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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, 2003

OR

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

For the transition period from _______________ to ______________

Commission file number 0-25424

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

655 West Reserve Drive
Kalispell, Montana 59901
(406) 752-2107
(Address of principal executive offices and telephone number)

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 an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). YES X NO __

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

Semitool, Inc.
Form 10-Q
Table of Contents

PART I — FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements

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

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

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

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

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

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

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

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

SEMITOOL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Basis of Presentation

The Company prepared the consolidated financial statements included herein, without audit, pursuant to the rules and regulations of the United States of America Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures, normally included in financial statements prepared in accordance with generally accepted accounting principles, have been condensed or omitted as permitted by such rules and regulations. These consolidated statements should be read in conjunction with the consolidated financial statements and the notes thereto for the year ended September 30, 2002 previously filed with the SEC on Form 10-K.

In our opinion these unaudited financial statements contain all of the adjustments (normal and recurring in nature) necessary to present fairly our consolidated financial position as of June 30, 2003, the consolidated results of operations for the three and nine month periods ended June 30, 2003 and 2002, and the consolidated cash flows for the nine month periods ended June 30, 2003 and 2002. The results of operations for the periods presented may not be indicative of those you may expect for the full year.

Our discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States 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 assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to revenue recognition, bad debts, inventories, investments, intangible assets, income taxes, financing operations, warranty obligations, 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.

New Accounting Pronouncements

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

In January 2003, the FASB issued Interpretation Number 46, “Consolidation of Variable Interest Entities” (FIN 46). This interpretation addresses consolidation by business enterprises of variable interest entities. We do not have variable interest entities, therefore, the interpretation is not expected to have a material effect on the Company’s consolidated financial statements.

In November 2002, the Emerging Issues Task Force reached a consensus on Issue No. 00-21, "Revenue Arrangements with Multiple Deliverables," or EITF 00-21. EITF 00-21 provides guidance on accounting for arrangements that involve the delivery of performance of multiple products, services and/or rights to use assets. We are in the process of assessing the effect of EITF 00-21 and do not expect the adoption of EITF 00-21, which will apply to revenue arrangements entered into in fiscal periods beginning after June 15, 2003, to have a material effect on our financial condition, results of operations or cash flows.

Reclassifications

Certain reclassifications have been made to prior periods to conform to current period presentations.

Note 2. Principles of Consolidation

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

Note 3. Inventories

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

During the three and nine months ended June 30, 2003, $1,197,784 and $2,684,241 of finished goods inventory was transferred to property, plant and equipment.

Note 4. Income Taxes

The components of the Company’s income tax benefit are as follows, (in thousands):

Our ability to realize our recorded deferred tax assets is dependent on a number of factors, including the ability to carry back losses to prior periods, tax planning strategies and the availability of future taxable income. Changes in estimates of future taxable income, the expiration dates of operating loss carry-backs and carry-forwards, and our ability to implement tax planning strategies which are designed to accelerate or increase taxable income will affect the realizability of these deferred tax assets. Specifically, our ability to carry-back losses against previously recognized income will expire on September 30, 2003.

Note 5. Contingencies

On January 16, 2002, we filed suit against Tokyo Electron, Ltd. and its subsidiaries, Tokyo Electron Kyushu Ltd. and Tokyo Electron America, Inc., referred to collectively as TEL, in the United States District Court for the Northern District of California (Case No. C-02-0288 EMC). The suit alleges infringement of our U.S. Patent 5,784,797 entitled “Carrierless Centrifugal Semiconductor Processing System (‘797 Patent), relating to the centrifugal cleaning and processing of semiconductor wafers. The suit seeks injunctive relief, damages for past infringement and increased damages for willful infringement. The defendants answered the complaint denying the claim and seeking to have the patent declared invalid. In addition, on April 16, 2002 the defendants asserted counterclaims alleging our infringement of three patents: U.S. Patent 4,985,722 entitled “Apparatus for Coating a Photo-Resist Film and/or Developing it After Being Exposed”; U.S. Patent 5,446,416 entitled “Resist Processing Method”; and U.S. Patent 5,740,053 entitled “Method of Controlling Monitor Used in Cleaning Machine and Object Processing Machine and Monitor Apparatus”. On July 12, 2002, the defendants withdrew with prejudice their counterclaim alleging infringement of U.S. Patent 5,740,053. The remaining counterclaims seek injunctive relief, damages for past infringement, increased damages for willful infringement and attorneys’ fees. We believe that the counterclaims are without merit and we are contesting the action vigorously. However, given the inherent uncertainty of litigation, there can be no assurance that the ultimate outcome will be in our favor. If TEL were to prevail in its counterclaims, it could have a material adverse effect on our business, financial condition, results of operations and cash flows. Further, regardless of the ultimate outcome, there can be no assurance that the diversion of management’s attention, and any costs associated with any of the lawsuits, will not have a material adverse effect on our business, financial condition, results of operations and cash flows. Trial is scheduled for July 2004.

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

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

Note 6. Loss Per Common Share

The following table sets forth the computation of basic and diluted loss per share (in thousands):

Diluted loss per share excludes the effects of 1,539,895 and 1,402,035 antidilutive stock options at June 30, 2003 and 2002.

Note 7. Warranty Obligations

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

Our obligations for warranty are accrued concurrently with the revenue recognized. We make provisions for our warranty obligations based upon historical costs incurred for such obligations adjusted, as necessary, for current conditions and factors. Due to the significant uncertainties and judgments involved in estimating our warranty obligations, including changing product designs and specifications, the ultimate amount incurred for warranty costs could change in the near term from our current estimate.

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

Note 8. Stock-Based Compensation

In 1994, the Company adopted the “Semitool, Inc. 1994 Stock Option Plan”: The Company accounts for this plan under the recognition and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations. No stock-based employee compensation cost is reflected in net loss, as all options granted under these plans had an exercise price equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net loss and loss per share if the Company had applied the fair value recognition provisions of FASB Statement No. 123, Accounting for Stock-Based Compensation, to stock-based employee compensation (in thousands, except per share amounts):

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

Caution – 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. In some cases, you can identify forward-looking statements by the use of terminology such as “may,” “will,” “expects,” “plans,” “anticipates,” “estimates,” “potential,” “believes,” “can impact,” “continue,” or the negative thereof or other comparable terminology.

These forward-looking statements include without limitation, statements regarding:

• net sales,
• gross margins,
• research and development,
• operating and planned capital requirements for the next 12 months,
• investments in, or acquisition of, complementary businesses, products or technologies,
• the adoption of SFAS No. 143,
• the impact of FASB Interpretation Number 46,
• the impact from a 10% change in long-term interest rates,
• the impact from a 10% change in foreign exchange rates on hedged transactions involving Japanese Yen forward exchange
• contracts,
• the ability to finance activities,
• cost of manufacturing,
• interest expense,
• tax rates,
• future balances,
• the sufficiency of funds, and
• effects of new accounting standards.

Management cautions that forward-looking statements are subject to risks and uncertainties that could cause our actual results to differ materially from those projected in such forward-looking statements. These risks and uncertainties include, but are not limited to, the cyclical nature of the semiconductor industry in general, lack of market acceptance for new products, decreasing demand for our existing products, impact of competitive products and pricing, product development, commercialization and technological difficulties, capacity and supply constraint difficulties and other risks.

Our future results will, in part, depend on our ability to continue to enhance our existing products, to develop and manufacture new products and to finance such activities. There can be no assurance that we will be successful in the introduction, marketing and cost-effective manufacture of any new products or that we will be able to develop and introduce in a timely manner new products or enhancements to our existing products and processes which satisfy customer needs or achieve widespread market acceptance. Further, backlog is not necessarily indicative of future revenue. All forward-looking statements included in this document are made as of the date hereof, based on information available to us as of the date hereof and we undertake no obligation to update forward-looking statements to reflect subsequent events, changed circumstances, or the occurrence of unanticipated events. The reader should also consult the cautionary statements and risk factors listed from time to time in our Reports on Form 10-K, 10-Q, 8-K and other reports filed from time to time with the Securities and Exchange Commission.

Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States 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 assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to revenue recognition, bad debts, inventories, investments, intangible assets, income taxes, financing operations, warranty obligations, contingencies and litigation. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

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

Revenue Recognition. Our revenue recognition policy is significant because revenue is a key component of our results of operations. In addition, revenue recognition determines the timing of certain expenses, such as cost of sales, commissions, warranty and installation expenses. We follow specific and detailed guidelines in measuring revenue; however, certain judgments may be required in the application of our revenue policy.

Warranty. We provide materials and labor warranty coverage on our products for a defined time period. The estimated cost of warranty is recorded concurrent with the recognition of revenue on the specific product. The estimated cost of warranty is based upon the warranty term, historical labor and material costs for each product group. The basis for our estimates is periodically reviewed. Should actual product failure rates, material usage or service delivery costs differ from our estimates, revisions to the estimated warranty liability would be required. These revisions could either positively or negatively impact our results of operations.

Allowance for Doubtful Accounts. We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. If the financial condition of our customers were to deteriorate, due to the cyclicallity of the industries we serve or for other reasons, resulting in an impairment of their ability to make payments, additional allowances may be required.

Inventory Valuation. We write down the carrying value of inventories for estimated obsolescence and marketability based upon assumptions about future demand and market conditions. If actual market conditions are less favorable than those projected by us, additional inventory valuation write-downs may be required.

Investments. We record an investment impairment charge when we believe an investment has experienced a decline in value that is other than temporary. Future adverse changes in market conditions or poor operating results of underlying investments could result in losses or an inability to recover the carrying value of the investments that may not be reflected in an investment’s current carrying value, thereby possibly requiring an impairment charge in the future.

Deferred Tax Assets. We make estimates to determine our deferred tax assets in the amount that we believe is more likely than not to be realized. While we consider future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for the valuation allowance, in the event we were to determine that we were able to realize deferred tax assets in the future in excess of the net recorded amount, an increase in the deferred tax asset would increase net income in the period such determination was made. Likewise, should we determine that we will not be able to realize all or part of our net deferred tax asset in the future, a decrease in the deferred tax asset would decrease net income in the period such determination was made.

Our ability to realize our recorded deferred tax assets is dependent on a number of factors, including the ability to carry back losses to prior periods, tax planning strategies and the availability of future taxable income. Changes in estimates of future taxable income, the expiration dates of operating loss carry-backs and carry-forwards, and our ability to implement tax planning strategies which are designed to accelerate or increase taxable income will affect the realizability of these deferred tax assets. Specifically, our ability to carry-back losses against previously recognized income will expire on September 30, 2003.

Results of Operations

Third Quarter and First Nine Months of Fiscal 2003 Compared with Third Quarter and First Nine Months of Fiscal 2002

Net Sales. Net sales consist of revenues from sales of semiconductor equipment, installation revenue, spare parts and service. Fiscal 2003 third quarter net sales were $25.0 million down 11.8% from $28.4 million in net sales for the same period of fiscal 2002. Net sales for the nine months of fiscal 2003 were $91.0 million up 5.2% from $86.5 million in net sales for the same period in fiscal 2002. Year over year, third quarter net sales were lower, primarily as a result of reduced order backlog and deferred revenues, the timing of shipments and recognition of revenue from customer system acceptances. The relatively flat revenues for both nine month periods reflect the current trend in the industry. The semiconductor equipment industry continues to be depressed from its previous levels.

Gross Margin. Fiscal 2003‘s third quarter gross margin was 47.8% of net sales, compared to 50.3% for the same period in fiscal 2002. The first nine months of fiscal 2003 gross margin was 45.4% of net sales, compared to the first nine months of fiscal 2002 gross margin of 48.2%. In all periods, gross margin reflects the negative effect of unabsorbed overhead costs resulting from our reduced production and shipment levels. We continued to reduce manufacturing costs in the third quarter of fiscal 2003 through staff reductions. Additionally, our gross margin has been, and will continue to be, affected by a variety of factors, including geographical and product sales mix, average selling price of products sold, the cost of manufacturing, servicing and supporting new and enhanced products and inventory obsolescence.

Selling, General and Administrative. Selling, general and administrative (“SG&A”) expenses include employment costs for sales, marketing, customer support and administrative personnel, travel, communications, sales, service and administrative office expenses and professional fees. SG&A expenses were $12.7 million, or 50.5% of net sales, for the third quarter of fiscal 2003 down from $15.3 million, or 54.1% of net sales, for the third quarter of fiscal 2002. SG&A expenses for the first nine months of fiscal 2003 were $40.3 million, or 44.4% of net sales, down from $44.0 million, or 50.9% of net sales in the first nine months of fiscal 2002. Contributing to the year over year decline in SG&A expenses for both the third quarter and first nine months of fiscal 2003 were reduced employee headcount, wage reductions for most employees, and lower travel expenses. Further reducing SG&A expenses in the third quarter of fiscal 2003 as compared to the same period in fiscal 2002, were lower sales commissions due to reduced sales, especially in Asia. Partially offsetting these SG&A costs reductions were legal expenses associated with ongoing litigation brought by us to protect our intellectual property, which were significantly higher in this year’s third quarter and nine month periods.

Research and Development. Research and development (“R&D”) expense consists of employment costs, project materials, laboratory costs, consulting fees, and other costs associated with our product development efforts. R&D expense was $3.5 million or 13.9% of net sales for the third quarter of fiscal 2003 compared to $5.4 million or 19.2% of net sales for the same period in fiscal 2002. For the first nine months of fiscal 2003, R&D expense was $13.4 million or 14.7% of net sales compared to $17.4 million or 20.1% of net sales for the first nine months of fiscal 2002. The first nine months year over year decrease is primarily attributable to reduced staffing levels and related costs. The third quarter and first nine month decreases as compared to the corresponding prior year periods were also affected by the reversal during the third quarter of fiscal 2003 of R&D expenses relating to a settlement of a commercial dispute with an equipment supplier.

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

Other Income (Expense), Net. Net other income (expense) was a net other income of approximately $330,000 in the third quarter of fiscal 2003 and included, among other items, interest income of approximately $246,000 from short-term investments and income tax refunds, and interest expense of $35,000. Net other income was $615,000 in the first nine months of fiscal 2003, which includes among other items, interest income of $492,000, interest expense of $163,000 and the settlement received from a patent infringement claim against a German manufacturer.

Income Taxes. The benefit from income taxes recorded for the third quarter of fiscal 2003 was $1.6 million compared to an income tax benefit of $2.2 million for the same period of fiscal 2002. For the first nine months of fiscal 2003, the income tax benefit was $4.6 million compared to $7.0 million in last year’s first nine months. Income tax benefits and provisions are made based on a blended estimate of federal, state and foreign effective income tax rates which was revised during the quarter to 39.0% in fiscal 2003. It was 38% in fiscal 2002.

Backlog. Consolidated orders backlog decreased 42.1% to $23.5 million at June 30, 2003, from approximately $40.6 million at June 30, 2002.

We include in backlog those customer orders for which we have written customer authorization and for which shipment is scheduled within the next twelve months. Orders are generally subject to cancellation or rescheduling by customers with limited or no cancellation fees. 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 new orders 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 delays.

Deferred Revenue and Deferred Profit. Deferred revenue was $13.1 million at June 30, 2003 compared to $41.4 million at June 30, 2002. Deferred revenue reflects equipment shipped to customers, which has not been accepted by the customer and the revenue has not been recognized by Semitool. Deferred profit is derived from its associated deferred revenue and is included in our current liabilities. At June 30, 2003, deferred profit was $6.4 million compared to $22.5 million at June 30, 2002. If our equipment is not accepted by our customer and the order is cancelled, the deferred revenue and associated deferred profit will not be realized. Deferred revenue is not included in orders backlog.

Liquidity and Capital Resources

As of June 30, 2003, our principal sources of liquidity consisted of approximately $21.3 million of cash and cash equivalents and $4.1 million in marketable securities.

Cash used in operating activities in the nine months ended June 30, 2003 was $13.0 million. This included a net loss of $7.2 million, non-cash depreciation and amortization of $6.3 million and an increase in net operating assets of $12.1 million. The increase in net operating assets was primarily the result of a $4.9 million increase in inventories to support the introduction of our newest single-wafer platform; a $3.8 million increase in income taxes refund receivable; a $3.3 million reduction in accounts payable; a $3.7 million decrease in accrued expenses; and a $13.9 million decrease in deferred profit as a result of customer acceptances exceeding deferred revenue from shipments in the period. The effect of these changes was partially offset by an $17.5 million decrease in accounts receivable. The decrease in accounts receivable, accounts payable and accrued expenses is primarily attributable to declining sales, production and shipments, which reflect the continuing depressed semiconductor equipment industry.

During the first nine months of fiscal 2003, net sales and maturities of marketable securities provided cash of $2.4 million. Offsetting this cash generation were investments in intangible assets associated with our intellectual property and laboratory equipment.

Cash used in financing activities in the first nine months of fiscal 2003 included long-term debt repayments of $563,000, which included the repayment of the commercial bank portion of the mortgage on our Coopersburg, Pennsylvania facility. The low interest rate mortgage loan provided by the Pennsylvania Industrial Development Authority remains in place.

The following commitments as of June 30, 2003 have been included in the consolidated financial statements, with the exception of purchase order commitments and operating lease obligations, which are properly excluded under accounting principles generally accepted in the United States of America. They are disclosed in the following table in order to provide a consolidated picture of our financial position and liquidity. We do not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities. We are not exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in such relationships.

We do not have any other commercial commitments such as lines of credit, standby letters of credit, guarantees, standby repurchase obligations or other commercial commitments.

Semitool has agreements with Mr. Raymon F. Thompson, the Company’s Chairman and Chief Executive Officer, to lease aircraft and an aircraft hangar. The rental rate for fiscal 2003 is approximately $175,000 per month for both the aircraft and the hangar. Since these operating lease commitments are month-to-month, they are not included in the table above.

We believe that at our current operating level, cash and cash equivalents and funds generated from the sale of marketable securities and from future operations, including approximately $10 million in income tax refunds receivable from net operating loss carrybacks expected to be received in the fourth quarter of fiscal 2003, will be sufficient to meet our operating and planned capital requirements for the next twelve months including the spending of approximately $1 to $2 million to purchase property, plant and equipment. Since the semiconductor equipment industry is cyclical, our liquidity requirements need to be sufficient to meet not only our needs during an industry downturn, but also to handle our working capital needs in an upturn. We believe that success in our industry requires substantial capital in order to maintain flexibility and to take advantage of opportunities as they arise. We may, from time to time, as market and business conditions warrant, invest in or acquire complementary businesses, products or technologies. We may sell additional equity or incur debt to fund such activities or to fund greater than anticipated needs and currently have a common stock shelf registration statement in place with an aggregate public offering price of $75 million. The sale of additional equity securities or the issuance of equity securities in a business combination could result in dilution to our shareholders.

New Accounting Pronouncements

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

In January 2003, the FASB issued Interpretation Number 46, “Consolidation of Variable Interest Entities” (FIN 46). This interpretation addresses consolidation by business enterprises of variable interest entities. We do not have any variable interest entities. Therefore, the interpretation is not expected to have a material effect on the Company’s consolidated financial statements.

In November 2002, the Emerging Issues Task Force reached a consensus on Issue No. 00-21, "Revenue Arrangements with Multiple Deliverables," or EITF 00-21. EITF 00-21 provides guidance on accounting for arrangements that involve the delivery of performance of multiple products, services and/or rights to use assets. We are in the process of assessing the effect of EITF 00-21 and do not expect the adoption of EITF 00-21, which will apply to revenue arrangements entered into in fiscal periods beginning after June 15, 2003, to have a material effect on our financial condition, results of operations or cash flows.

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, 2003, we had approximately $2.6 million in fixed-rate long-term debt. Changes in market interest rates would change the estimated fair value of our long-term debt. We believe that a 10% change in long-term interest rates would not have a material effect on our financial condition, results of operations or cash flows.

All of our international operations are subject to inherent risks in conducting business abroad, including fluctuation in the relative value of currencies. As the Yen is our functional currency in Japan, we use forward exchange contracts to reduce our foreign currency exchange risk related to forecasted sales. At June 30, 2003, we held forward contracts to sell Japanese Yen with a face value of $1,186,000, a market value of $1,175,000 and an unrealized gain of $11,000. Additionally, the impact of movements in currency exchange rates on forward contracts are offset to the extent of intercompany receivables denominated in Japanese Yen. We believe 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. Disclosure Controls and Procedures

Our Company's management, including our Chief Executive Officer and Chief Financial Officer, are responsible for establishing and maintaining our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934). Based on an evaluation of such controls and procedures as of June 30, 2003, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective in ensuring that the information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC. A controls system, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the controls system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected. As of the end of the period covered by this report, there have been no significant changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.

The certifications of the Chief Executive Officer and the Chief Financial Officer required in accordance with Section 302 of the Sarbanes-Oxley Act of 2002 are filed as exhibits to this quarterly report on Form 10-Q. This section of the quarterly report on Form 10-Q is the information concerning the controls evaluation referred to in the Section 302 certifications and this information should be read in conjunction with the Section 302 certifications for a more complete understanding of the topics presented.

PART II — OTHER INFORMATION

Item 1. Legal Proceedings

On January 16, 2002, we filed suit against Tokyo Electron, Ltd. and its subsidiaries, Tokyo Electron Kyushu Ltd. and Tokyo Electron America, Inc., referred to collectively as TEL, in the United States District Court for the Northern District of California (Case No. C-02-0288 EMC). The suit alleges infringement of our U.S. Patent 5,784,797 entitled “Carrierless Centrifugal Semiconductor Processing System (‘797 Patent), relating to the centrifugal cleaning and processing of semiconductor wafers. The suit seeks injunctive relief, damages for past infringement and increased damages for willful infringement. The defendants answered the complaint denying the claim and seeking to have the patent declared invalid. In addition, on April 16, 2002 the defendants asserted counterclaims alleging our infringement of three patents: U.S. Patent 4,985,722 entitled “Apparatus for Coating a Photo-Resist Film and/or Developing it After Being Exposed”; U.S. Patent 5,446,416 entitled “Resist Processing Method”; and U.S. Patent 5,740,053 entitled “Method of Controlling Monitor Used in Cleaning Machine and Object Processing Machine and Monitor Apparatus”. On July 12, 2002, the defendants withdrew with prejudice their counterclaim alleging infringement of U.S. Patent 5,740,053. The remaining counterclaims seek injunctive relief, damages for past infringement, increased damages for willful infringement and attorneys’ fees. We believe that the counterclaims are without merit and we are contesting the action vigorously. However, given the inherent uncertainty of litigation, there can be no assurance that the ultimate outcome will be in our favor. If TEL were to prevail in its counterclaims, it could have a material adverse effect on our business, financial condition, results of operations and cash flows. Further, regardless of the ultimate outcome, there can be no assurance that the diversion of management’s attention, and any costs associated with any of the lawsuits, will not have a material adverse effect on our business, financial condition, results of operations and cash flows. Trial is scheduled for July 2004.

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

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

Item 6. Exhibits and Reports on Form 8-K

(a)    Exhibits

        10.41  Employment Agreement between Larry A. Viano and Semitool, Inc. dated June 1, 2003

        10.42  Employment Agreement between Timothy C. Dodkin and Semitool, Inc. dated June 30, 2003

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

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

        Additional Exhibits

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

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

        32.2   Certification of Larry A. Viano, Chief Financial Officer, pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

(b)     Reports on Form 8-K

         Current report on Form 8-K dated June 4, 2003, announcing the resignation of William A. Freeman and appointment of Larry A. Viano as Chief Financial Officer.

         Current report on Form 8-K dated July 10, 2003, announcing the resignation of L. Peter Larson as a member of the Board of Directors and the promotion of Timothy Dodkin
         to the position of Executive Vice President.

        Current report on Form 8-K dated July 29, 2003, reporting third quarter fiscal 2003 results.

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.

SEMITOOL, INC.
(Registrant)

Exhibit 10.41

June 1, 2003

Mr. Larry Viano
351 Harrison Blvd.
Kalispell, MT 59901

Dear Larry,

This letter will confirm your promotion to Chief Financial Officer of Semitool, Inc. as of June 1, 2003 and outline the terms and conditions of your position.

None of the above terms of this letter represent an agreement by you or Semitool, Inc. for any specific length of employment. Either you or Semitool may, at any time, terminate the employment relationship upon notice to the other party. Any controversy or claim arising out of termination of employment shall be settled by arbitration as provided in Montana’s Uniform Arbitration Act. The laws of Montana shall apply to this employment relationship.

Exhibit 10.42

June 30, 2003

Mr. Tim Dodkin
Whitefish, MT 59937

Dear Tim,

Please allow this letter to confirm our conversations regarding your continued role as a key member of the executive management team of Semitool. We want you to continue your current leadership role in global sales, but wish to selectively broaden your involvement with the goal of steering Semitool to an improved market position. In light of your two-year commitment to assume these additional tasks and maintain your primary office residence in the Kalispell head office, we have outlined the terms of these supplemental arrangements.

        Semitool will provide you with scheduled financial assistance (after tax) for relocation, each payment being contingent upon your continuing your primary residence in the head office in Kalispell:

        In the unlikely event you or Semitool determines this working relationship is not to continue and you return to the Cambridge office, we will provide a $100,000.00 relocation package (after tax) to defray the cost of your relocation. This element of the package will be in effect for two years beginning August 1, 2003. This is not intended to be a severance package in the event you leave Semitool.

        In addition, a company car of executive class will be made available for your business and personal use during your tenure at the head office.

3.     Salary. You will remain at your current salary, but have the opportunity to restore your previous salary level upon the Company achieving two consecutive profitable quarters, with additional increases depending on future corporate profitability.

4.     Other Benefits & Considerations. We have also outlined your continued benefits.

        You will continue to receive five weeks annual paid vacation. Vacations are subject to company scheduling.

        You will continue to be eligible for all of Semitool’s 401(k), insurance, and medical plans as described in the attached information.

        In view of your primary domicile and residence being in the U.K., we will pay for your immediate family’s reasonable travel between the U.K. and Kalispell.

        None of the above terms of this offer represents an agreement by yourself or Semitool for any specific length of employment. Either you or Semitool may, at any time, terminate the employment relationship upon notice to the other party.

        Any controversy or claim arising out of the termination of employment shall be settled by arbitration as provided in Montana’s Uniform Arbitration Act. The laws of Montana shall apply to this employment relationship.

Tim, we greatly appreciate the commitment you are making to the continued success of Semitool.

Exhibit 31.1

CERTIFICATION

I, Raymon F. Thompson, certify that:

Exhibit 31.2

CERTIFICATION

I, Larry A. Viano, certify that:

Exhibit 32.1

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

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

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

Exhibit 32.2

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

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

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