total compensation cost recorded in the second quarter of fiscal 2008 and fiscal 2007, respectively, was $355,000 and $259,000 pre-tax, or $228,000 and $202,000 after tax, an impact of approximately $0.01 per basic and diluted share in both periods. Total compensation cost recorded in the first six months of fiscal 2008 and fiscal 2007, respectively, was $1.1 million and $554,000 pre-tax, or $675,000 and $423,000 after tax, an impact of approximately $0.02 and $0.01 per basic and diluted share.

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. Under the 2004 Plan, 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.

The total shares reserved for issuance under the 2007 Plan are 3,137,950 at March 31, 2008, 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. Restricted stock awards include restricted stock and restricted stock units. As of March 31, 2008, 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 awards are settled with newly issued common shares.

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 following assumptions were used in the Black-Scholes model for the six month periods ending March 31, 2008 and March 31, 2007: expected stock price volatility of 51.6%; risk-free interest rate of 4.4%; and expected life of options of 5.1 years. The following assumptions were used for the three month period ending March 31, 2007: expected stock price volatility of 51.6%; risk-free interest rate of 4.7%; and expected life of 5.1 years. There were no stock options granted in the second quarter of fiscal 2008.

The weighted average grant date fair values based on the Black-Scholes option pricing model for stock options granted in the first six months of fiscal 2008 and fiscal 2007 were $4.77 and $6.41 per share, respectively, and for options granted in the second quarter of fiscal 2007 were $6.47 per share.

8

The following summary shows stock option activity for the first half of fiscal 2008:

	Number of Shares			Weighted- average Exercise Price Per Share
	(In thousands)
Outstanding at September 30, 2007		1,780			$7.69
Options granted		5			9.49
Options exercised		(235	)		6.36
Options forfeited		(14	)		10.51
Outstanding at March 31, 2008		1,536			$7.87
Exercisable at March 31, 2008		1,127			$7.71

As of March 31, 2008, $1.6 million of total unrecognized compensation cost related to non-vested stock options is expected to be recognized over a weighted average period of 1.3 years. The weighted average remaining contractual term for options outstanding and exercisable at March 31, 2008 was 5.6 years and 5.0 years, respectively. The aggregate intrinsic value for options outstanding and exercisable at March 31, 2008 was $1.8 million and $1.5 million, respectively. The total intrinsic value of stock options exercised during the second quarter of fiscal 2008 and fiscal 2007 was $128,000 and $369,000, respectively, and $474,000 and $786,000 during the first six months of fiscal 2008 and fiscal 2007, respectively.

A summary of the Company’s restricted stock award activity for the first half of fiscal 2008 is as follows:

	Number of Shares			Weighted Average Grant Date Fair Value
	(In thousands)
Unvested at September 30, 2007		12			$9.64
Restricted stock awards granted		250			9.06
Restricted stock awards vested		(48	)		9.16
Restricted stock awards forfeited		(16	)		9.35
Unvested at March 31, 2008		198			$9.04

The fair value of the restricted stock awards is calculated based upon the fair market value of the Company’s stock at the date of the grant. As of March 31, 2008, $1.5 million of total unrecognized compensation cost related to restricted stock awards is expected to be recognized over a weighted average period of 1.9 years.

Computation of Earnings Per Share

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

	Three Months Ended March 31,				Six Months Ended March 31,
	2008		2007		2008		2007
Numerator:
Net income used for basic and
diluted earnings per share	$	2,145	$	1,070	$	1,369	$	6,763
Denominator:
Weighted average common shares used for
basic earnings per share		32,300		32,016		32,227		31,985
Effect of dilutive stock options		181		523		218		525
Denominator for diluted earnings per share		32,481		32,539		32,445		32,510

9

Diluted earnings per share excludes the effects of antidilutive stock options of 1,008,281 and 251,724 for the three months ended March 31, 2008 and 2007, respectively, and 977,993 and 245,841 for the six months ended March 31, 2008 and 2007, respectively.

Note 2.  Restricted Cash

Restricted cash consists of a $696,000 customer advance payment held under a bank guarantee until certain contractual requirements are met.

Note 3.  Marketable Securities

Marketable securities consists of one million shares of common stock acquired in a sales transaction. The shares have not been registered under the Securities Act of 1933, as amended. The shares have registration rights attached to them which require registration with the SEC no later than 15 months after the date of the transaction. In valuing the stock, the Company took into consideration marketability and blockage discounts. The Company recognized $1.2 million in revenue on the transaction in the first quarter of fiscal 2008 and deferred revenue related to its remaining performance obligations.

As of the second quarter of fiscal 2008, the shares are subject to reporting under SFAS No. 115 “Accounting for Certain Investments in Debt and Equity Securities” (SFAS No. 115). The shares are classified as Available-for-Sale securities and are marked to market in Other Comprehensive Income (OCI) every quarter.

For individual securities defined as Available-for-Sale, SFAS No. 115 requires the Company to determine whether any 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. During the second quarter of fiscal 2008, the market value of the shares acquired in the first quarter transaction described above declined approximately 70%. The Company reviewed the relevant factors and determined that, at this point, the decline in fair value is a temporary decline in the fair value of the stock and thus recorded the change in fair value in OCI.

Note 4.  Inventories

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

	March 31, 2008		September 30, 2007
Parts and raw materials	$	45,839	$	44,441
Work-in-process		31,021		23,280
Finished goods		10,184		10,296
	$	87,044	$	78,017

For the three and six months ended March 31, 2008, a net $1,703,000 and $2,393,000 of inventory was transferred to property, plant and equipment for testing and laboratory use.

Note 5.  Note Payable to Bank

The Company recently amended its $30 million Credit Agreement with a bank, redefining certain financial covenants and extending the expiration date to March 1, 2010. Borrowings are collateralized by certain assets of the Company and bear interest at the bank’s prime lending rate, 5.25% as of March 31, 2008, or at our option, LIBOR plus 2.25%, or 4.95% 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 an updated measurement of tangible net worth, total liabilities divided by tangible net worth, a maximum borrowing limit based on a funded debt to Earnings before Interest, Taxes, Depreciation and Amortization (EBITDA) ratio which replaces a profitability covenant and a maximum borrowing limit based upon total accounts receivable. The Company was in compliance with its debt covenants as of March 31, 2008. At March 31, 2008, there were $9 million in advances outstanding on the agreement.

10

Note 6.  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):

	Six Months Ended March 31,
	2008			2007
Accrued warranty balance, beginning of period	$	7,781		$	7,368
Accruals for new warranties issued during the period		5,138			5,719
Expirations and changes in estimates to pre-existing warranties		(298	)		813
Warranty labor and materials provided during the period		(4,168	)		(5,873	)
Accrued warranty balance, end of period	$	8,453		$	8,027

Note 7.  Contingencies

The Company is involved in legal proceedings that arise in the ordinary course of its 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 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.

The Company has determined that it inadvertently exported certain pumps and valves that are listed on the U.S. Bureau of Industry and Security’s (BIS) Commerce Control List to countries where there is an export license requirement if an exception is not otherwise available. The countries at issue are Singapore, Taiwan, China, Israel, Malaysia and Liechtenstein. These pumps and valves are used as replacement parts in our equipment, and are eligible for a license exception if they are exported as one-for-one replacement parts directly to the customer. However, in some instances the Company warehoused these parts in the subject countries before they were delivered to the customer or they were exported to the customer in retrofit packages, which makes the export ineligible for the replacement license exception. In response thereto, the Company has submitted a voluntary self-disclosure describing the nature of these shipments to the Office of Export Enforcement of the Department of Commerce (OEE) in accordance with applicable Export Administration Regulations. If it is determined that the Company failed to comply with applicable U.S. export regulations, the OEE could assess penalties, restrict exports of the items or provide an administrative warning to the Company. Because the OEE has not yet responded to our voluntary self-disclosure, the Company does not know whether it will ultimately have to pay any fines or penalties or, if the Company does, whether those fines or penalties will be substantial. In the interim, the Company has applied for licenses to enable it to export these parts in the same manner as it has disclosed to the OEE and it is in receipt of the first of these licenses. However, the receipt of these export licenses does not affect the ability of the OEE to assess fines or sanctions for past violations.

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Note 8.  Income Taxes

The Company’s estimated effective tax rate for fiscal 2008 is 36% as of March 31, 2008 as compared to an estimated effective tax rate for fiscal 2007 of 22% as of March 31, 2007. The Company’s fiscal year 2008 tax rate is higher than in fiscal 2007 due to the expiration of the federal research credit on December 31, 2007.

The first quarter of fiscal year 2007 also included a benefit of $540,000 related to the extension of the federal research credit as it pertained to fiscal year 2006. Legislation to extend the federal research credit was signed into law after the close of our fiscal year 2006 on September 30, 2006; therefore the Company was unable to recognize the full federal research credit in fiscal 2006.

Effective October 1, 2007, the Company adopted the provisions of FASB Interpretation (FIN) No. 48, “Accounting for Uncertainty in Income Taxes-an interpretation of FASB Statement 109” (FIN 48). FIN 48 contains a two-step approach to recognizing and measuring uncertain tax positions accounted for in accordance with SFAS No. 109, “Accounting for Income Taxes.” 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 FIN 48, the Company increased its estimate of net unrecognized tax benefits by approximately $671,000 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 were approximately $2.4 million, substantially all of which would, if recognized, impact the Company’s tax rate. The Company anticipates that the amount of unrecognized tax benefits could change in the next twelve months but does not expect those changes to have a significant impact on the results of operations or the financial position of the Company.

During the six months of fiscal 2008, the total amount of unrecognized tax benefits was as follows:

	Six Months Ended March 31, 2008
	(In thousands)
October 1, 2007 (after adoption of FIN 48)	$	2,421
Year-to-date changes for unrecognized benefits and interest		204
March 31, 2008	$	2,625

As of October 1, 2007, the Company is potentially subject to U.S. federal income tax examinations for the fiscal tax years 2004 through 2007 and to non-U.S. income tax examinations for fiscal tax years 2002 through 2007. In addition, the Company is potentially subject to state income tax examinations for fiscal tax years 2004 through 2007. The Company includes interest and penalties related to unrecognized tax benefits within its provision for taxes. As of the date of adoption of FIN 48, the Company 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 increased approximately $101,000 in the six months ended March 31, 2008.

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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 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, 2007. 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 six month periods ended March 31, 2008.

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.

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 processing technologies for enhanced surface preparation;
• wafer level and other advanced packaging to enable smaller portable products; and
• emerging need for thinner wafers and chip stacking driven by the demand for smaller portable devices.

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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 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 second quarter includes:

• Second quarter fiscal 2008 bookings were $66.2 million, a 75.0% increase over second quarter fiscal 2007 bookings of $37.8 million. Year-to-date bookings were $130.0 million compared with $82.8 million for the comparable period in fiscal 2007.
  
  
• Shipments in the second quarter of fiscal 2008 were $66.8 million as compared with shipments of $59.6 million in the second quarter of fiscal 2007.
  
  
• Net income was $2.1 million on revenues of $63.0 million during the second quarter of fiscal 2008 compared to net income of $1.1 million on revenues of $53.5 million in the second quarter of fiscal 2007.
  
  
• Our gross margin was 47.8% of net sales, down 1.5 percentage points from the 49.3% gross margin we reported in the second quarter of fiscal 2007. Our second quarter gross margin was negatively impacted by sales incentives provided to a major new prospective customer that has subsequently placed additional tool orders with us.
  
  
• Deferred revenue at March 31, 2008 was $21.2 million.
  
  
• Cash, cash equivalents, restricted cash and marketable securities were $13.0 million at March 31, 2008.

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 March 31,						Six Months Ended March 31,
	2008			2007			2008			2007
Net sales		100.0	%		100.0	%		100.0	%		100.0	%
Cost of sales		52.2	%		50.7	%		51.4	%		51.3	%
Gross profit		47.8	%		49.3	%		48.6	%		48.7	%
Operating expenses:
Selling, general and administrative		31.9	%		35.0	%		34.8	%		31.5	%
Research and development		11.0	%		13.6	%		12.4	%		11.3	%
Gain on sale of building		--	%		--	%		--	%		(0.5	)%
Total operating expenses		42.9	%		48.6	%		47.2	%		42.3	%
Income from operations		4.9	%		0.7	%		1.4	%		6.4	%
Other income, net		0.7	%		0.0	%		0.8	%		0.2	%
Income before income taxes		5.6	%		0.7	%		2.2	%		6.6	%
Income tax provision (benefit)		2.2	%		(1.3	)%		1.0	%		1.0	%
Net income		3.4	%		2.0	%		1.2	%		5.6	%

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Second Quarter and First Half of Fiscal 2008 Compared with Second Quarter and First Half of Fiscal 2007

Net Sales

	Three Months Ended				Six Months Ended
	March 31, 2008		March 31, 2007		March 31, 2008		March 31, 2007
	(In thousands)				(In thousands)
Net sales	$	62,958	$	53,474	$	111,550	$	121,439

Net sales consist of revenues from sales of semiconductor equipment, spare parts and service and royalties. Our revenue recognition policy provides that 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 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 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.

Net sales increased $9.5 million for the second quarter of fiscal 2008 as compared to the second quarter of fiscal 2007 reflecting the strengthening of tool order bookings over the past three quarters. In the second quarter of fiscal 2008, revenue from shipments increased approximately 22% as compared to the same period in fiscal 2007. Revenue from tool acceptances increased approximately 42% over fiscal 2007‘s second quarter. Revenue from both shipments and acceptances was weighted toward our Raider platform.

Net sales declined $9.9 million in the first half of fiscal 2008 as compared with the first half of fiscal 2007 as a result of the downturn in the industry. Although second quarter fiscal 2008 revenue increased significantly over the comparable period in fiscal 2007, our first quarter fiscal 2008 revenues of $48.6 million were still impacted by the industry-wide downturn. In the year-to-date comparable periods, revenue from tool shipments declined approximately 10% and revenue from tool acceptances declined approximately 24%.

Geographically, our sales mix year-to-date was weighted toward Asia and North America after being weighted toward Europe in fiscal 2007. Increasing revenue in Asia, including Japan and Korea, offset the decreased capital spending by our European customers in the first six months of fiscal 2008 while North American sales have held constant both in dollar and percentage terms.

Gross Profit

	Three Months Ended						Six Months Ended
	March 31, 2008			March 31, 2007			March 31, 2008			March 31, 2007
	(Dollars in thousands)						(Dollars in thousands)
Gross profit	$	30,072		$	26,381		$	54,244		$	59,146
Gross margin percentage		47.8	%		49.3	%		48.6	%		48.7	%

Gross profit increased by $3.7 million or 14.0% in the second quarter of fiscal 2008 compared with the second quarter of fiscal 2007. Our second quarter fiscal 2008 gross margin percentage declined approximately 1.5 percentage points to 47.8% from the 49.3% reported in the second quarter of fiscal 2007. The gross margin percentage was stable in the year-to-date comparative periods, but due to lower revenues in fiscal 2008, gross profit decreased $4.9 million in the first half of fiscal 2008 as compared with the first half of fiscal 2007.

In the quarterly comparison, gross profit increased in absolute dollars because of higher sales volumes. Our gross profit was negatively impacted by the expense related to sales incentives provided to a major new prospective customer that has subsequently placed additional tool orders with us. Exclusive of that incentive, our gross margin percentage in the second quarter of fiscal 2008 would have been slightly higher than the second quarter fiscal 2007 gross margin percentage. Tool gross margins were benefitted by approximately two percentage points by lower warranty and installation costs as actual warranty costs reported were lower than in the comparable period of fiscal 2007. This savings was offset by lower margins on spares parts and restorations.

Year-to-date, our gross margins decreased in absolute dollars, but remained flat as a percentage of sales. Exclusive of the customer incentive described in the quarterly results, margins would have improved approximately one percentage point primarily due to lower warranty and installation costs reported in the first half of fiscal 2008 as compared with the first half of fiscal 2007.

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Selling, General and Administrative

	Three Months Ended						Six Months Ended
	March 31, 2008			March 31, 2007			March 31, 2008			March 31, 2007
	(Dollars in thousands)						(Dollars in thousands)
Selling, general and administrative	$	20,070		$	18,721		$	38,766		$	38,330
Percentage of net sales		31.9	%		35.0	%		34.8	%		31.5	%

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 North American and international locations. In the second quarter of fiscal 2008, SG&A expenses increased $1.3 million as compared to the second quarter of fiscal 2007 but decreased to 31.9% of net sales from 35.0% of net sales. For the first six months of fiscal 2008, SG&A expenses increased $436,000 as compared to the first six months of fiscal 2007 and increased to 34.8% of net sales from 31.5% of net sales.

Commission expense increased $889,000 in the second quarter of fiscal 2008 as compared with the second quarter of fiscal 2007 and $616,000 in the first six months of fiscal 2008 as compared with the same period of fiscal 2007 related to higher sales volumes in the quarterly comparison. In both comparative periods, commission expense was impacted by commissions paid to a U.S. sales representative who earns commissions at a higher rate than salaried-plus-commission based employees. Employment costs increased approximately 5.2% and 2.7% in the quarterly and year-to-date comparisons, respectively, related to merit increases, the weakness of the U.S. dollar and, in the year-to-date comparison, stock-based compensation expense.

Research and Development

	Three Months Ended						Six Months Ended
	March 31, 2008			March 31, 2007			March 31, 2008			March 31, 2007
	(Dollars in thousands)						(Dollars in thousands)
Research and development	$	6,947		$	7,266		$	13,926		$	13,747
Percentage of net sales		11.0	%		13.6	%		12.4	%		11.3	%

Research and Development (R&D) expense consists of salaries, project materials, laboratory costs, consulting fees and other costs associated with our product development efforts. In the second quarter of fiscal 2008, R&D expense decreased approximately $320,000 or from 13.6% of net sales to 11.0% of net sales in fiscal 2008 as compared with fiscal 2007. In the six month period, R&D expense increased approximately $180,000 or from 11.3% of net sales to 12.4% of net sales.

Lower prototype costs were the primary driver in the decline in R&D expense in the second quarter of fiscal 2008 as compared with the second quarter of fiscal 2007. Prototype costs and general operating expenses decreased approximately 28% from the first half of fiscal 2007 as our efforts were focused on projects related to cost reduction and throughput enhancement for our tools that, if successful, will help lower our customers’ cost of ownership and improve our gross margin. We continued to work on a number of leading edge projects including on-going development of porous silicon for the solar industry. The decrease in prototype and general operating expenses was partially offset by the impact of the continued weakening of the U.S. Dollar and by increased employment costs. Employment costs increased approximately 9% in the second quarter of fiscal 2008 as compared with the second quarter of fiscal 2007 as a result of increasing our staff to improve our wafer process engineering capabilities for our customers and merit increases.

Employment costs were also the driver in the $180,000 increase in R&D expense in the first half of fiscal 2008 as compared with the first half of fiscal 2007. Employment costs increased approximately 12% primarily due to increased stock-based compensation expense, merit increases and recruiting costs. This increase was partially offset by lower prototype and general operating expenses as described in the quarterly comparison.

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.

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Gain on Sale of Building

	Three Months Ended						Six Months Ended
	March 31, 2008			March 31, 2007			March 31, 2008			March 31, 2007
	(Dollars in thousands)						(Dollars in thousands)
Gain on sale of building	$	--		$	--		$	--		$	648
Percentage of net sales		--	%		--	%		--	%		0.5	%

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, Net

	Three Months Ended						Six Months Ended
	March 31, 2008			March 31, 2007			March 31, 2008			March 31, 2007
	(In thousands)						(In thousands)
Interest income	$	51		$	98		$	147		$	162
Interest expense		(113	)		(122	)		(224	)		(218	)
Foreign exchange gain		385			(171	)		663			(160	)
Other		136			201			320			477
Total other income, net	$	459		$	6		$	906		$	261

Net other income increased by approximately $450,000 in the second quarter of fiscal 2008 to a net other income of $459,000 as compared to a net other income of $6,000 in the same period in fiscal 2007 and increased $645,000 to a net other income of $906,000 in the first half of fiscal 2008 as compared with a net other income of $261,000 in the same period in fiscal 2007 primarily related to foreign exchange gains on unhedged intercompany transactions denominated in local currency with our Japanese and Austrian subsidiaries. The Yen to U.S. Dollar rate has declined from approximately 118 to 100 and the U.S. Dollar to Euro rate has declined from 1.34 to 1.58 from March 31, 2007 to March 31, 2008.

Income Taxes

	Three Months Ended					Six Months Ended
	March 31, 2008		March 31, 2007			March 31, 2008		March 31, 2007
	(In thousands)					(In thousands)
Income tax provision (benefit)	$	1,369	$	(670	)	$	1,089	$	1,215

Our estimated effective tax rate for fiscal 2008 is 36% as of March 31, 2008 as compared to an estimated effective rate of 22% as of March 31, 2007. Our fiscal year 2008 tax rate is higher than in fiscal 2007 due to the expiration of the federal research credit on December 31, 2007.

The first quarter of fiscal year 2007 included a benefit of $540,000 related to the extension of the federal research credit as it pertained to our fiscal year 2006. Legislation to extend the federal research credit was signed into law after the close of our fiscal year 2006 on September 30, 2006; therefore we were unable to recognize the full federal research credit in fiscal 2006.

Effective October 1, 2007, we adopted the provisions of FASB Interpretation (FIN) No. 48, “Accounting for Uncertainty in Income Taxes-an interpretation of FASB Statement 109” (FIN 48). FIN 48 contains a two-step approach to recognizing and measuring uncertain tax positions accounted for in accordance with SFAS No. 109, “Accounting for Income Taxes.” 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 FIN 48, we increased our estimated net unrecognized tax benefits by approximately $671,000 and accounted for the increase as a cumulative effect of a change in accounting principle that resulted in a $671,000 decrease to our beginning retained earnings. Total unrecognized tax benefits at October 1, 2007 were approximately $2.4 million, substantially all of which would, if recognized, 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 the six months of fiscal 2008, the total amount of unrecognized tax benefits was as follows:

	Six Months Ended March 31, 2008
	(In thousands)
October 1, 2007 (after adoption of FIN 48)	$	2,421
Year-to-date changes for unrecognized benefits and interest		204
March 31, 2008	$	2,625

As of October 1, 2007, we are potentially subject to U.S. federal income tax examinations for the fiscal tax years 2004 through 2007 and to non-U.S. income tax examinations for fiscal tax years 2002 through 2007. In addition, we are potentially subject to state income tax examinations for fiscal tax years 2004 through 2007. We include interest and penalties related to unrecognized tax benefits within our provision for taxes. As of the date of adoption of FIN 48, 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 increased approximately $101,000 in the six months ended March 31, 2008.

Backlog and Deferred Revenue

	March 31, 2008			March 31, 2007
	(Dollars in millions)
Backlog	$	71.6		$	42.3
Percentage change in backlog year-over-year		69.3	%		(32.4	)%
Deferred revenue	$	21.2		$	15.0
Percentage change in deferred revenue year-over-year		41.3	%		(17.6	)%

Approximately 83% of our current backlog is for Raider tools. Deferred revenue increased $6.2 million at March 31, 2008 as compared with March 31, 2007 primarily because of shipments of Raiders which were classified as new tools, into new customer environments or into Japan, where risk of ownership does not transfer until final customer acceptance, all of which require full deferral of tool revenue until final customer acceptance in accordance with our revenue recognition policy. Current revenue deferrals include all or a part of 31 Raiders as compared with 19 Raiders at March 31, 2007. The percentage of Raiders that represent new tools, new customer environments or shipments to Japan, requiring full deferral of revenue on those tools was approximately the same in both periods.

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

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. 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. We have issued both restricted stock awards and stock options. 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 for all award types recorded in the second quarter of fiscal 2008 and fiscal 2007, respectively, was $355,000 and $259,000 pre-tax, or $228,000 and $202,000 after tax, an impact of approximately $0.01 per basic and diluted share in both periods. Total compensation cost recorded in the first six months of fiscal 2008 and fiscal 2007, respectively, was $1.1 million and $554,000 pre-tax, or $675,000 and $423,000 after tax, an impact of approximately $0.02 and $0.01 per basic and diluted share.

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Liquidity and Capital Resources

Cash used by operating activities was $12.8 million in the first half of fiscal 2008. The primary source of cash was a $5.7 million increase in accounts payable as inventory purchases increased in response to strong bookings in the past three quarters. Customer advances increased $3.6 million due to an advance payment for a tool that will ship in the third quarter; deferred profit increased $3.6 million due to higher sales volumes and non-cash operating expenses, including depreciation and stock-based compensation, totaled $5.6 million. Cash was primarily used to fund increases in trade receivables and inventories. Trade receivables increased $25.1 million primarily due to increased shipments in the past three quarters and the timing of customer payments. Inventories increased $10.3 million as our Work-In-Process inventory grew in response to higher order volumes and expected third quarter shipments.

Investing activities in the first half of fiscal 2008 included $942,000 in purchases of factory equipment and other property. We invested an additional $2.4 million in our development and demonstration laboratories by transferring finished goods inventory to property, plant and equipment. We also invested a net amount of $349,000 in our patent portfolio.

Financing activities in the first half of fiscal 2008 provided cash of $9.6 million, including a $9 million advance on our line of credit that was repaid in early April. Stock option exercises of $1.5 million were partially offset by repayments on long-term debt and capital leases of $927,000.

In the first half of fiscal 2007, cash used by operating activities was $8.4 million. The primary use of cash in the first half of fiscal 2007 was a $7.1 million decrease in accounts payable as our accounts payable pool unwound from higher business activity levels. Inventories increased $5.8 million, primarily attributable to a $5.1 million increase in our raw materials and parts inventory, as raw material and parts usage slowed down in response to lower business activity levels. Trade receivables also increased $3.3 million related to the timing of customer payments. Customer advances decreased $3.9 million as we shipped the tools underlying those advances. The primary sources of cash from operations during the first half of fiscal 2007 were net income of $6.8 million and other non-cash operating activities of $5.0 million.

Investing activities in the first half of fiscal 2007 included $4.5 million in purchases of factory equipment, other property and the expansion and remodeling of our Rhetech facility. We invested an additional $1.9 million in our development and demonstration laboratories by transferring finished goods inventory to property, plant and equipment. These investments in our equipment and facilities were partially offset by proceeds from the sale of property, plant and equipment, primarily a manufacturing facility located near Kalispell, Montana, which we sold for approximately $1.9 million. We also invested a net amount of $626,000 in our patent portfolio.

Financing activities in the first half of fiscal 2007 provided cash of $6.9 million and consisted primarily of $1.6 million in borrowings under long-term debt for our Rhetech expansion and remodeling project and $4.9 million in new long term debt used to finance the acquisition, remodeling and equipping of a manufacturing facility located near Kalispell, Montana. The $4.9 million financing with First Interstate Bank is under a value-added loan program sponsored by the Montana Board of Investments (MBOI). The MBOI participation in 75% of the loan carries an interest rate of 2.5% for the first five years and 6.5% for the second five years of a ten-year term. The 25% of the loan financed by First Interstate Bank has a 7.75% interest rate over the ten-year term. Stock option exercises also provided $947,000 in the first six months of fiscal 2007.

As of March 31, 2008, our principal sources of liquidity consisted of approximately $11.9 million of cash and cash equivalents and our $30.0 million revolving line of credit. The credit facility is with Wells Fargo and bears interest at the bank’s prime lending rate, 5.25% as of March 31, 2008, or at our option, LIBOR plus 2.25%, or 4.95% as of that date. During the second quarter of fiscal 2008, we amended the credit facility with Wells Fargo, extending the expiration date of the credit facility and redefining two of the financial covenants. The revolving credit line now expires on March 1, 2010. 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 which replaces a profitability covenant, and a maximum borrowing limit based on trade receivables. We currently are in compliance with our debt covenants; however, there is no assurance that in the future we will be able to maintain compliance with these covenants so as to ensure availability of the entire $30 million line.

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 2008 and into the foreseeable future. However, continued growth in shipments of product may require additional funding. We estimate capital expenditures will be between $8.0 million and $10.0 million during fiscal 2008. 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 additional common stock or 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.

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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.

There were no changes to our critical accounting policies and estimates in the first six months of fiscal 2008 other than our accounting for income taxes. 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, 2007.

New Accounting Pronouncements

In March 2008, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 161, “Disclosures about Derivative Instruments and Hedging Activities – an amendment of SFAS No. 133” (SFAS No. 161). This statement changes the disclosure requirements for derivative instruments and hedging activities. SFAS No. 161 requires us to provide enhanced disclosures about (a) how and why we use derivative instruments, (b) how derivative instruments and related hedged items are accounted for under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” and its related interpretations, and (c) how derivative instruments and related hedged items affect our financial position, financial performance, and cash flows. SFAS No. 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. SFAS No. 161 encourages, but does not require, comparative disclosures for earlier periods at initial adoption. Accordingly, we will adopt SFAS No. 161 in our interim period beginning January 1, 2009. We are currently evaluating the potential impact of adoption of SFAS No. 161 on our consolidated financial statement disclosures.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (SFAS No. 157). SFAS No. 157 clarifies the definition of fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. SFAS No. 157 applies under other accounting pronouncements that require or permit fair value measurements. In February 2008, the FASB adopted FASB Staff Position SFAS No. 157-2 “Effective Date of FASB Statement No. 157” (FSP 157-2) delaying the effective date of SFAS No. 157 for one year for all non-financial assets and non-financial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). FSP 157-2 is effective for fiscal years beginning after November 15, 2008 and interim periods within those fiscal years for items falling within the scope of FSP 157-2. Accordingly, we will adopt SFAS No. 157 in the first quarter of fiscal 2010. We are currently evaluating the impact this statement will have on our results of operations and financial condition.

In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations” (SFAS No. 141(R)) which replaces SFAS No 141. The statement retains the purchase method of accounting for acquisitions, but requires 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. SFAS No. 141(R) 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 SFAS No. 141(R) in the first quarter of our fiscal 2010. SFAS No. 141(R) will only impact us if we are involved in a business combination.

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 March 31, 2008, we had approximately $10.9 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.

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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 March 31, 2008, we held forward contracts to sell Japanese Yen with a total face value of $7.3 million and a total market value of $8.4 million and a future unrealized loss of approximately $1.1 million. 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-15(e) and 15d-15(e) 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.

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PART II — OTHER INFORMATION

Item 1.   Legal Proceedings

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.

We have determined that we inadvertently exported certain pumps and valves that are listed on the U.S. Bureau of Industry and Security’s (BIS) Commerce Control List to countries where there is an export license requirement if an exception is not otherwise available. The countries at issue are Singapore, Taiwan, China, Israel, Malaysia and Liechtenstein. These pumps and valves are used as replacement parts in our equipment, and are eligible for a license exception if they are exported as one-for-one replacement parts directly to the customer. However, in some instances we warehoused these parts in the subject countries before they were delivered to the customer or they were exported to the customer in retrofit packages, which makes the export ineligible for the replacement license exception. In response thereto, we have submitted a voluntary self-disclosure describing the nature of these shipments to the Office of Export Enforcement of the Department of Commerce (OEE) in accordance with applicable Export Administration Regulations. If it is determined that we failed to comply with applicable U.S. export regulations, the OEE could assess penalties, restrict exports of the items or provide an administrative warning to us. Because the OEE has not yet responded to our voluntary self-disclosure, we do not know whether we will ultimately have to pay any fines or penalties or, if we do, whether those fines or penalties will be substantial. In the interim, we have applied for licenses to enable us to export these parts in the same manner as we have disclosed to the OEE and we are in receipt of the first of these licenses. However, the receipt of these export licenses does not affect the ability of the OEE to assess fines or sanctions for past violations.

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, 2007.

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

At the Company’s Annual Meeting of Shareholders held on March 6, 2008, the following proposals were adopted:

1. To elect eight directors of the Company to serve until the 2009 Annual Meeting of Shareholders or until their successors are elected and qualified. All director nominees received votes, which exceeded the minimum number of votes to be elected. The table below summarizes voting results:

	Votes For		Authority Withheld
Raymon F. Thompson		21,796,426		7,977,717
Howard E. Bateman		29,555,940		218,203
Donald P. Baumann		29,591,158		182,985
Timothy C. Dodkin		21,850,474		7,923,669
Daniel J. Eigeman		29,554,990		219,153
Charles P. Grenier		29,651,138		123,005
Steven C. Stahlberg		29,649,788		124,355
Steven R. Thompson		20,944,333		8,829,810

2. To ratify the appointment of Grant Thornton LLP as the Company’s independent registered public accountants for the fiscal year ending September 30, 2008.

Votes For		Votes Against		Votes Abstain
	29,733,450		29,468		11,225

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Item 6.   Exhibits

      Exhibits

      10.97
           
      31.1
      31.2
      32.1
           
      32.2
            Third Amendment to Credit Agreement between Wells Fargo HSBC Trade Bank, N.A. and the Company, dated
     February 4, 2008.
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

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: May 8, 2008 SEMITOOL, INC.
    (Registrant)



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

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