ROBOTIC VISION SYSTEMS INC - 10-K Annual Report

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K

(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2002

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 0-8623

ROBOTIC VISION SYSTEMS, INC.
(Exact name of registrant as specified in its charter)

DELAWARE 11-2400145
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)

5 SHAWMUT ROAD, CANTON, MASSACHUSETTS 02021
(Address of Principal Executive Offices)

REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE
(781) 302-2439

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, PAR VALUE $.01 PER SHARE
(TITLE OF CLASS)

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

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

The number of shares outstanding of the Registrant's common stock was
61,168,743 as of January 7, 2003.

The aggregate market value of the common stock held by non-affiliates of
the Registrant was $15,681,499 as of January 7, 2003.

DOCUMENTS INCORPORATED BY REFERENCE

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PART I

ITEM 1. DESCRIPTION OF BUSINESS

(a) GENERAL

Robotic Vision Systems, Inc. designs, manufactures and markets machine
vision, automatic identification and related products for the semiconductor
capital equipment, electronics, automotive, aerospace, pharmaceutical and other
industries. Founded in 1976, we use advanced technology including vision-enabled
process equipment, high-performance optics, lighting and advanced hardware and
software to offer a full range of automation solutions. In 1991, we introduced
the first generation of our current principal product, the lead scanner, a
three-dimensional machine vision system, which inspects the physical
characteristics of packaged semiconductors. We believe we currently have the
dominant share of lead scanners used by the semiconductor industry. More
recently, we have become a leader in designing and manufacturing products that
utilize machine vision technology to read two-dimensional bar codes. We operate
through two divisions -- the Semiconductor Equipment Group and the Acuity
CiMatrix division.

- The Semiconductor Equipment Group's primary business is the design,
manufacture and marketing of systems that inspect semiconductor wafers
and assembled chip packages, transfer integrated circuits from one medium
to another and attach solder balls to ball grid array semiconductors.
This group serves the semiconductor capital equipment market.

- The Acuity CiMatrix division designs, manufactures and markets two
primary product lines:

- board-level vision systems used in the general purpose machine vision
market for a variety of industrial applications; and

- two-dimensional bar code reading systems and related products used in
the automatic identification and data collection market to provide
unit-level traceability of products and components for the
semiconductor, aerospace, automotive, printed circuit board,
pharmaceutical, and consumer products businesses.

We were pioneers in the development of machine vision and have utilized our
technology to enter the emerging market for two-dimensional bar code readers. We
developed the technology and own the patents to Data Matrix, a two-dimensional
bar code symbology that can be marked directly onto parts and components. We
placed the Data Matrix symbology into the public domain to the extent necessary
to enable compliance with standards promulgated for various industries. We
retain patent rights for the use of Data Matrix in certain applications,
including biometrics.

The Semiconductor Equipment Group, has facilities in Hauppauge, New York;
Quebec, Canada; New Berlin, Wisconsin and Tucson, Arizona. The Acuity CiMatrix
division is located in Canton, Massachusetts, with additional facilities in
Cherry Hill, New Jersey and Nashua and Weare, New Hampshire.

We were incorporated in New York in 1976 and reincorporated in Delaware in
1977. Our executive offices are located at 5 Shawmut Road, Canton, Massachusetts
02021; our telephone number is (781) 302-2439.

As of December 15, 2001 we sold our one-dimensional material handling
product line ("material handling business"), which had been part of the
Company's Acuity CiMatrix division, to affiliates of SICK AG of Germany
("SICK"). The material handling business had designed, manufactured and marketed
one-dimensional bar code reading and machine vision systems and related products
used in the automatic identification and data collection market to track
packages for the parcel delivery services and material handling industries. The
sales price was $11.5 million, which includes the right to receive $0.5 million
following the expiration of a 16-month escrow to cover indemnification claims.
The costs of the transaction were approximately $0.8 million. The Company
recorded a net gain of $6.9 million in the first quarter of fiscal 2002, related
to the sale of the material handling business. For the period from October 1,
2001 through December 15, 2001, the material handling business had revenues of
approximately $2.8 million and had an operating loss of approximately $0.25
million.

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On May 2, 2002, we completed a private placement, which raised $13.6
million, net of offering expenses. A total of 10.3 million shares of common
stock were sold at $1.46 per share. The placement also included warrants to
purchase up to 2.1 million shares at $1.46 per share on or before June 30, 2002
(the "60-day Warrants"), and warrants to purchase up to 2.6 million shares at
$1.50 per share on or before May 1, 2005 (the "3-year Warrants"). On June 27,
2002, the 60-day Warrants were modified to expire on August 30, 2002 and all
such warrants expired without exercise on that date. The private placement also
included warrants issued to the placement agent (the "Placement Warrants") to
purchase up to 0.6 million shares of common stock at $1.50 per share on or
before May 1, 2005. We may call the $1.50 warrants, effectively forcing
conversion, if the price of our common stock trades above $2.35 per share for
twenty consecutive trading days at any time prior to the warrants' expiration.

While we had not adopted a formal plan as of September 30, 2002 to dispose
of the Semiconductor Equipment Group, in September 2002, we announced that we
were exploring the sale of our Semiconductor Equipment Group, had retained
Needham and Company as our investment advisor, and had started discussions with
multiple interested parties. We believe that the sale of the Semiconductor
Equipment Group is in the best interests of shareholders because of the capital
intensive nature of that business, the heightened cyclicality and
unpredictability of the industry it serves, and the significant attention
required to manage the business. As of January 2003, we are in advanced
discussions with a party interested in acquiring that business, and we continue
more preliminary exchanges with other possible acquirers. We are currently
unable to quantify what the ultimate sale price may be or to predict the closing
date of any such sale.

(b) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS

For the purpose of segment reporting, we consider the business to operate
in two segments servicing the machine vision industry. See Note 12 to the
Consolidated Financial Statements.

(c) NARRATIVE DESCRIPTION OF THE BUSINESS

INDUSTRY OVERVIEW

Machine vision refers to the technology using optical sensors and digital
image processing hardware and software to identify, guide, inspect and measure
objects. Machine vision is important for applications in which human vision is
inadequate due to fatigue, visual acuity or speed. In addition, machine vision
is increasingly used to achieve substantial cost savings and improve product
quality. Many types of manufacturing equipment require machine vision because of
the increasing demands for speed and accuracy in manufacturing processes, as
well as the decreasing size and increasing complexity of items being
manufactured.

The semiconductor capital equipment market represents the largest
application for machine vision products. Machine vision is also extensively used
in general industrial applications such as the manufacture of electronics,
automotive, aerospace, pharmaceutical and consumer products. Increasingly,
machine vision is being utilized in the automatic identification and data
collection market as a complementary or alternative technology to traditional
laser scanning devices for reading bar codes.

SEMICONDUCTOR CAPITAL EQUIPMENT MARKET

Semiconductor capital equipment is sold primarily to companies engaged in
the manufacture of semiconductor devices in order to expand the capacity of
existing facilities as well as to enable the production of more complex, higher
density and smaller designs. Semiconductors, which are also known as chips, ICs,
or integrated circuits, are critical components used to create an increasing
variety of electronic products and systems. The semiconductor manufacturing
process is divided into the front-end fabrication of semiconductor wafers and
the back-end packaging process that involves the assembly, test and inspection
of the integrated circuits. Our semiconductor capital equipment is used
primarily in the back-end of the semiconductor manufacturing process.

According to the Semiconductor Industry Association (SIA), the
semiconductor market expanded from approximately $50.5 billion in 1990 to $204.4
billion in 2000, representing a compound annual growth rate of

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approximately 15% during this period. We believe that this growth resulted
primarily from two factors. The first factor is the proliferation of
semiconductor applications due to the rapidly expanding end-user demand for
faster, smaller and more efficient electronic devices with greater functionality
and reliability coupled with an increasingly broad range of applications. The
second factor is the increasing importance of semiconductors in electronic
systems. We believe that these trends will continue to drive the long-term
growth of semiconductors.

However, the semiconductor market can be cyclical as a result of periodic
oversupply of integrated circuits, resulting in reduction in demand for the
capital equipment used to fabricate, assemble, and inspect chips. This was
evident in 2001 and 2002, as a combination of lower-than-expected end-user
demand and over-production in 2000 combined to decrease semiconductor industry
sales by 32%, to $138.4 billion in 2001, followed by a very modest 1.8% recovery
to $141.0 billion in 2002. Declines, even of this magnitude, are not
predictable. As late as the end of 2000, the SIA was predicting substantial
growth in 2001. The SIA's prediction in November 2001 of modest growth in 2002
(6.3%) turned out to be overly optimistic. In November 2002, the SIA predicted
industry growth of 19.8% for 2003, and 22% growth for 2004. Growth at these
rates would result in semiconductor industry revenues of $206.0 billion in 2004,
slightly exceeding the industry's prior peak.

During downturns such as occurred during 2001 and 2002, semiconductor
companies greatly reduce their levels of capital spending. Semiconductor
production ultimately drives demand for the capital equipment that supplies chip
manufacturers. Like the semiconductor industry forecasts, predictions for future
growth of the semiconductor capital equipment market have proven to be
unreliable. In December 2000, the Semiconductor Equipment Materials Institute
(SEMI), the trade association for suppliers of capital equipment to the
semiconductor industry, predicted growth of 22% in 2001 on top of the record 83%
growth reported in 2000. In reality, equipment shipments declined 41%. In
December 2001, the Semiconductor Equipment Materials Institute predicted flat
revenues in 2002 for equipment manufacturers. By December 2002, that same group
had revised its expectations for 2002 to show an expectation of a further 31%
decline in shipments. Thus, from 2000 revenues of $47.7 billion, industry
shipments have declined 60% to an estimated $18.95 billion in 2002. SEMI's
current prediction, issued in December 2002, is for industry growth of 14.9% in
2003 and 21.3% in 2004. If these predictions prove accurate, industry revenues
in 2004 will be approximately $26.4 billion, 45% below the 2000 peak.

The demand for semiconductor capital equipment is generally driven by two
forces. The first is the need for additional capacity. As more chips are
produced, there is a commensurate need for more equipment to fabricate, test,
package, and inspect those devices. The second force influencing demand for
semiconductor capital equipment is technology change. As new generations of
chips are designed, they call for ever smaller, lighter, and lower-profile
packages. Thus, there is a need for equipment to produce advanced chips that is
independent of overall rises and declines in the semiconductor industry.

The factors that drive the sale of inspection equipment of the kind
manufactured by RVSI include the following:

- the general proliferation of advanced package types, such as ball grid
array and chip-scale packages, and the trend towards miniaturization of
semiconductor devices;

- the desire of semiconductor manufacturers to replace slower, older
inspection technology with newer, faster generations of equipment;

- the desire to maximize capacity and improve efficiencies by minimizing
floor space requirements and reducing the total number of systems
employed;

- the emerging need to inspect previously uninspected classes of
semiconductor devices, such as memory chips, due to their increasing
package complexity; and

- The requirement to inspect semiconductors at additional steps within the
manufacturing process, most notably wafer-scale inspection during the
application of solder balls for flip-chip packages and package visual
inspection during the transfer of assembled chips from trays to tubes or
tape prior to shipment.

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Semiconductor manufacturers are increasingly outsourcing their packaging
requirements to subcontractors. Subcontractors account for an increasing
percentage of semiconductor capital equipment orders as they establish new and
expand existing packaging facilities.

GENERAL PURPOSE MACHINE VISION MARKET

A general-purpose machine vision system usually consists of a personal
computer equipped with special vision processing software and a vision board
connected to a solid-state video camera. The camera is used to acquire a digital
image of the subject in computer memory. The vision processing hardware and
software is used to extract features from the image, verify the identity of the
subject, detect its location or orientation, inspect for surface defects and
perform non-contact measurements. The semiconductor industry is the largest
market for machine vision systems, followed by the electronics industry,
including board-level manufacturing. General-purpose machine vision is also
actively employed in the automotive, aerospace, pharmaceutical and consumer
products markets.

Growth in the general-purpose machine vision market is driven by the need
to guide high-speed automated assembly equipment and inspect manufactured
products. For example, in pharmaceutical manufacturing, machine vision is
employed to inspect and verify packaging, labeling and quantities. In the
automotive industry, machine vision is used in parts identification, component
inspection, assembly verification and robot guidance. We believe that the
utilization of general-purpose machine vision products will continue to increase
as products become smaller and more complex, requiring more accurate
measurements.

According to an October 2002 report by the ARC Advisory Group, the
worldwide market for general-purpose machine vision in 2002 (including machine
vision as applied to the semiconductor industry) was $892 million, and is
forecast to grow at a compound annual rate of 8.9% through 2006, reaching $1.3
billion in that year.

AUTOMATIC IDENTIFICATION AND DATA COLLECTION MARKET

There is also a broader market known as the automatic identification and
data collection (AIDC) market. This market encompasses products that read bar
codes, print bar codes, and collect data from bar code readers; and the labels
on which bar codes are printed. According to a 2002 study by Venture Development
Corporation (VDC), the total market for AIDC in 2001 was $7.6 billion,
representing a 14.5% decrease in revenues from 2000. However, the same VDC
report forecasts 2005 revenues for the industry of $12.0 billion.

For RVSI, the automatic identification and data collection market
encompasses products that mark, read and interpret two-dimensional bar codes,
through either a stationary or hand-held machine-vision-based imager. The 2002
VDC study reported the total market for stationary and hand-held scanners in
2000 was $1.66 billion, with a projected growth to $2.22 billion in 2005. The
vast majority of this market is for linear, or one-dimensional, bar code
scanners. The two-dimensional bar-code imaging segment of this market is not the
subject of any current studies. We believe that the scanning portion of the
automated identification and data collection market will be increasingly
penetrated by machine vision manufacturers, especially in high-density
applications such as printed circuit board manufacturing and parts marking and
tracking.

A traditional linear bar code consists of lines of varying width and
spacing. A laser interprets that width and spacing with the result that a
typical bar code an inch on a side can contain eight to twelve digits. Two
dimensional bar codes represent an important technology improvement in that they
store substantially more information in the same or a smaller space. Two
dimensional bar codes, in turn, can be divided into analog codes and digital
codes. Analog codes, such as Symbol Technologies Inc.'s PDF 417, stack bar codes
on top of one another. Digital bar codes such as RVSI's Data Matrix encode
information in binary form. The latter approach stores a significantly greater
volume of information in the same space, but the code must be read using machine
vision imagers.

The use of machine vision to read binary codes frees the user of the code
from the constraints of high-contrast paper labels or precise offset printing.
Codes can be marked directly onto products via ink-jet printing,

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pin stamping, or laser etching. Because each code is made uniquely, each code
can contain unique information; the serial number of an individual component,
for example. This creates a solution to a problem that has become increasingly
important in commerce: how to individually identify manufactured items that
appear identical, but which have vastly different manufacturing histories. The
industry's name for this concept is unit level traceability.

The requirement for unit level traceability has evolved over time. For
example, microprocessors are extremely valuable and highly portable objects.
They are manufactured by the tens of millions each year, yet most appear
identical to the unaided eye. Several major microprocessor manufacturers
inscribe each processor with a machine readable, two dimensional bar code
containing the serial number of the microprocessor. This program has helped
prevent theft of microprocessors, as well as trace processors that are illegally
re-sold by distributors.

The use of two-dimensional bar codes is not limited to high-value-added
electronics items. The turbine blades of a jet engine, for example, appear
identical but, because they are individually machined, each has a slightly
different weight and center of gravity. These tolerances can be captured in a
two-dimensional bar code and marked on the completed blade. When a jet engine is
being assembled, blades of the proper specification can be identified and placed
in the engine to ensure a perfectly balanced turbine. Another two dimensional
bar code can capture the date of manufacture and installation, so that blades
can be retired upon expiration of their mandated service life.

We invented and patented Data Matrix, but have placed it into the public
domain to the extent necessary to allow its adoption as an internationally
recognized standard. By 2002, Data Matrix was accepted and recognized for use by
nine standards-setting organizations.

While basic camera-based scanners are capable of reading high contrast and
high quality Data Matrix images, we believe that the broad application of Data
Matrix symbology on parts and components requires the imaging and processing
technology typically associated with machine vision. We believe our long history
with Data Matrix gives us a competitive advantage in reading the code under
adverse conditions, as well as in understanding the needs of organizations
implementing unit level traceability programs.

In November 2001 we announced the development of ID Trace, the application
of Data Matrix technology for encoding biometric information such as
photographs, fingerprints, and retinal scans, for use in secure identification.
ID Trace uses a Data Matrix containing approximately one kilobyte of
information, which in turn is read by a machine vision imager.

STRATEGY

Our goal is to grow by continuing to work with leaders in each of our
served markets, anticipating their needs and offering them the most advanced
products and technology. To accomplish this objective, we intend to:

-- Offer the industry's broadest spectrum of machine-vision-based imagers.
While most competitors have a single two dimensional bar code reader as
part of their product offering, we have more than a dozen. We cover a
wide range of price points with fixed-mount and hand-held readers.

-- Treat two dimensional bar code imagers as one part of a broader system
solution that begins with identification of a customer's unit-level
traceability requirement and continues through working with the customer
to implement programs to mark product, read marks, verify that marks
will remain readable, and communicate data collected from imagers over
networks.

-- Continually work with customers on pilot programs that can grow into
major sales opportunities. Each of our customers with an installed base
of more than a million dollars in machine vision imagers began as a
small pilot program.

-- Concentrate on a handful of high growth markets. We have focused our
sales and marketing efforts on industries such as pharmaceutical,
medical devices, electronics manufacturing services, and automo-

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tive. This has allowed us to become experts in critical industry
segments rather than generalists, and also allowed us to leverage off of
success with one customer in the industry to develop others.

PRINCIPAL PRODUCTS

Our products range from state-of-the-art machine vision systems on a
circuit board which can be priced as low as $1,000 to inspection systems with
selling prices greater than $800,000 for bumped-wafers used in advanced
semiconductor packages. Our own sales force sells some of our products; other
products are sold either through manufacturers' representatives or to original
equipment manufacturers for incorporation into customized systems.

SEMICONDUCTOR EQUIPMENT GROUP

Our Semiconductor Equipment Group is comprised of our RVSI Electronics,
RVSI Systemation and RVSI Vanguard subdivisions.

The Electronics subdivision, including Abante Automation, supplies
inspection equipment to the semiconductor industry. Our lead scanning systems,
which can be found in most back-end semiconductor manufacturing lines, generally
perform the final inspection of semiconductor packages prior to their
preparation for shipment to the end-user. Our lead scanning systems offer
automated, high-speed, three-dimensional semiconductor package lead inspection
with the added feature of non-contact scanning of the packages in their shipping
trays, which is known as in-tray scanning. The systems use a laser-based, non-
contact, three-dimensional measurement technique to inspect and sort a wide
variety of semiconductor package types, such as quad flat packs, thin quad flat
packs, chip scale packages, wafer scaled products, ball grid arrays and thin
small outline packs in their carrying trays. The system measurements captured by
our systems include coplanarity, total package height, true position spread and
span, as well as lead angle, width, pitch and gap.

The development of a new kind of integrated circuit, used primarily in high
performance and small form factor applications, has created a new requirement
for high-speed wafer inspection equipment. These ICs, called flip chips,
necessitate ball grid arrays to be applied and inspected at the end of the
front-end fabrication process, and then re-inspected during the back-end
packaging process. Recognizing this need, in 2000 we introduced the WS-series, a
two and three-dimensional machine vision-based inspection system. We believe
that our WS-1000, WS-2000, WS-2500 and WS-3000 are the most widely employed
bumped wafer inspection equipment in use today, and provide the semiconductor
industry with the broadest range of products for bumped wafer inspection.

Our Systemation subdivision offers semiconductor handling systems,
including tape and reel component processing systems, designed to transfer and
inspect a variety of integrated circuit packages. Systemation's tape and reel
packaging product can be integrated into our lead scanners to collect acceptable
products and place them into packaging media as required by different customers.
We believe that Systemation's expertise in designing and manufacturing systems
that transfer semiconductors between media while providing camera-based machine
vision inspection enables us to further expand the breadth of our product
offerings to the semiconductor market.

Our Vanguard subdivision is a supplier of ball attach equipment used in
ball grid array and chip scale package assembly for the semiconductor and
connection industries. These devices attach solder balls to the integrated
circuit in order to generate a medium which, when heated, will connect the
package to the printed circuit board. Vanguard's products are deployed on the
back-end manufacturing line prior to our lead scanner testing device.

ACUITY CIMATRIX DIVISION

The Acuity CiMatrix division designs, manufactures and markets
two-dimensional machine vision systems and lighting products as well as
two-dimensional data collection products and bar code reading systems. These
products are used by a broad range of businesses, including customers in the
semiconductor,

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electronics, automotive, pharmaceutical and consumer products industries. The
Acuity CiMatrix division also supplies certain machine vision products to our
Semiconductor Equipment Group.

Our Acuity CiMatrix machine vision systems use processor chips optimized
for vision, software and solid-state video cameras to perform functions such as
measurement, flaw detection and inspection of manufactured products. These
products examine an image of a manufactured product in order to ascertain
physical characteristics, identify deviations and check for identification. For
the general-purpose machine vision market, our Acuity CiMatrix division offers
single-board machine vision systems, which can be tailored to the needs of
specific industries via software modules. The vertical industries currently
served include semiconductor, electronics, automotive and
packaging/pharmaceutical. Acuity CiMatrix's principal machine vision product,
Visionscape, was first introduced in 1998 and today encompasses a family of
board-level machine vision systems. Visionscape is a machine vision product
platform on a single printed circuit board for computers using the Windows
operating system. This product family is designed to meet the needs of original
equipment manufacturers, which incorporate vision products into their systems,
as well as for direct use by manufacturers on their factory floor.

Our Acuity CiMatrix data collection and bar code reading systems use
machine vision to read and collect data from one- and two-dimensional bar codes
for purposes such as process control, traceability and security. Our product
offerings also include both fixed and hand-held two-dimensional camera-based
readers.

In two-dimensional applications, we have concentrated our efforts on
scanning systems compatible with Data Matrix, a symbology that we believe has a
number of advantages over other two-dimensional bar codes in the public domain.
The smaller size of the Data Matrix symbology enables it to be used in
miniaturized applications. Data Matrix is read using machine vision as compared
to traditional laser scanning systems. The machine vision scanning process
enables Data Matrix to exhibit a wider span of character integrity and, hence,
enables Data Matrix to be applied to a variety of surfaces. We believe that
these characteristics make Data Matrix the preferred symbology for applications
in which components need to be marked directly, such as in parts identification.
For example, as part of a move to a paperless manufacturing process, one of our
customers, an aircraft engine manufacturer, is now applying two-dimensional bar
codes to critical engine components. We believe that on part marking will become
increasingly common due to the trend toward reducing electronic component sizes
and the desire to improve the traceability of each component.

By incorporating our expertise in machine vision with our innovations in
bar code technologies, we are uniquely positioned to offer integrated solutions
to manufacturers in our served markets.

MANUFACTURING

Our manufacturing strategy is to produce internally only those components
that possess a critical technology and to subcontract all other components. Our
production facilities are capable of fabricating and assembling total electronic
and electromechanical systems and subsystems. Facilities include assembly and
wiring operations that have the ability to produce intricate electronic
subassemblies, as well as complex wiring harnesses.

We manufacture products for the Semiconductor Equipment Group in Hauppauge,
New York, Tucson, Arizona and New Berlin, Wisconsin. We manufacture products for
the Acuity CiMatrix division in Nashua and Weare, New Hampshire. We maintain
comprehensive test and inspection programs to ensure that all systems meet
exacting customer requirements for performance and quality workmanship prior to
delivery.

MARKETING AND SALES

Our Semiconductor Equipment Group's marketing strategy focuses on
cultivating long-term relationships with the leading manufacturers of electronic
and semiconductor inspection and quality control equipment. Its marketing
efforts rely heavily on direct sales. The selling cycle for products, generally,
is between six to nine months from initial customer contact to closure. A
lengthier process is often the case in the purchase of an initial unit.
Subsequent purchases require less time and often result in multiple orders.
Group sales activities in the domestic market are handled by direct sales
personnel. The Semiconductor Equipment Group also

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maintains sales capabilities in both Europe and the Far East through independent
sales representatives and distributors, providing access to all major markets
for electronic and semiconductor test equipment. Sales and technical support
offices are maintained in Singapore.

The Acuity CiMatrix division markets its products through a combination of
direct sales personnel, distributors and system integrators. For sales made
through distributors, the Acuity CiMatrix division supports these activities
with direct sales management and technical support personnel. The Acuity
CiMatrix division maintains sales and technical support offices in various
locations in the United States, as well as in the United Kingdom.

ENGINEERING, PRODUCT DEVELOPMENT AND RESEARCH

We believe that our engineering, product development and research functions
are critical to our ability to maintain our leadership position in our current
markets and to develop new products. As of September 30, 2002 we employed over
100 people who are dedicated to engineering, product development and research
functions.

Our research and development efforts over recent years have been largely
devoted to continued development of advanced two-dimensional and
three-dimensional vision technology and applications software for use in various
inspection and process control automation. Research and development
expenditures, net of capitalized software development costs, were $18.6 million,
$28.4 million, and $27.0 million for the years ended September 30, 2002, 2001,
and 2000, respectively. In the fiscal years ended September 30, 2002, 2001, and
2000, we capitalized $1.4 million, $3.4 million, and $4.2 million, respectively,
of our software development costs in accordance with the provisions of Statement
of Financial Accounting Standards No. 86.

SOURCES OF SUPPLY

To support our internal operations and to extend our overall capacity, we
purchase a wide variety of components, assemblies and services from proven
outside manufacturers, distributors and service organizations. We have
experienced some difficulty in obtaining adequate supplies to perform under our
contracts as a result of our limited cash availability.

A number of our components and sub-systems are purchased from single
sources. We believe that alternative sources of supply could be obtained, if
necessary, without major interruption in production. In addition, certain
products or sub-systems developed and marketed by the Acuity CiMatrix division
are incorporated into the Semiconductor Equipment Group's product offerings.

PROPRIETARY PROTECTION

At September 30, 2002, we owned over 120 issued U.S. patents, with
expiration dates ranging from March 2003 to May 2020 and we owned more than 50
foreign patents. We also have various U.S. and foreign registered trademarks.

We do not believe that our present operations are materially dependent upon
the proprietary protection that may be available to us by reason of any one or
more of such patents. Moreover, as our patent position is largely untested, we
can give no assurance as to the effectiveness of the protection afforded by our
patent rights.

CUSTOMERS

One company accounted for 10% of our revenues during the fiscal years ended
September 30, 2002 and 2001. No customers accounted for more than 10% of sales
during the fiscal year ended September 30, 2000.

BOOKINGS AND BACKLOG

We define our bookings during a fiscal period as incoming orders
deliverable to customers in the next eighteen months less cancellations. For the
twelve months ended September 30, 2002, bookings were

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$58.1 million. This compares to bookings of $71.4 million for the twelve months
ended September 30, 2001. The decline in our bookings in fiscal 2002 is a
reflection of reduced demand by semiconductor industry customers, coupled with a
generally uncertain climate for capital equipment expenditures for all
industries. As a general rule, we ship most products in the quarter in which
orders are received.

At September 30, 2002 our backlog was $12.9 million, as compared to $15.3
million at September 30, 2001. We believe that most of our backlog at September
30, 2002 will be delivered in the next 12 months. The change in our backlog in
these periods is a reflection of short-term business levels and customer lead
times. Because orders in backlog are subject to cancellation or indefinite
delay, we do not believe that our backlog at any particular time is necessarily
indicative of our long-term future business.

COMPETITION

We believe that machine vision has evolved over the past several years into
a new industry, in which a number of machine vision-based firms have developed
successful industrial applications for the technology. We are aware that a large
number of companies, estimated to be upward of 100 firms, entered the industry
in the 1980's and that most of these were small private concerns. Over the last
several years the number of competitors has narrowed to fewer than 25. We
believe this is attributable, to a large extent, to consolidation within the
industry. Our principal competitors are ICOS Vision Systems NV in semiconductor
inspection, August Technology, Inc. in bumped wafer inspection, Ismeca Europe
S.A. in tape and reel handlers and Cognex in machine vision. We believe that we
are a significant competitor in the machine vision industry based upon the
breadth of our product lines and our customer base. The pricing of our
semiconductor inspection systems is somewhat higher, generally, than that of our
competitors, but we do not regard this factor as a significant competitive
disadvantage as customers have historically demonstrated their willingness to
pay our asking prices to obtain features that are unavailable in our
competitors' product offerings or result in lower cost of ownership over the
life of the product.

EMPLOYEES

At September 30, 2002 we employed 315 persons, of whom 129 were engineering
and other technical personnel. None of our employees is a member of a labor
union.

(d) FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES

Revenues from unaffiliated customers generated by our European subsidiaries
were $1.8 million, $4.5 million and $8.2 million for the years ended September
30, 2002, 2001 and 2000, respectively.

Total revenues to customers outside the U.S. were $32.5 million, $65.6
million and $158.2 million for the years ended September 30, 2002, 2001 and
2000, respectively.

ITEM 2. PROPERTIES

Our executive offices, as well as our Acuity CiMatrix division, are located
in a 60,000 square foot facility in Canton, Massachusetts. In connection with
the sale of our material handling business as of December 15, 2001, we subleased
a portion of the Canton facility totaling approximately 34,100 square feet, to
SICK. The Acuity CiMatrix division also maintains a 34,000 square foot
engineering facility in Nashua, New Hampshire and its Northeast Robotics
operations are located in an 18,000 square foot facility in Weare, New
Hampshire. Auto Image ID operations are located in an 8,000 square foot facility
in Cherry Hill, New Jersey. Our Electronics subdivision is located in a 65,000
square foot facility located in Hauppauge, New York. Systemation's operations
are located in a 90,000 square foot facility located in New Berlin, Wisconsin
and Vanguard's operations are located in a 38,000 square foot facility in
Tucson, Arizona. Our Abante Automation operations are located in a 4,600 square
foot facility in Quebec, Canada.

We also maintain sales and service offices across the United States to
support our various operations. The Acuity CiMatrix division has sales and
service offices in the United Kingdom and France. We maintain sales and service
offices in Singapore and Malaysia to support our Semiconductor Equipment group's
operations.

9

All of our facilities are leased, with annual rental payments of
approximately $2.9 million and lease expiration dates ranging from fiscal 2003
to 2011.

ITEM 3. LEGAL PROCEEDINGS

A number of purported securities class actions were filed beginning on or
about June 11, 2001 against us, Pat V. Costa, Chief Executive Officer, and Frank
Edwards, our former Chief Financial Officer, in the Federal District Court for
the District of Massachusetts. The consolidated action is now pending as In Re
Robotic Vision Systems, Inc. Securities Litigation, Master File No. 01-CV-10876
(RGS). The plaintiffs seek damages for alleged false and misleading statements
made prior to our announcement that we would restate our financial results for
fiscal year 2000 and the first quarter of fiscal year 2001. On December 6, 2002,
the parties agreed in principle to settle this matter, subject to the parties
drafting and executing appropriate settlement documents, conducting certain
limited confirmatory discovery and obtaining court approval. We expect the
settlement amount to be covered by proceeds from our directors and officers
liability insurance policy.

In May 2002, a purported shareholder derivative action entitled Mead Ann
Krim v. Pat V. Costa, et al., Civil Action No. 19604-NC, was filed in the Court
of Chancery of the State of Delaware against the members of our Board of
Directors, and against us as a nominal defendant. The complaint seeks damages to
us as a result of the statements at issue in the pending purported securities
class actions. The individual defendants deny the wrongdoing alleged and intend
to vigorously defend the litigation.

In March 2002, we learned that the staff of the Securities and Exchange
Commission had commenced a formal investigation into the statements that
preceded, and the accounting practices that led to, our May 2001 restatement of
our financial results for fiscal year 2000 and for the first quarter of fiscal
2001. We are cooperating in the investigation.

In September 2002, McDonald Investments Inc. filed a demand for arbitration
with the American Arbitration Association claiming entitlement to certain
advisory fees in connection with the financing we completed in May 2002. The
matter remains at a preliminary stage. We believe that this claim is without
merit and intend to defend vigorously against it.

In addition, we are subject to legal proceedings that arise in the ordinary
course of business, but we do not believe these claims will have a material
adverse effect on our consolidated position.

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

None

10

PART II

ITEM 5. MARKET FOR THE COMMON STOCK AND RELATED SECURITY HOLDER MATTERS

(a) MARKET INFORMATION

Our common stock is quoted on The Nasdaq Small Cap Market under the symbol
ROBV. The following table sets forth the high and low closing prices for our
common stock for the periods indicated:

On January 7, 2003 the closing price of our common stock was $0.26 per
share.

(b) HOLDERS

The number of holders of record of our common stock as of January 7, 2003
was approximately 3,300.

(c) DIVIDENDS

We have never paid any cash dividends and intend, for the foreseeable
future, to retain any future earnings for the development of our business. Our
bank credit agreement restricts our ability to pay dividends. Our future
dividend policy will be determined by our board of directors on the basis of
various factors, including our results of operations and financial condition.

11

ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA

The following selected consolidated financial data should be read in
conjunction with our consolidated financial statements including the
accompanying notes and Management's Discussion and Analysis of Financial
Condition and Results of Operations, both appearing elsewhere in this report.
The accompanying financial data for fiscal year ended September 30, 2002 has
been prepared assuming the Company will continue as a going concern (see Note 1
to the Consolidated Financial Statements). The data as of September 30, 2002 and
2001 and for each of the three prior years ended September 30, have been derived
from, and should be read in conjunction with, our audited consolidated financial
statements and accompanying notes, which are contained elsewhere in this report.
The Balance Sheet Data as of September 30, 2000, 1999 and 1998 and the Statement
of Operations Data for years September 30, 2000, 1999 and 1998 have been derived
from our audited financial statements, which are not contained in this Report.

- ---------------

(1) The effect of adopting Staff Accounting Bulletin No. 101 (SAB 101) was to
increase fiscal 2001 revenues by $15,197 and to reduce the loss before
cumulative effect of the accounting change by $8,107 (or $0.23 per share).

12

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

OVERVIEW

Our business activity involves the development, manufacture, marketing and
servicing of machine vision equipment for a variety of industries, including the
global semiconductor industry. Demand for products can change significantly from
period to period as a result of numerous factors including, but not limited to,
changes in global economic conditions, supply and demand for semiconductors,
changes in semiconductor manufacturing capacity and processes and competitive
product offerings. Due to these and other factors, our historical results of
operations including the periods described herein may not be indicative of
future operating results.

As of December 15, 2001, we sold our one-dimensional material handling
product line ("material handling business"), which had been part of our Acuity
CiMatrix division, to affiliates of SICK AG of Germany for approximately $11.5
million. This price includes the right to receive $0.5 million following the
expiration of a 16-month escrow to cover indemnification claims. The costs of
this transaction were approximately $0.8 million. For the period from October 1,
2001 through December 15, 2001, the material handling business had revenues of
approximately $2.8 million and had an operating loss of approximately $0.25
million. The material handling business had revenues and operating income of
approximately $16.1 million and $0.2 million, respectively, in fiscal 2001. The
sale of the business reduced our revenues and operating expenses in future
quarters.

On May 2, 2002, we completed a private placement, which raised $13.5
million, net of offering expenses. A total of 10.3 million shares of common
stock were sold at $1.46 per share. The placement also included warrants to
purchase up to 2.1 million shares at $1.46 per share on or before June 30, 2002
(the "60-day Warrants"), and warrants to purchase up to 2.6 million shares at
$1.50 per share on or before May 1, 2005 (the "3-year Warrants"). On June 27,
2002, the 60-day Warrants were modified to expire on August 30, 2002 and all
such warrants expired without exercise on that date. The private placement also
included warrants issued to the placement agent (the "Placement Warrants") to
purchase up to 0.6 million shares of common stock at $1.50 per share on or
before May 1, 2005. We may call the $1.50 warrants, effectively forcing
conversion, if the price of our common stock trades above $2.35 per share for
twenty consecutive trading days at any time prior to the warrants' expiration.

The above-described transactions served to provide cash utilized to fund
the ongoing business in 2002.

We incurred operating losses amounting to $41.8 million and $104.4 million
in fiscal 2002 and 2001, respectively. Net cash used in operating activities
amounted to $25.9 million, $12.6 million and $21.2 million in fiscal 2002, 2001
and 2000, respectively. In addition we are not in compliance with certain
covenants of our revolving credit facility, which expires in April 2003.
Further, we have debt payments past due, which relate to prior years'
acquisitions. These conditions raise substantial doubt about our ability to
continue as a going concern.

Our consolidated financial statements have been prepared assuming that we
will continue as a going concern. However, because of continuing negative cash
flow, limited credit facilities, and the uncertainty of the sale of our
Semiconductor Equipment Group, there is no certainty that we will have the
financial resources to continue in business.

We have prepared and are executing a plan to address our financial needs.
We recognize that we cannot continue to sustain the losses of both our
Semiconductor Equipment Group and Acuity CiMatrix Division. Accordingly, while
we had not adopted a formal plan as of September 30, 2002 to dispose of the
Semiconductor Equipment Group, on September 17, 2002 we announced that we were
exploring the sale of our Semiconductor Equipment Group. Also, we continue to
implement plans to control operating expenses, inventory levels, and capital
expenditures as well as plans to manage accounts payable and accounts receivable
to enhance cash flows. As of January 2003, we are in advanced discussions with a
party interested in acquiring that business, and we continue more preliminary
exchanges with other possible acquirers. The sale of the Semiconductor Equipment
Group, if completed, should be sufficient to pay down our debt, reduce accounts
payable, and provide working capital for our remaining businesses. Upon such
sale, the assets supporting our current revolving credit agreement will be
substantially reduced and we cannot be assured of having a line of

13

credit in place. Moreover, the continuation of our current line of credit is
conditioned upon obtaining waivers for the events of noncompliance of that
facility. Thus, our financial planning must include a replacement of our current
revolving credit agreement, additional equity financing or generation of
sufficient working capital to operate without a credit facility.

Because the proceeds of the prospective sale are uncertain, and because
there will inevitably be a delay between the reaching of a definitive agreement
and the completion of a sale of the division, we also recognize that we will
likely require a supplemental infusion of capital. This capital infusion may be
required either for some short-term period prior to the completion of a sale of
the division, or for long-term self-sufficiency of working capital. To that end,
on December 4, 2002, we issued a 9% Convertible Senior Note in the amount of
$0.5 million, for value received, to Pat V. Costa. Our plan also calls for
continued actions to control operating expenses, inventory levels, and capital
expenses; as well as to manage accounts payable and accounts receivable to
enhance cash flow.

If we do not succeed in selling the Semiconductor Equipment Group, we will
have insufficient working capital to continue in business. While we believe that
we will complete such a sale, there can be no assurance that the proceeds of a
sale will be sufficient to finance our remaining businesses. In that event, we
would be forced either to seek additional financing or to sell some or all of
the remaining product lines of Acuity CiMatrix.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Management's Discussion and Analysis of Financial Condition and Results of
Operations discusses 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
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and the disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period.

Management believes the following critical accounting policies affect the
more significant judgments and estimates used in the preparation of the
consolidated financial statements. On an on-going basis, management evaluates
its estimates and judgments, including those related to the allowance for
doubtful accounts, inventories, intangible assets, income taxes, warranty
obligations, restructuring costs, and contingencies and litigation. Management
bases its estimates and judgments on historical experience and on various other
factors that are believed to be reasonable under the circumstances. These
estimates form the basis for making judgments about the carrying values of
assets and liabilities. Actual results may differ from these estimates. We have
identified certain critical accounting policies, which are described below:

REVENUE RECOGNITION

In fiscal 2001, we changed our method of accounting for revenue on certain
semiconductor equipment sales to comply with SEC Staff Accounting Bulletin (SAB)
No. 101, "Revenue Recognition in Financial Statements." Previously, we generally
recognized revenue upon shipment to the customer, and accrued the cost of
providing any undelivered services associated with the equipment at the time of
revenue recognition. Under the new accounting method, adopted as of October 1,
2000, we now recognize revenue based on the type of equipment that is sold and
the terms and conditions of the underlying sales contracts.

We defer all or a portion of the gross profit on revenue transactions that
include acceptance provisions. If the amount due upon acceptance is 20% or less
of the total sales amount, we recognize as revenue the amount due upon shipment.
We record a receivable for 100% of the sales amount and the entire cost of the
product upon shipment. The portion of the receivable that is due upon acceptance
is recorded as deferred gross profit until such time as final acceptance is
received. When client acceptance is received, the deferred gross profit is
recognized in the statement of operations.

If the amount due upon acceptance is more than 20% of the total sales
amount, we recognize no revenue on the transaction. We record a receivable for
100% of the sales amount and remove 100% of the cost from

14

inventory. The entire receivable and entire inventory balance is then recorded
with an offsetting adjustment to deferred gross profit. When client acceptance
is received, the deferred gross profit is recognized in the statement of
operations.

PROVIDING FOR BAD DEBTS

We maintain an allowance for doubtful accounts for estimated losses
resulting from the inability of our customers to make required payments. These
estimated allowances are periodically reviewed, on a case by case basis,
analyzing the customers' payment history and information regarding customers'
creditworthiness known to us. In addition, we record a reserve based on the size
and age of all receivable balances against which we do not have specific
reserves. If the financial condition of our customers was to deteriorate,
resulting in their inability to make payments, additional allowances may be
required.

INVENTORY VALUATION

We reduce the carrying value of our inventory for estimated obsolescence or
excess inventory by the difference between the cost of inventory and its
estimated net realizable value based upon assumptions about future demand and
market conditions. There can be no assurance that we will not have to take
additional inventory provisions in the future, based upon a number of factors
including: changing business conditions; shortened product life cycles; the
introduction of new products and the effect of new technology.

GOODWILL AND OTHER LONG-LIVED ASSET VALUATIONS

Our business acquisitions have resulted in goodwill and other intangible
assets, which affect the amount of future period amortization expense and
possible impairment expense that we will incur. We record impairment charges
when we believe an asset has experienced a decline in value that is other than
temporary. Future adverse changes in market conditions or poor operating results
of underlying assets could result in losses or an inability to recover the
carrying value of the assets that may not be reflected in an asset's current
carrying value, thereby possibly requiring an impairment charge in the future.
We are required to adopt Statement of Financial Accounting Standards (SFAS) No.
142, "Goodwill and Other Intangible Assets" on October 1, 2002. The adoption of
the standard will require that we discontinue the amortization of goodwill and
that we perform a transitional impairment analysis of the goodwill that we have
recorded. We will then be required to update that analysis on an annual basis.
We recorded approximately $0.4 million, $0.9 million and $0.6 million in
goodwill amortization during fiscal 2002, 2001 and 2000, respectively. At
September 30, 2002, the amount of goodwill subject to the future potential
impairment totaled approximately $1.6 million.

INCOME TAX PROVISION

We record a valuation allowance against deferred tax assets when we believe
that it is more likely than not that these assets will not be realized. Because
of our recurring losses and negative cash flows, we have provided a valuation
allowance against all deferred taxes as of September 30, 2002 and 2001.

PROVIDING FOR WARRANTIES

We estimate the cost of product warranties at the time revenue is
recognized. While we engage in extensive product quality programs and processes,
including actively monitoring and evaluating the quality of our component
suppliers, our warranty obligation is affected by product failure rates,
material usage and service delivery costs incurred in correcting a product
failure. Should actual product failure rates, material usage or service delivery
costs differ from our estimates, revisions to the estimated warranty liability
may be required. We recorded warranty provisions totaling $0.8 million, $2.0
million and $5.0 million during fiscal 2002, 2001 and 2000, respectively. In
addition, our warranty reserve balance at September 30, 2002 was $1.7 million,
which we believe is adequate due to the decrease in revenue, which occurred
during fiscal 2002.

15

RESTRUCTURING PROVISIONS

Because of the recent semiconductor decline, we have periodically evaluated
whether we need to reduce expenses in line with our current level of business.
We record restructuring charges based on our estimated costs to terminate
employees, exit from facilities and write-down other tangible and intangible
assets. These estimates could have a material impact if we change our operating
plans or incur costs not foreseen when implementing our cost reduction efforts.
Such was the case as discussed in Note 15, whereby we reversed severance charges
during the fiscal year ended September 30, 2002.

LITIGATION RESERVES

We periodically assess our exposure to pending litigation and possible
unasserted claims against us in order to establish appropriate litigation
reserves. In establishing such reserves, we work with our counsel to consider
the availability of insurance coverage, the likelihood of prevailing on a claim,
the probable costs of defending the claim, and the prospects for, and costs of,
resolution of the matter. It is possible that the litigation reserves
established by us will not be sufficient to cover our actual liability and
future results of operations for any particular quarterly or annual period could
be materially adversely affected by the outcome of certain litigation or claims.

FISCAL YEARS ENDED SEPTEMBER 30, 2002 AND 2001

The following discussion of results of operations includes the operations
of the material handling business in the prior periods as the basis of the
analysis, unless otherwise noted.

Our bookings and revenues are inevitably tied to the growth or contraction
of the overall semiconductor industry and the changes in capital spending by
semiconductor companies. We define bookings during a fiscal period as incoming
orders deliverable to customers in the next eighteen months less known
cancellations.

In fiscal 2002, bookings were $58.1 million compared to $71.4 million for
fiscal 2001, a decrease of 18.6%. Bookings associated with the material handling
business during fiscal 2002 and fiscal 2001 were $1.7 million and $15.7 million,
respectively. Excluding the material handling business, bookings during fiscal
2002 were $56.4 million compared to $55.7 million during fiscal 2001, an
increase of 1.3%. For the three month period ended September 30, 2002, bookings
were $14.2 million compared to $15.7 million for the three month period ended
June 30, 2002, to $18.4 million for the three month period ended March 31, 2002,
$9.8 million for the three month period ended December 31, 2001 and $15.0
million for the three month period ended September 30, 2001. For the three month
periods ended September 30, 2002, June 30, 2002, March 31, 2002, December 31,
2001 and September 30, 2001, bookings associated with the material handling
business were none, none, none, $1.7 million and $2.7 million, respectively. The
slight increase in our bookings in the last year, excluding the material
handling business, was a result of increased demand for our two-dimensional bar
code reading systems and related products, offset by a continued decrease in
demand for our semiconductor inspection and handling equipment products.

Our revenues were $59.2 million for the fiscal year ended September 30,
2002, compared to $107.8 million for the fiscal year ended September 30, 2001, a
decrease of 45.1%. Revenues associated with the material handling business
during the fiscal years ended September 30, 2002 and September 30, 2001 were
$2.8 million and $16.1 million, respectively. Our revenues excluding the
material handling business for the fiscal year ended September 30, 2002 were
$56.4 million compared to $91.7 million for the fiscal year ended September 30,
2001, a decrease of 38.5%. For the three month period ended September 30, 2002,
revenues were $14.9 million compared to $15.3 million for the three month period
ended June 30, 2002, to $14.0 million for the three month period ended March 31,
2002, $15.0 million for the three month period ended December 31, 2001 and $16.5
million for the three month period ended September 30, 2001. For the three month
periods ended September 30, 2002, June 30, 2002, March 31, 2002, December 31,
2001 and September 30, 2001, revenues associated with the material handling
business were none, none, none, $2.8 million and $3.6 million, respectively. The
reason for the decline in our revenues in the last year excluding the material
handling business, is due to the continued slowdown in demand for our
Semiconductor

16

Equipment Group products, offset in part by the increased demand for our
two-dimensional bar code reading systems and related products.

In fiscal 2002, revenues for our Semiconductor Equipment Group were $34.2
million, which represented 57.8% of total revenues, compared to $71.8 million or
66.6% of revenues in fiscal 2001. Overall, revenues declined 52.4% in our
Semiconductor Equipment Group during fiscal 2002. For the three month period
ended September 30, 2002, revenues were $10.0 million in comparison to revenues
of $10.5 million for the three months ended June 30, 2002 to $7.3 million for
the three months ended March 31, 2002 and $6.4 million for the three months
ended December 31, 2001. The decrease in our revenues in fiscal 2002 reflects a
continued dramatic slowdown in demand from the semiconductor capital equipment
industry.

In fiscal 2002, revenues for our Acuity CiMatrix division were $25.1
million, representing 42.2% of total revenue, compared to $36.0 million or 33.4%
of revenues in fiscal 2001. The decline in fiscal 2002 revenues compared to
fiscal 2001 revenues of 30.4%, is attributable to the loss of revenues resulting
from the sale of the material handling business. Revenues associated with the
material handling business during the fiscal years ended September 30, 2002 and
September 30, 2001 were $2.8 million and $16.1 million, respectively. Excluding
the material handling business, revenues during fiscal 2002 were $22.3 million
compared to $19.8 million during fiscal 2001, an increase of 12.6%. This
increase was a result of increased sales of two-dimensional bar code reading
systems and related products. The Acuity CiMatrix division revenues were $4.9
million for the three months ended September 30, 2002, which compares to
revenues of $4.9 million in the three months ended June 30, 2002, $6.8 million
in the three months ended March 31, 2002 and $5.7 million in the three months
ended December 31, 2001, excluding revenues associated with the material
handling business.

We review and evaluate the excess, obsolescence and net realizable value of
inventories on a quarterly basis. The carrying value of the inventory is
compared to the future realizable value of such products given sales prices and
revenue projections. Substantially all inventory provisions recorded during
fiscal 2002, 2001 and 2000 related to excess inventories. We believe that these
provisions have reduced the inventories to their appropriate net realizable
value. However, there can be no assurance that we will not have to take
additional inventory provisions in the future, based upon a number of factors
including: changing business conditions; shortened product life cycles; the
introduction of new products and the effect of new technology. Our gross profit
margins, as a percentage of revenues, increased to 24.1% for fiscal 2002
compared to 16.5% for fiscal 2001. As a result of the quarterly analyses
mentioned above, we recorded inventory provisions, which reduced our gross
profit during fiscal 2002, of $4.7 million or 7.9% of revenue and $17.3 million
or 16.0% of revenue during fiscal 2001, primarily relating to excess
inventories. The reduction in inventory provisions in fiscal 2002 versus fiscal
2001 led to the margin improvement in fiscal 2002. Exclusive of inventory
provisions, gross profit was 32.1% of revenues during fiscal 2002 compared to
32.6% during fiscal 2001. The gross profit margin percentage, exclusive of
inventory provisions, for the Semiconductor Equipment Group decreased to 20.8%
for fiscal 2002 as compared to 29.4% of revenues for fiscal 2001, primarily due
to the lower level of sales compared to the prior year and fixed costs spread
over fewer units, partially offset by the cost reductions. Gross profit margin,
as a percentage of revenues, increased for the Acuity CiMatrix division to 47.1%
in fiscal 2002, as compared to 38.9% for fiscal 2001, attributable to cost
reductions and the impact of the sale of the lower margin material handling
business that was included in fiscal year 2001.

Our research and development expenses were $18.6 million, or 31.4% of
revenues, in fiscal 2002, compared to $28.4 million, or 26.3% of revenues, in
fiscal 2001. The decline in spending relates primarily to our cost cutting
efforts during fiscal 2002 in addition to less cost incurred due to the sale of
the material handling business. Research and development expenses associated
with the material handling business during fiscal 2002 and fiscal 2001 were $0.4
million and $2.0 million, respectively.

The current level of research and development expense reflects spending
associated with our continued efforts to maintain our market position and ensure
we have the appropriate products for our customers when demand returns. In our
Semiconductor Equipment Group, the research and development projects included
work on the new wafer scanning inspection systems and enhanced capabilities for
our lead scanning systems. At Acuity CiMatrix, we continued to invest in
enhancing our two-dimensional barcode reading products and

17

expanding our machine vision platform, Visionscape. During fiscal 2002, we
capitalized $1.4 million of software development costs, in accordance with SFAS
No. 86, compared to $3.4 million in fiscal 2001.

Our selling, general and administrative expenses were $36.9 million, or
62.3% of revenues, in fiscal 2002, compared to $54.3 million, or 50.4% of
revenues, in fiscal 2001. The decrease in spending is a combination of a lower
level of variable selling expenses associated with the decrease in revenues and
cost reductions taken in the restructurings discussed below. In addition, we
incurred less cost in fiscal 2002 due to the sale of the material handling
business. Selling, general and administrative expenses associated with the
material handling business during fiscal 2002 were $762 thousand as compared to
$2.9 million during fiscal 2001.

In response to the lower level of revenues in fiscal 2002, we took steps to
reduce our operating costs. In addition, we reviewed our long-lived assets for
impairment. A summary of these restructuring costs and impairment charges is as
follows:

Restructuring -- We experienced a decline in orders and revenues during
fiscal 2002. Our response was to develop and implement headcount reduction plans
designed to reduce costs and expenses. As the downturn in the economy worsened,
management reviewed its operational plan and made further headcount reductions.
During the quarters ended December 31, 2001, March 31, 2002 and June 30, 2002,
management made decisions to terminate employees in response to lower revenues.
In addition to headcount reductions, we incurred costs related to the closing of
a foreign office. Certain tangible and intangible assets were also abandoned in
connection with the restructuring efforts. Restructuring charges, totaling
approximately $1.7 million after reversals, were recorded during fiscal 2002.
The charges can be summarized as follows:

- During the quarter ended December 31, 2001, approximately $0.2 million of
employee severance was recorded. Headcount reductions were made in the
Semiconductor Equipment Group and the Acuity CiMatrix division.
Approximately 30 employees were terminated throughout all functions of
these operations.

- In the quarter ended March 31, 2002, approximately $0.5 million of
severance was recorded. Approximately 30 employees were terminated
throughout all functions of the Semiconductor Equipment Group. Also,
approximately $0.3 million of severance and facility cost restructuring
charges was reversed during the quarter. The reversal of charges was due
to a change in operating plans by management, which abandoned plans to
close a facility. Severance for employees at that facility and facility
exit costs previously accrued were reversed.

- In the quarter ended June 30, 2002, approximately $1.3 million of
severance and other charges was recorded. Approximately 100 employees
were terminated throughout all functions of the Semiconductor Equipment
Group, the Acuity CiMatrix division as well as within the Corporate
staff. The

18

restructuring also included costs related to closing a foreign office,
which included the write-off of tangible assets of $0.27 million.

- In the quarter ended September 30, 2002, approximately $0.1 million of
severance and other charges in the Semiconductor Equipment Group were
recorded, relating primarily to the finalization of a foreign office
closing, which included the write-off of certain tangible property
totaling $85 thousand. Also, approximately $0.1 million of severance was
reversed during the quarter, relating to the Acuity CiMatrix division, an
adjustment to an estimated amount accrued in the prior quarter.

All charges are expected to be paid within our fiscal year ending September
30, 2003.

Impairments -- Because of the continued decline in revenues in 2002, we
reviewed our long-lived assets, including capitalized software, purchased
technologies and goodwill for impairment. To evaluate and measure the impairment
of capitalized software we considered the estimated future gross revenues
reduced by estimated future costs, including costs of performing maintenance and
customer support. To evaluate the impairment of purchased technologies and
goodwill, we compared the carrying amount to estimated undiscounted net future
cash flows. If an impairment was indicated, the amount was measured as the
excess of the carrying amount over the fair market value of the asset, which we
generally estimated using a discounted cash flow model. This model assumed
future revenue growth commensurate with industry projections, a level of costs
consistent with past experience, a discount rate based on our incremental
borrowing rate and cash flows over the remaining useful life of the intangible
asset being tested. As a result of this review, we recorded in fiscal 2002
impairment charges relating to capitalized software, goodwill and other
non-current assets totaling $0.3 million, $2.3 million and $2.0 million,
respectively.

Net interest expense was $1.2 million for fiscal 2002 and fiscal 2001. The
interest expense relates to borrowings on our line of credit and acquisition
debt. We had $7.1 million of borrowings on our line of credit at the end of
fiscal 2002.

There was no tax provision in fiscal 2002, due to the operating losses
incurred and the valuation allowances provided on those deferred tax assets.
During fiscal 2001, based on the losses and the inability to project a return to
profitability until there is a sustained upturn in the semiconductor capital
equipment sector, we recorded $9.2 million of additional valuation allowance and
a corresponding tax expense in fiscal 2001.

In fiscal 2002, we had a net loss of $41.8 million, or a loss of $0.84 per
share. For fiscal 2001, we had a net loss of $104.4 million, or $2.94 per
diluted share.

FISCAL YEARS ENDED SEPTEMBER 30, 2001 AND 2000

For the three month period ended September 30, 2001, bookings were $15.0
million and revenues were $16.5 million. This compares to bookings of $13.5
million and revenues of $21.1 million for the three month period ended June 30,
2001 and to bookings of $47.2 million and revenues of $59.2 million for the
three month period ended September 30, 2000. The decline in our bookings from
fiscal year 2000 to fiscal year 2001 was a reflection of a sharp semiconductor
industry slowdown, as a result of which our customers had decreased demand for
our products.

Our revenues were $107.8 million for the fiscal year ended September 30,
2001, compared to $223.2 million for the fiscal year ended September 30, 2000, a
decrease of 51.7%. The lower revenues were associated with decreased shipments
of semiconductor inspection and handling equipment, as well as vision reading
systems sold primarily to the semiconductor industry.

In fiscal 2001, revenues for our Semiconductor Equipment Group were $71.8
million, which represented 66.6% of total revenues, compared to $175.4 million
or 78.6% of revenues in fiscal 2000. In the Semiconductor Equipment Group,
revenues fell to $8.7 million for the three month period ended September 30,
2001, which compares to revenues of $11.9 million in the three month period
ended June 30, 2001, $22.0 million in the three month period ended March 31,
2001, $29.2 million in the three month period ended December 31, 2000, $46.4
million in the three month period ended September 30, 2000 and $47.9 million for
the three month

19

period ended June 30, 2000. The decrease in our revenues in the fourth quarter
of fiscal 2001 reflected a continued dramatic slowdown in demand from the
semiconductor capital equipment industry.

In fiscal 2001, revenues for our Acuity CiMatrix division were $36.0
million, which was 33.4% of total revenue, compared to $47.8 million or 21.4% of
revenues in fiscal 2000. In the Acuity CiMatrix division revenues declined to
$7.8 million for the three months ended September 30, 2001, which compares to
revenues of $9.2 million in the three months ended June 30, 2001, $9.3 million
in the three months ended March 31, 2001, $9.7 million in the three months ended
December 31, 2000, $12.8 million in the three months ended September 30, 2000
and $13.2 million for the three months ended June 30, 2000. The continued lower
level of revenues in the fourth quarter of fiscal 2001 reflects a reduction in
demand for our machine vision products sold to the semiconductor industry,
delays in the implementation of direct part mark reading programs and a general
reluctance to commit to capital programs on the part of the industries we
largely serve, including the electronics industry.

Our gross profit margin at both divisions declined during fiscal 2001. Our
gross profit percentage declined to 16.5% in fiscal 2001 as compared with 44.3%
for fiscal 2000. The gross profit margin, as a percentage of revenues, for the
Semiconductor Equipment Group decreased to 14.4% for fiscal 2001 as compared to
41.6% of revenues for fiscal 2000. Gross profit margin, as a percentage of
revenues, decreased for the Acuity CiMatrix division to 17.7% in fiscal 2001, as
compared to 50.1% for fiscal 2000. The two major reasons for the decrease
include an inventory provision of $16.5 million or 15.3%, primarily charged for
inventory in excess of current requirements, and a delay in reducing
manufacturing infrastructure as sales volume declined. We could not foresee the
severity of the downturn and we were reluctant to let go skilled people in what
was then a tight labor market, so we did not severely cut staffing levels early
in the fiscal year.

In fiscal 2001, we recorded inventory provisions of $17.3 million as
compared to $1.4 million in fiscal 2000. Because of the significance of the
losses incurred in fiscal 2001, we reported a charge of $16.5 million,
representing the losses incurred primarily for excess and obsolete inventories
related principally to semiconductor inspection and handling equipment and some
Acuity CiMatrix products. The $16.5 million provision reflected reduced demand
for products as a result of the sharp semiconductor industry downturn and the
general reduction in capital spending in the industry that we serve. The
remaining provision in fiscal 2001 and the inventory provision in fiscal 2000
reflected normal recurring losses resulting from excess and obsolescence. We
review and evaluate the excess, obsolescence and net realizable value of
inventories on a quarterly basis. The carrying value of the inventory is
compared to the future realizable value of such products given sales prices and
revenue projections. As a result of these quarterly analyses, we recorded a
$10.3 million inventory provision during the three month period ended March 31,
2001, a $0.7 million inventory provision during the three month period ended
June 30, 2001 and an additional $5.5 million inventory provision during the
three month period ended September 30, 2001. Substantially all inventory
provisions related to excess inventories.

Excluding the $16.5 million inventory provision, our gross profit
percentage declined to 32.0% in fiscal 2001 as compared with 44.3% for fiscal
2000. In addition, the Semiconductor Equipment Group gross profit percentage
decreased to 29.4% for fiscal 2001 as compared to 41.6% of revenues for fiscal
2000. Also, the Acuity CiMatrix division gross profit percentage decreased to
31.3% for fiscal 2001 as compared to 50.1% of revenues for fiscal 2000. The
reasons for the decline in gross margins, excluding the inventory provisions,
were the same as for the revenues.

Our research and development expenses were $28.4 million, or 26.3% of
revenues, in fiscal 2001, compared to $27.0 million, or 12.1% of revenues, in
fiscal 2000. The higher level of expense reflected spending associated with our
continued efforts to maintain our market position and ensure we have the
appropriate products for our customers when demand returns.

In our Semiconductor Equipment Group, the research and development projects
included work on the new wafer scanning inspection systems and enhanced
capabilities for our lead scanning systems, as well as a new line of
ball-placement equipment. At Acuity CiMatrix, we continued to invest in
enhancing our two-dimensional barcode reading products and expanding our machine
vision platform, Visionscape. During fiscal 2001, we capitalized $3.4 million of
software development costs, in accordance with SFAS No. 86, compared to $4.2
million in fiscal 2000.

20

Our selling, general and administrative expenses were $54.3 million, or
50.4% of revenues, in fiscal 2001, compared to $59.7 million, or 26.8% of
revenues, in fiscal 2000. The level of expenses in fiscal 2001 reflected a
combination of the higher level of fixed costs on a lower revenue base, which
was partially offset by a lower level of variable selling expenses associated
with the decrease in revenues, and a portion of the cost reductions taken
throughout fiscal year 2001 which are discussed below.

We recorded a provision for doubtful accounts during fiscal 2001 of $1.1
million as a result of collection problems arising from the downturn in the
economy. The provision for doubtful accounts was determined based upon quarterly
analyses of account collectibility. These analyses included reviewing payment
history, known bankruptcies and customer responses to calls on delayed payments.
In fiscal 2000, the amount added to the allowance for doubtful accounts was $0.7
million. Management increased collection efforts through increased monitoring of
accounts receivable and weekly collection calls by credit managers.

In response to the lower level of revenues in fiscal 2001, we took steps to
reduce our operating costs. In addition, we reviewed our long-lived assets for
impairment. A summary of these restructuring costs and impairment charges is as
follows:

Restructuring -- We experienced a significant decline in orders and
revenues commencing with the first quarter of fiscal 2001. Our response was to
develop and implement headcount reduction plans designed to reduce costs and
expenses. As the downturn in the economy worsened, we reviewed our operational
plan and made further headcount reductions. During all quarters of fiscal 2001,
we made decisions to terminate employees in response to lower revenues. In
addition to headcount reductions, we exited certain facilities, including
substantially all European locations. The remaining lease obligations were
accrued when an exit plan was determined. Certain tangible and intangible assets
were also abandoned in connection with the restructuring efforts. Restructuring
charges, totaling approximately $5.2 million after reversals, were recorded
during fiscal 2001. The charges can be summarized as follows:

- During the quarter ended December 31, 2000, approximately $1.5 million of
employee severance was recorded. Headcount reductions were made in the
Semiconductor Equipment Group, the Acuity CiMatrix division, as well as
within the Corporate staff. Approximately 110 employees were terminated
throughout all functions of these operations. In addition, a
restructuring of the European operations led to lease termination costs,
a write-off of facility leasehold improvement costs and write-off of
intangible assets considered impaired with the closure of the European
businesses, all of which totaled approximately $1.2 million.

21

- In the quarter ended March 31, 2001, approximately $0.8 million of
severance was recorded. Approximately 90 employees were terminated
throughout all functions of the Semiconductor Equipment Group and the
Acuity CiMatrix division. Approximately $0.1 million of severance was
reversed as a result of lower termination costs than anticipated.
Continued efforts to downsize the European operations led to lease
termination costs and write-off of facility leasehold improvements,
totaling approximately $0.4 million.

- In the quarter ended June 30, 2001, approximately $0.5 million of
severance was recorded. Approximately 100 employees were terminated
throughout all functions of the Semiconductor Equipment Group and the
Acuity CiMatrix division.

- In the quarter ended September 30, 2001, approximately $0.9 million of
severance was recorded, representing 100 employees throughout all
functions of the Semiconductor Equipment Group and the Acuity CiMatrix
division. Finalization of the European facilities' closures and other
restructuring activities resulted in a $0.9 million write-off of
abandoned property and equipment and certain intangibles, totaling $0.2
million. As a result of favorable negotiations, the estimated lease
obligations on a facility in the U.K. were reduced by $0.9 million.

- Impairments -- Because of the significant decline in revenues in 2001, we
reviewed our long-lived assets, including capitalized software, purchased
technologies and goodwill for impairment. To evaluate and measure the
impairment of capitalized software we considered the estimated future
gross revenues reduced by estimated future costs, including costs of
performing maintenance and customer support. To evaluate the impairment
of purchased technologies and goodwill, we compared the carrying amount
to estimated undiscounted net future cash flows. If an impairment was
indicated, the amount was measured as the excess of the carrying amount
over the fair market value of the asset, which we estimated using a
discounted cash flow model.

Net interest expense was $1.2 million for fiscal 2001, compared to net
interest expense of $1.4 million for fiscal 2000. The reason for the decline in
interest expense relates to the levels of invested cash balances in fiscal 2001
compared to fiscal 2000, partially offset by interest expense on new acquisition
debt. We had $2.3 million of borrowings on our line of credit at the end of
fiscal 2001.

Based on the our losses and inability to project a return to profitability
until there is a sustained upturn in the semiconductor capital equipment sector,
we recorded $9.2 million of additional valuation allowance and a corresponding
tax expense in fiscal 2001. The tax provision in fiscal 2000 reflected minimum
federal income taxes, offset by a change in our deferred tax asset.

In fiscal 2001, we had a net loss of $104.4 million, or a loss of $2.94 per
share. For fiscal 2000, we had net income of $10.7 million, or $0.27 per diluted
share.

LIQUIDITY AND CAPITAL RESOURCES

As of December 15, 2001, we sold our one-dimensional material handling
product line ("material handling business"), which had been part of our Acuity
CiMatrix division, to affiliates of SICK AG of Germany for approximately $11.5
million. This price includes the right to receive $0.5 million following the
expiration of a 16-month escrow to cover indemnification claims. The costs of
this transaction were approximately $0.8 million. For the period from October 1,
2001 through December 15, 2001, the material handling business had revenues of
approximately $2.8 million and had an operating loss of approximately $0.25
million.

On May 2, 2002, we completed a private placement, which raised $13.6
million, net of offering expenses. A total of 10.3 million shares of common
stock were sold at $1.46 per share. The placement also included warrants to
purchase up to 2.1 million shares at $1.46 per share on or before June 30, 2002
(the "60-day Warrants"), and warrants to purchase up to 2.6 million shares at
$1.50 per share on or before May 1, 2005 (the "3-year Warrants"). On June 27,
2002, the 60-day Warrants were modified to expire on August 30, 2002. The
private placement also included warrants issued to the placement agent to
purchase up to 0.6 million shares of common stock at $1.50 per share on or
before May 1, 2005 (the "Placement Warrants"). We may

22

call the $1.50 warrants, effectively forcing conversion, if the price of our
common stock trades above $2.35 per share for twenty consecutive trading days at
any time prior to the warrants' expiration. The fair value of the 60-day
Warrants, totaling approximately $0.5 million, the 3-year Warrants, totaling
approximately $1.4 million, and the Placement Warrants, totaling approximately
$0.3 million (determined using Black-Scholes pricing model), was all credited to
additional paid-in capital.

On December 4, 2002, Pat V. Costa (the "Holder"), loaned us $0.5 million
and we issued a 9% Convertible Note in the amount of $0.5 million. Under the
terms of this agreement, we are required to make semiannual interest payments in
cash on May 15 and November 15 of each year commencing May 2003, and pay the
principal amount on December 4, 2005. This agreement also allows for conversion
into shares of common stock. The note may be converted at any time by the Holder
until the note is paid in full or by us, if at any time following the closing
date, the closing price of our Common Stock is greater, for 30 consecutive
trading days, than 200% of the conversion price. The Holders' conversion price
is equal to 125% of the average closing price of our common stock for the thirty
consecutive trading days ending on December 3, 2002, or $0.42 per share.

In connection with the 9% Convertible Senior Note, on December 4, 2002, the
Company issued Common Stock Warrants to Pat V. Costa. Under the terms of the
agreement, the Holder is entitled to acquire from the Company, warrants to
purchase shares equal to 25% of the total number of shares of Common Stock into
which the Convertible Senior Note may be converted or approximately 300,000
shares. The warrants have an exercise price of $0.63.

On December 4, 2002, we entered into a Security Agreement with Pat V.
Costa, in connection with the 9% Convertible Senior Note. As a condition to
making the loan mentioned above and in order to secure the prompt and complete
payment, Mr. Costa has required us to perform all of its obligations and
liabilities under the Note. Under the terms of this Note, we granted Mr. Costa a
security interest in certain of our assets.

Our cash balance decreased $3.3 million, to $0.2 million, in fiscal 2002,
as a result of $26.1 million of net cash used in operating activities, $7.9
million of net cash provided by investing activities, including $10.2 million in
net proceeds from the sale of the material handling business and $14.7 million
of net cash provided by financing activities, including $13.6 million of net
proceeds from the private placement.

The $25.9 million of net cash used in operating activities was primarily a
result of the $41.8 million loss in fiscal 2002, a $6.9 million gain on the sale
of the material handling business, depreciation and amortization of $10.3
million, a $2.7 million decrease in accounts payable, offset in part by
decreases in inventory and accounts receivable of $9.0 million and $1.3 million,
respectively, as well as write-off's of tangible and intangible assets of $4.8
million.

Additions to plant and equipment were $0.8 million in fiscal 2002, as
compared to $2.3 million in fiscal 2001. The capitalized software development
costs for fiscal 2002 were $1.4 million as compared with $3.4 million in fiscal
2001.

We have a $10.0 million credit facility that expires in April 2003. This
agreement allows for borrowings of up to 90% of eligible foreign receivables up
to $10 million of availability provided under the Export-Import Bank of the
United States guarantee of certain foreign receivables and inventories, less a
reserve and the aggregate amount of drawings under letters of credit. At
September 30, 2002, the amount available under the line was $8.6 million,
against which we had $7.1 million of borrowings, resulting in an availability at
September 30, 2002 of $1.5 million, subject to the terms of the credit facility.
Outstanding balances bear interest at a variable rate as determined periodically
by the bank (5.75 % at September 30, 2002). At September 30, 2002, we were not
in compliance with certain covenants of the credit agreement, and therefore in
technical default on the facility, however, the bank continues to make funds
available for borrowings. There can be no certainty that the bank will continue
to make funds available and the bank may immediately call for repayment of
outstanding borrowings.

23

On November 21, 2001, the $1.5 million note payable issued to the former
principals of Abante Automation, Inc. ("Abante") came due, together with 8%
interest thereon from November 29, 2000. In connection with the acquisition of
Abante, we agreed to make post-closing installment payments to the selling
shareholders of Abante. These non-interest bearing payments were payable in
annual installments of not less than $0.5 million through November 2005.
Pursuant to an oral agreement with the former principals of Abante, we paid, on
November 21, 2001, the interest, $0.25 million of note principal and
approximately $0.11 million of the first annual installment. The balance of the
sums originally due on November 21, 2001 were rescheduled for payment in
installments through the first quarter of fiscal 2003. In January 2002, the
principals demanded current full payment of these amounts or collateralization
of the future payment obligations. We did not agree to the request for
collateralization but continued to make certain payments in accordance with the
terms of the oral agreement, paying the interest, $0.25 million of note
principal and approximately $0.15 million of the first annual installment on
February 21, 2002, and paying approximately $0.24 million of the first annual
installment on May 21, 2002. We did not make either the November 2002 note
principal payment of $1.0 million or the November 2002 annual installment
payment of $0.5 million, and are therefore in default. Although we have failed
to make the installment payment, there is no provision in the agreements that
would require the acceleration of future payments due under this arrangement. As
a result, we have classified the payments due during fiscal 2004, 2005 and 2006
in the amount of $1.2 million as long-term debt in the accompanying consolidated
financial statements.

On January 3, 2002, a payment of $1.85 million under a note issued to the
former shareholders of Auto Image ID, Inc. ("AIID") came due together with
interest at prime rate. On the due date, we paid the interest and approximately
$0.24 million of note principal to certain of these shareholders. We reached an
agreement with the other former stockholders to pay the sums originally due on
January 3, 2002 in three equal principal installments in April 2002, August 2002
and December 2002. In exchange for the deferral, we issued warrants with an
exercise price of $1.14 per share. The fair value of these warrants totaling
approximately $0.1 million, (determined using Black-Scholes pricing model), is
being charged to operations through January 2003. In accordance with the
agreement with the other former stockholders, we made note principal and
interest payments on April 1, 2002 of approximately $0.52 million and $31
thousand, respectively, and note principal and interest payments on August 1,
2002 of approximately $0.54 million and $29 thousand, respectively. We did not
make the December 2002 and January 2003 installment payments due of $0.50
million and $1.85 million, respectively, and are therefore in default. There is
no provision in the AIID promissory notes giving rights of acceleration of the
future installments due in the event of default under the arrangement. As a
result, we have classified the payments due during fiscal 2004 in the amount of
$1.8 million as long-term debt in the accompanying consolidated financial
statements.

In total, therefore, we are in default of $11.0 million of our borrowings
as of January 14, 2003.

We have incurred operating losses in fiscal 2002 amounting to $41.8
million, and $104.4 million in fiscal 2001. Net cash used in operating
activities amounted to $25.9 million, $12.6 million and $21.2 million in fiscal
2002, 2001 and 2000, respectively. In addition, we are not in compliance with
certain covenants of our revolving credit facility, which expires in April 2003.
Further, we have debt payments past due, which relate to prior years'
acquisitions. These conditions raise substantial doubt about our ability to
continue as a going concern.

Our consolidated financial statements have been prepared assuming that we
will continue as a going concern. However, because of continuing negative cash
flow, limited credit facilities, and the uncertainty of the sale of our
Semiconductor Equipment Group, there is no certainty that we will have the
financial resources to continue in business.

We have prepared and are executing a plan to address our financial needs.
We recognize that we cannot continue to sustain the losses of both our
Semiconductor Equipment Group and Acuity CiMatrix Division. Accordingly, while
we had not adopted a formal plan as of September 30, 2002 to dispose of the
Semiconductor Equipment Group, on September 17, 2002 we announced that we were
exploring the sale of our Semiconductor Equipment Group. Also, we continue to
implement plans to control operating expenses, inventory levels, and capital
expenditures as well as plans to manage accounts payable and accounts receivable

24

to enhance cash flows. As of January 2003, we are in advanced discussions with a
party interested in acquiring that business, and we continue more preliminary
exchanges with other possible acquirers. The sale of the Semiconductor Equipment
Group, if completed, should be sufficient to pay down our debt, reduce accounts
payable, and provide working capital for our remaining businesses. Upon such
sale, the assets supporting our current revolving credit agreement will be
substantially reduced and we cannot be assured of having a line of credit in
place. Moreover, the continuation of our current line of credit is conditioned
upon obtaining waivers for the events of noncompliance of that facility. Thus,
our financial planning must include a replacement of our current revolving
credit agreement, additional equity financing or generation of sufficient
working capital to operate without a credit facility.

Because the proceeds of the prospective sale are uncertain, and because
there will inevitably be a delay between the reaching of a definitive agreement
and the completion of a sale of the division, we also recognize that we will
likely require a supplemental infusion of capital. This capital infusion may be
required either for some short-term period prior to the completion of a sale of
the division, or for long-term self-sufficiency of working capital. To that end,
on December 4, 2002, we issued a 9% Convertible Senior Note in the amount of
$0.5 million, for value received, to Pat V. Costa. Our plan also calls for
continued actions to control operating expenses, inventory levels, and capital
expenses; as well as to manage accounts payable and accounts receivable to
enhance cash flow.

If we do not succeed is selling the Semiconductor Equipment Group, we will
have insufficient working capital to continue in business. While management
believes that it will complete such a sale, there can be no assurance that the
proceeds of a sale will be sufficient to finance the Company's remaining
businesses. In that event, we would be forced either to seek additional
financing or to sell some or all of the remaining product lines of Acuity
CiMatrix.

Purchase Commitments -- As of September 30, 2002, we had approximately
$22.7 million of purchase commitments with vendors. Approximately $20.5 million
was for the Semiconductor Equipment Group, and included computers, handling
equipment, and manufactured components for the division's lead scanning, wafer
scanning, handling and ball attach product lines. Approximately $2.2 million was
for the Acuity CiMatrix Division, and included computers, PC boards, cameras,
and manufactured components for the division's machine vision and
two-dimensional inspection product lines. We are required to take delivery of
this inventory over the next three years. Substantially all deliveries are
expected to be taken in the next eighteen months. A schedule of the commitments
is as follows:

As a result of the slowdown experienced during fiscal 2002, we identified
certain purchase commitments for products that have been discontinued. We have
recorded a loss in the amount of $0.15 million related to these commitments.

RECENT ACCOUNTING PRONOUNCEMENTS

Business Combinations -- In June 2001, the FASB issued SFAS No. 141,
"Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible
Assets." SFAS No. 141 requires business combinations initiated after June 30,
2001 to be accounted for using the purchase method of accounting, and broadens
the criteria for recording intangible assets separate from goodwill. Recorded
goodwill and intangibles will be evaluated against these new criteria. SFAS No.
142 requires, among other things, the discontinuance of goodwill amortization.
Under this approach, goodwill and certain intangibles will not be amortized into
results of operations, but instead would be reviewed for impairment and written
down and charged to operations only in the periods in which the recorded value
of goodwill and certain intangibles is more than its fair value. SFAS

25

No. 142 also requires a transitional goodwill impairment test six months from
the date of adoption of SFAS No. 142. We are required to adopt SFAS No. 141 and
142 on October 1, 2002.

The adoption of SFAS No. 142 is expected to result in certain intangible
assets, including amounts capitalized for workforce, to be reclassified to
goodwill. In addition, SFAS No. 142 requires that we discontinue the
amortization of goodwill. Goodwill amortization totaled approximately $0.4
million, $0.9 million and $0.6 million in fiscal 2002, 2001 and 2000,
respectively. We do not expect the transitional goodwill impairment test to have
a significant impact on our financial statements.

Impairments -- In August 2001, the FASB issued SFAS No. 144, "Accounting
for Impairment or Disposal of Long-Lived Assets," which replaces SFAS No. 121.
The new statement establishes a single accounting model for long-lived assets to
be disposed of by sale. Under its provisions, which apply to both continuing and
discontinued operations, companies must measure long-lived assets at the lower
of fair value, less cost to sell, or the carrying amount. As a result, amounts
reported as discontinued operations should no longer be reported at net
realizable value or include any losses that have not yet occurred. We are
required to adopt SFAS No. 144 on October 1, 2002. We have reviewed the impact
of SFAS No. 144, and do not believe it will have a significant impact on our
financial position or results of operations. At September 30, 2002, the total
long-lived assets totaled approximately $13.3 million.

Early Retirement of Debt -- In April 2002, the FASB issued SFAS 145,
"Rescission of FASB Statements SFAS 4, 44 and 64, Amendment of FASB Statement
No. 13 and Technical Corrections". SFAS 145 rescinds Statement No. 4, "Reporting
Gains and Losses from Extinguishments of Debt", and an amendment of that
Statement, FASB Statement No. 64, "Extinguishments of Debt Made to Satisfy
Sinking-Fund Requirements". SFAS 145 also rescinds FASB Statement No. 44,
"Accounting for Intangible Assets of Motor Carriers". SFAS 145 amends FASB
Statement No. 13, "Accounting for Leases", to eliminate an inconsistency between
the required accounting for sale-leaseback transactions and the required
accounting for certain lease modifications that have economic effects that are
similar to sale leaseback transactions. SFAS 145 also amends other existing
authoritative pronouncements to make various technical corrections, clarify
meanings, or describe their applicability under changed conditions. The
provision of SFAS 145 related to the rescission of Statement No. 4 shall be
applied in fiscal year beginning after May 15, 2002. The provisions of SFAS 145
related to Statement No. 13 should be for transactions occurring after May 15,
2002. Early application of the provisions of this Statement is encouraged. We do
not expect the adoption of SFAS 145 will have a significant impact on our
consolidated results of operations, financial position or cash flows.

Restructuring -- In July 2002, the FASB issued Statement No. 146,
Accounting for Costs Associated with Exit or Disposal Activities (FAS 146),
which nullifies EITF Issue No. 94-3. FAS 146 requires that a liability for a
cost associated with an exit or disposal activity be recognized when the
liability is incurred, whereas EITF No 94-3 had recognized the liability at the
commitment date to an exit plan. We are required to adopt the provisions of FAS
146 effective for exit or disposal activities initiated after December 31, 2002.

EFFECT OF INFLATION

We believe that the effect of inflation has not been material during the
years ended September 30, 2002, 2001 and 2000.

FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS

This report contains forward-looking statements including statements
regarding, among other items, business strategy, growth strategy and anticipated
trends in our business, which are made pursuant to the "safe harbor" provisions
of the Private Securities Litigation Reform Act of 1995. The words "believe,"
"expect" and "anticipate" and similar expressions identify forward-looking
statements, which speak only as of the date the statement is made. These
forward-looking statements are based largely on our expectations and are subject
to a number of risks and uncertainties, some of which cannot be predicted or
quantified and are beyond our control. Future events and actual results could
differ materially from those set forth in, contemplated by, or underlying the
forward-looking statements. Statements in this report, including those set forth
in "Risk Factors" below, describe factors, among others, that could contribute
to or cause such differences. In light of

26

these risks and uncertainties, there can be no assurance that the
forward-looking information contained in this Report will in fact transpire or
prove to be accurate.

RISK FACTORS

WE MAY NOT HAVE SUFFICIENT RESOURCES TO CONTINUE AS A GOING CONCERN

Our consolidated financial statements have been prepared assuming that we
will continue as a going concern. However, because of continuing negative cash
flow, limited credit facilities, and the uncertainty of the sale of our
Semiconductor Equipment Group, there is no certainty that we will have the
financial resources to continue in business.

We have prepared and are executing a plan to address our financial needs.
We recognize that we cannot continue to sustain the losses of both our
Semiconductor Equipment Group and Acuity CiMatrix Division. Accordingly, while
we had not adopted a formal plan as of September 30, 2002 to dispose of the
Semiconductor Equipment Group, on September 17, 2002 we announced that we were
exploring the sale of our Semiconductor Equipment Group. Also, we continue to
implement plans to control operating expenses, inventory levels, and capital
expenditures as well as plans to manage accounts payable and accounts receivable
to enhance cash flows. As of January 2003, we are in advanced discussions with a
party interested in acquiring that business, and we continue more preliminary
exchanges with other possible acquirers. The sale of the Semiconductor Equipment
Group, if completed, should be sufficient to pay down our debt, reduce accounts
payable, and provide working capital for our remaining businesses. Upon such
sale, the assets supporting our current revolving credit agreement will be
substantially reduced and we cannot be assured of having a line of credit in
place. Moreover, the continuation of our current line of credit is conditioned
upon obtaining waivers for the events of noncompliance of that facility. Thus,
our financial planning must include a replacement of our current revolving
credit agreement, additional equity financing or generation of sufficient
working capital to operate without a credit facility.

Because the proceeds of the prospective sale are uncertain, and because
there will inevitably be a delay between the reaching of a definitive agreement
and the completion of a sale of the division, we also recognize that we will
likely require a supplemental infusion of capital. This capital infusion may be
required either for some short-term period prior to the completion of a sale of
the division, or for long-term self-sufficiency of working capital. To that end,
on December 4, 2002, we issued a 9% Convertible Senior Note in the amount of
$0.5 million, for value received, to Pat V. Costa. Our plan also calls for
continued actions to control operating expenses, inventory levels, and capital
expenses; as well as to manage accounts payable and accounts receivable to
enhance cash flow.

If we do not succeed is selling the Semiconductor Equipment Group, we will
have insufficient working capital to continue in business. While management
believes that it will complete such a sale, there can be no assurance that the
proceeds of a sale will be sufficient to finance our remaining businesses. In
that event, we would be forced either to seek additional financing or to sell
some or all of the remaining product lines of Acuity CiMatrix.

ANY SIGNIFICANT DOWNTURN IN THE HIGHLY CYCLICAL SEMICONDUCTOR INDUSTRY OR IN
GENERAL ECONOMIC CONDITIONS WOULD LIKELY RESULT IN A REDUCTION IN DEMAND FOR
OUR PRODUCTS AND WOULD BE DETRIMENTAL TO OUR BUSINESS

We sell capital equipment to companies that design, manufacture, assemble
and test semiconductor devices. The semiconductor industry is highly cyclical,
causing in turn a cyclical impact on our financial results. Historically, any
significant downturns in the markets for our customers' semiconductor devices or
in general economic conditions has resulted in a reduction in demand for our
products and has been detrimental to our business.

We define bookings during a fiscal period as incoming orders deliverable to
customers in the next eighteen months, less cancellations. Our bookings levels
decreased each quarter from the third quarter of fiscal 2000 when they were
$61.5 million through the fourth quarter of fiscal 2002 when they were $14.2
million. This decline mirrors the steep decline in the industry, where reports
are that bookings rates are down

27

significantly for manufacturers of test, assembly, and packaging. At December
2002, there was no consensus among industry analysts or research organizations
as to how long the current downturn will continue before a period of renewed
growth.

As was the case in both the 1998 and 1999 downturn and the current economic
downturn, our revenue and operating results declined as a result of a sudden and
severe downturn in the semiconductor industry. Downturns in the semiconductor
capital equipment industry have been characterized by diminished product demand,
excess production capacity and accelerated erosion of selling prices. In the
past, we have experienced delays in commitments, delays in collecting accounts
receivable and significant declines in demand for our product during these
downturns, and we have experienced similar delays and declines in this downturn.
Additionally, as a capital equipment provider, our revenues are driven by the
spending patterns of our customers who often delay expenditures or cancel orders
in reaction to variations in their businesses. Because a high proportion of our
costs are fixed, we are limited in our ability to reduce expenses quickly in
response to severe revenue shortfalls. In a contraction, we may not be able to
reduce our significant fixed costs, such as our infrastructure and our continued
investment in research and development.

During a downturn, we may experience delays in collecting receivables,
which may impose constraints on our working capital. In addition, a downturn in
industry demand for our products may place us in a position of excessive
inventories, which would further constrain cash flow. By way of illustration, we
recorded a provision of approximately $16.5 million during fiscal 2001, as a
consequence of an unexpected industry downturn.

WE WILL BE UNABLE TO ACHIEVE PROFITABLE OPERATIONS UNLESS WE INCREASE
QUARTERLY REVENUE OR MAKE FURTHER REDUCTIONS IN OUR COSTS

We incurred net losses of $41.8 million, $104.4 million and $9.3 million
for the fiscal years 2002, 2001 and 1999, respectively, primarily attributable
to the worldwide downturn in demand for semiconductor capital equipment. Our
ability to achieve profitable operations will depend upon our ability to
increase quarterly revenue levels or make further reductions in our costs. There
can be no assurance that we will reduce our costs sufficiently in anticipation
of declines in demand to return to profitability.

RELATIONS WITH A MAJOR CUSTOMER HAVE DETERIORATED

We have been in an escalating dispute with Intel Corporation relating to a
number of that company's practices. We allege that Intel has repeatedly
interfered with our business to our detriment. The two companies have been in
discussions to settle their differences, but there can be no assurance that a
mutually agreeable conclusion will be reached. The preponderance of our revenue
to Intel is through our Semiconductor Equipment Group, a business which we
intend to sell.

A LOSS OF OR DECREASE IN PURCHASES BY ONE OF OUR SIGNIFICANT CUSTOMERS COULD
MATERIALLY AND ADVERSELY AFFECT OUR REVENUES AND PROFITABILITY

The semiconductor industry is highly concentrated, and a small number of
semiconductor device manufacturers and contract assemblers account for a
substantial portion of purchases of semiconductor capital equipment. Sales to
our ten largest customers accounted for 34.4%, 30.0% and 40.6% of total revenues
in fiscal years ended September 30, 2002, 2001 and 2000, respectively. Intel
Corporation accounted for 10% of our revenues in fiscal years 2002 and 2001. No
single customer accounted for more than 10% of revenues in fiscal year ended
September 30, 2000. A loss of or decrease in purchases by one of these customers
could materially and adversely affect our revenues and profitability.

ECONOMIC DIFFICULTIES ENCOUNTERED BY CERTAIN OF OUR FOREIGN CUSTOMERS MAY
RESULT IN ORDER CANCELLATIONS AND REDUCE COLLECTIONS OF OUTSTANDING RECEIVABLES

International sales, primarily to Asia and Western Europe, accounted for
approximately 54.5%, 61% and 71% of our revenues for the fiscal years ended
September 30, 2002, 2001 and 2000, respectively. In particular, sales to Taiwan,
Korea and other Asian countries accounted for approximately 44.6%, 51% and 61%
of our revenues for the fiscal years ended September 30, 2002, 2001 and 2000,
respectively. While our sales in Asia
28

are generally denominated in U.S. dollars, our international business may be
affected by changes in demand resulting from fluctuations in currency exchange
rates, trade restrictions, duties and other political and economic factors. By
way of illustration, the Asian economic crisis in 1998 led to significant order
cancellations from customers in Taiwan, Korea, Malaysia and the Philippines as
currency devaluations prevented these customers from acquiring U.S. dollars at
favorable exchange rates, thereby adversely affecting revenue, collections and
profitability.

DEVELOPMENT OF OUR PRODUCTS REQUIRES SIGNIFICANT LEAD TIME AND WE MAY FAIL TO
CORRECTLY ANTICIPATE THE TECHNICAL NEEDS OF OUR MARKETS

We must anticipate industry trends and develop products in advance of the
commercialization of semiconductor capital equipment. We are required to make
capital investments to develop new products before our customers commercially
accept them. In addition, if we are not successful in developing enhancements or
new generations of products, we may not be able to recover the costs of these
investments or may incur significant losses. If we are not able to develop new
products, which meet the needs of our markets, our competitive position in our
industries may be diminished and our relationships with our customers may be
impaired.

INADEQUATE CASH FLOW AND RESTRICTIONS IN OUR BANKING ARRANGEMENTS MAY IMPEDE
OUR PRODUCTION AND PREVENT US FROM INVESTING SUFFICIENT FUNDS IN RESEARCH AND
DEVELOPMENT

The markets for our products are extremely competitive. Our near-term
competitive position is dependent upon our ability to satisfy orders received in
a timely manner. To do so, we need access to capital to rapidly increase our
production capabilities. Maintaining our long-term competitive position will
require our continued investment in research and product development. Our
ability to satisfy orders received in a timely manner and to invest in research
and product development may be limited by our cash flow availability and by our
need to comply with covenants in our banking arrangements that may limit our
production, research and product development expenditures. We were in default
with these covenants at September 30, 2002.

THE LOSS OF KEY PERSONNEL COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS

Our success depends in large part upon our ability to hire and retain
qualified personnel in technical and managerial positions. We have a limited
number of employment agreements with our technical and managerial personnel. The
market for employees with the combination of skills and attributes required to
carry out our needs is extremely competitive. Our inability to hire and retain
such personnel could adversely affect our growth and profitability.

THE LARGE NUMBER OF SHARES AVAILABLE FOR FUTURE SALE COULD ADVERSELY AFFECT THE
PRICE OF OUR COMMON STOCK

As of September 30, 2002, we had outstanding 4.0 million shares of common
stock issuable upon exercise of outstanding stock options with a weighted
average exercise price of $3.82 per share; and a total of 7.2 million warrants
outstanding, with substantially all of these warrants having an exercise price
of $1.14 to $4.02 per share. The shares underlying these options and
substantially all of the shares underlying the warrants have been registered for
resale and none of them is subject to any contractual restrictions on resale.
Future sales of any of these shares, or the anticipation of such sales, could
adversely affect the market price of our common stock and could materially
impair our future ability to raise capital through an offering of equity
securities. Further, any issuance of a substantial number of these shares could
result in increased volatility in the price of our common stock.

THE VOLATILITY OF OUR STOCK PRICE COULD ADVERSELY AFFECT THE VALUE OF AN
INVESTMENT IN OUR COMMON STOCK

During the twelve month period ended September 30, 2002 the closing price
of our common stock has ranged from a low of $0.25 to a high of $1.72. The price
of our common stock has been and likely will continue to be subject to wide
fluctuations in response to a number of events and factors, such as:

- quarterly variations in operating results;
29

- differences between our quarterly results of operations and securities
analysts' estimates;

- announcements of technological innovations, new products or strategic
alliances;

- the announcement of the results of existing or new litigation; and

- news reports relating to companies or trends in our markets.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Financial instruments that potentially subject us to concentrations of
credit risk consist principally of cash equivalents and trade receivables. We
place our cash equivalents with high-quality financial institutions, limit the
amount of credit exposure to any one institution and have established investment
guidelines relative to diversification and maturities designed to maintain
safety and liquidity. Our trade receivables result primarily from sales to
semiconductor manufacturers located in North America, Japan, the Pacific Rim and
Europe. Receivables are denominated in U.S. dollars, mostly from major
corporations or distributors or are supported by letters of credit. We maintain
reserves for potential credit losses and such losses have been immaterial.

We are exposed to the impact of fluctuation in interest rates, primarily
through our borrowing activities. Our policy has been to use U.S. dollar
denominated borrowings to fund our working capital requirements. The interest
rates on our current borrowings fluctuate with current market rates. A 100 basis
point change in interest rates would not have a material impact on our results
of operations.

We believe that our exposure to currency exchange fluctuation risk is
insignificant because the operations of our international subsidiaries are
immaterial. Sales of our U.S. divisions to foreign customers are primarily U.S.
dollar denominated. During fiscal 2001 and 2002, we did not engage in foreign
currency hedging activities. Based on a hypothetical ten percent adverse
movement in foreign currency exchange rates, the potential losses in future
earnings, fair value of foreign currency sensitive instruments, and cash flows
are immaterial, although the actual effects may differ materially from the
hypothetical analysis.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Reference is made to Item 15(a)(i) herein.

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

Not applicable

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Item 10 is hereby incorporated by reference from our definitive proxy
statement to be filed within 120 days of September 30, 2002.

ITEM 11. EXECUTIVE COMPENSATION

Item 11 is hereby incorporated by reference from our definitive proxy
statement to be filed within 120 days of September 30, 2002.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Item 12 is hereby incorporated by reference from our definitive proxy
statement to be filed within 120 days of September 30, 2002.

30

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Item 13 is hereby incorporated by reference from our definitive proxy
statement to be filed within 120 days of September 30, 2002.

ITEM 14. CONTROLS AND PROCEDURES

Management, including the Chief Executive Officer and Chief Financial
Officer, have performed an evaluation of the effectiveness of the Company's
disclosure controls and procedures. Based on that evaluation, management,
including the Chief Executive Officer and Chief Financial Officer, have
concluded that the Company's disclosure controls and procedures were effective
to ensure that information required to be disclosed by the Company in its
periodic reports is recorded, processed, summarized and reported within the time
periods specified in the rules and forms of the SEC. There have been no
significant changes in the Company's internal controls or in other factors that
could significantly affect internal controls subsequent to the date of their
evaluation, including any corrective actions with regard to significant
deficiencies and material weaknesses.

PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a) Documents filed as part of this report:

(i) Financial Statements.

Independent Auditors' Report

Consolidated Balance Sheets at September 30, 2002 and September 30, 2001

Consolidated Statements of Operations for the Years Ended September 30,
2002, 2001 and 2000

Consolidated Statements of Stockholders' Equity for the Years Ended
September 30, 2002, 2001 and 2000

Consolidated Statements of Comprehensive Income (Loss) for the Years
Ended September 30, 2002, 2001 and 2000

Consolidated Statements of Cash Flows for the Years Ended September 30,
2002, 2001 and 2000

Notes to Consolidated Financial Statements

(ii) Financial Statement Schedule.

Schedule II -- Valuation and Qualifying Accounts

(iii) Exhibits.

- ---------------

* Compensatory Employment Agreement

(1) Filed as an exhibit to Registrant's Registration Statement on Form S-4,
File No. 333-08633.

(2) Filed as an exhibit to Registrant's Registration Statement on Form S-1,
File No. 333-76927.

(3) Filed as an exhibit to Registrant's Current Report on Form 8-K dated May
20, 1998.

(4) Filed as an exhibit to Registrant's Current Report on Form 8-K dated
February 24, 1999.

32

(5) Filed as an exhibit to Registrant's Current Report on Form 8-K dated July
23, 1999.

(6) Filed as an exhibit to Registrant's Annual Report on Form 10-K for its
fiscal year ended September 30, 1998.

(7) Filed as an exhibit to Registrant's Annual Report on Form 10-K for its
fiscal year ended September 30, 1999.

(8) Filed as an exhibit to Registrant's Quarterly Report on Form 10-Q, for its
fiscal quarter ended March 31, 2000.

(9) Filed as an exhibit to Registrant's Annual Report on Form 10-K, for its
fiscal year ended September 30, 2001.

(10) Filed as an exhibit to Registrant's Quarterly Report on Form 10-Q, for its
fiscal quarter ended March 31, 2002.

(b) Reports on Form 8-K:

We filed a current report on Form 8-K dated August 14, 2002, with the
Securities and Exchange Commission. The items reported on such Form 8-K were
Item 9 (Regulation FD Disclosure). This Form 8-K stated that we had certified
the quarterly report for the period ended June 30, 2002 by our Chief Executive
Officer and Chief Financial Officer.

We filed a current report on Form 8-K dated October 25, 2002, with the
Securities and Exchange Commission. The items reported on such Form 8-K were
Item 5 (Other Events). This Form 8-K stated that we had issued a press release
announcing that our request to transfer from the Nasdaq National Market to the
Nasdaq Small Cap market had been approved.

33

INDEPENDENT AUDITORS' REPORT

To the Board of Directors and Stockholders of
Robotic Vision Systems, Inc.
Canton, Massachusetts

We have audited the accompanying balance sheets of Robotic Vision Systems,
Inc. and subsidiaries (the "Company") as of September 30, 2002 and 2001, and the
related consolidated statements of operations, stockholders' equity,
comprehensive loss, and cash flows for the three years in the period ended
September 30, 2002. Our audits also included the financial statements schedule
listed in the Index at Item 14. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, such financial statements present fairly, in all material
respects, the financial position of Robotic Vision Systems, Inc. and
subsidiaries at September 30, 2002 and 2001, and the results of their operations
and their cash flows for each of the three years ended September 30, 2002, in
conformity with accounting principles generally accepted in the United States of
America. Also, in our opinion, such financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a
whole, present fairly in all material respects the information set forth
therein.

As discussed in Note 2 to the consolidated financial statements, effective
October 1, 2000, the Company changed its method of revenue recognition to
conform to Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial
Statements."

The accompanying financial statements for the year ended September 30, 2002
have been prepared assuming that the Company will continue as a going concern.
As discussed in Note 1 to the financial statements, the Company's recurring
losses and non-compliance with certain loan covenants raise substantial doubt
about its ability to continue as a going concern. Management's plans concerning
these matters are also described in Note 1. The financial statements do not
include any adjustments that might result from the outcome of this uncertainty.

DELOITTE & TOUCHE LLP

Boston, Massachusetts
January 14, 2003

34

ROBOTIC VISION SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2002 AND 2001

See notes to consolidated financial statements.
35

ROBOTIC VISION SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED SEPTEMBER 30, 2002, 2001 AND 2000

See notes to consolidated financial statements.

36

ROBOTIC VISION SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED SEPTEMBER 30, 2002, 2001 AND 2000

See notes to consolidated financial statements.

37

ROBOTIC VISION SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
FOR THE YEARS ENDED SEPTEMBER 30, 2002, 2001 AND 2000

See notes to consolidated financial statements.

38

ROBOTIC VISION SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED SEPTEMBER 30, 2002, 2001 AND 2000

See notes to consolidated financial statements.

39

ROBOTIC VISION SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 2002, 2001 AND 2000
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

1. BUSINESS OVERVIEW AND GOING CONCERN CONSIDERATIONS

Description of Business -- Robotic Vision Systems, Inc. ("RVSI"), including
its subsidiaries (collectively the "Company"), designs, manufactures, markets
and sells automated two dimensional ("2-D") and three dimensional ("3-D")
machine vision based products and systems for inspection, measurement and
identification, and is a leader in advanced electro-optical sensor technology.

The accompanying financial statements have been prepared assuming the
Company will continue as a going concern. The Company has incurred operating
losses for fiscal 2002 and 2001 amounting to $40.5 million and $83.2 million,
respectively, and negative cash flows from operations for fiscal 2002, 2001 and
2000 amounting to $25.9 million, $12.6 million and $21.2, respectively. In
addition, the Company is not in compliance with certain covenants of its
revolving credit facility, which expires in April 2003. Further, the Company has
debt payments due, which relate to acquisitions the Company has made. These
conditions raise substantial doubt about the Company's ability to continue as a
going concern.

The Company's consolidated financial statements have been prepared assuming
that it will continue as a going concern. However, because of continuing
negative cash flow, limited credit facilities, and the uncertainty of the sale
of the Company's Semiconductor Equipment Group, there is no certainty that the
Company will have the financial resources to continue in business.

The Company has prepared and is executing a plan to address its financial
needs. The Company recognizes that it cannot continue to sustain the losses of
both its Semiconductor Equipment Group and Acuity CiMatrix Division.
Accordingly, while the Company had not adopted a formal plan as of September 30,
2002 to dispose of the Semiconductor Equipment Group, on September 17, 2002 the
Company announced that it was exploring the sale of its Semiconductor Equipment
Group. Also, the Company continues to implement plans to control operating
expenses, inventory levels, and capital expenditures as well as plans to manage
accounts payable and accounts receivable to enhance cash flows. As of January
2003, the Company is in advanced discussions with a party interested in
acquiring that business, and it continues more preliminary exchanges with other
possible acquirers. The sale of the Semiconductor Equipment Group, if completed,
should be sufficient to pay down the Company's debt, reduce accounts payable,
and provide working capital for the Company's remaining businesses. Upon such
sale, the assets supporting the Company's current revolving credit agreement
will be substantially reduced and it cannot be assured of having a line of
credit in place. Moreover, the continuation of the Company's current line of
credit is conditioned upon obtaining waivers for the events of noncompliance of
that facility. Thus, the Company's financial planning must include a replacement
of its current revolving credit agreement, additional equity financing or
generation of sufficient working capital to operate without a credit facility.

Because the proceeds of the prospective sale are uncertain, and because
there will inevitably be a delay between the reaching of a definitive agreement
and the completion of a sale of the division, the Company also recognizes that
it will likely require a supplemental infusion of capital. This capital infusion
may be required either for some short-term period prior to the completion of a
sale of the division, or for long-term self-sufficiency of working capital. To
that end, on December 4, 2002, the Company issued a 9% Convertible Senior Note
in the amount of $0.5 million, for value received, to Pat V. Costa. The
Company's plan also calls for continued actions to control operating expenses,
inventory levels, and capital expenses, as well as to manage accounts payable
and accounts receivable to enhance cash flow.

If the Company does not succeed is selling the Semiconductor Equipment
Group, it will have insufficient working capital to continue in business. While
the Company believes that it will complete such a sale, there can be no
assurance that the proceeds of a sale will be sufficient to finance the
Company's remaining

40

ROBOTIC VISION SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

businesses. In that event, the Company would be forced either to seek additional
financing or to sell some or all of the remaining product lines of Acuity
CiMatrix.

2. SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation -- The consolidated financial statements
include the financial statements of RVSI and its subsidiaries, all of which are
wholly-owned. All significant intercompany transactions and balances have been
eliminated in consolidation.

Revenues, Cost of Revenues and Cumulative Effect of Accounting Change -- In
fiscal year 2001, the Company changed its method of accounting for revenue on
certain semiconductor equipment sales to comply with SEC Staff Accounting
Bulletin (SAB) No. 101, "Revenue Recognition in Financial Statements."
Previously, the Company generally recognized revenue upon shipment to the
customer, and accrued the cost of providing any undelivered services associated
with the equipment at the time of revenue recognition. Under the new accounting
method, adopted retroactive as of October 1, 2000, the Company recognizes
revenue based on the type of equipment that is sold and the terms and conditions
of the underlying sales contracts.

Revenue for established products that have previously satisfied customer
acceptance requirements and that provide for full payment tied to shipment is
generally recognized upon shipment and passage of title. In those cases,
installation is not deemed to be essential to the functionality of the equipment
since installation does not involve significant changes to the features or
capabilities of the equipment or building complex interfaces and connections. In
addition, the equipment could be installed by the customer or other vendors and
generally the cost of installation approximates only 1% to 2% of the sales value
of the related equipment. When customer payment terms provide that a minor
portion of the equipment purchase price be paid only upon customer acceptance
(less than 20%), the portion of the purchase price related to customer
acceptance is generally recognized upon customer acceptance with the majority
portion of revenue and the entire product cost recognized upon shipment and
passage of title. When customer payment terms require that a significant portion
of the equipment price be paid upon customer acceptance (greater than 20%), the
entire purchase price and cost are deferred until customer acceptance is
received. Revenue for new products that have not previously satisfied customer
acceptance requirements, generally semiconductor capital equipment, is
recognized upon customer acceptance. The gross profit on sales that are not yet
recognized is recorded as deferred gross profit in the consolidated balance
sheet. The Company provides for warranty costs at the time the related revenue
is recognized. Equipment installation is typically provided by the Company and
is generally not billed separately to the customer. Service revenue, related to
maintenance and training programs, is recognized ratably over the period that
services are provided. The Company does not grant any rights of return or price
protection privileges to distributors.

The cumulative effect of the change as of October 1, 2000 resulted in a
charge to operations of $10,747, which is included in the Consolidated Statement
of Operations for the year ended September 30, 2001. The effect of the change on
the year ended September 30, 2001 was to increase revenues by $15,197 and to
reduce the loss before the cumulative effect of the accounting change by $8,107.
Pro forma amounts for the periods prior to October 1, 2000 have not been
presented, as the effect of the change in accounting principle could not be
reasonably determined.

Cash and Cash Equivalents -- Cash and cash equivalents include money market
accounts and certain debt securities issued by the United States government
purchased with an original or remaining maturity of three months or less.

Allowance for Doubtful Accounts -- The Company maintains an allowance for
doubtful accounts for estimated losses resulting from the inability of its
customers to make required payments. These estimated allowances are periodically
reviewed, on a case by case basis, analyzing the customers' payment history and

41

ROBOTIC VISION SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

information regarding customers' creditworthiness known to the Company. In
addition, the Company records a reserve based on the size and age of all
receivable balances against which it does not have specific reserves.

Inventories -- Inventories are stated at the lower of cost (using the
first-in, first-out cost flow assumption) or market. The Company reduces the
carrying value of its inventory for estimated obsolescence by the difference
between the cost of inventory and its estimated net realizable value based upon
assumptions about future demand and market conditions. There can be no assurance
that the Company will not have to take additional inventory provisions in the
future, based upon a number of factors including: changing business conditions;
shortened product life cycles; the introduction of new products and the effect
of new technology.

Foreign Currency -- Foreign currencies are translated in accordance with
Statement of Financial Accounting Standards (SFAS) No. 52, Foreign Currency
Translations. Under this standard, assets and liabilities of the Company's
foreign subsidiaries are translated into U.S. dollars at current exchange
values. Income and expense items are translated at average rates of exchange
prevailing during the year.

Gains and losses arising from the translation of the Company's foreign
subsidiaries' financial statements are reflected as a component of equity.
Realized and unrealized gains and losses are included in income in the period in
which they occur.

Plant and Equipment -- Plant and equipment is recorded at cost less
accumulated depreciation and amortization. Depreciation is computed by the
straight-line method over estimated lives ranging from two to eight years.
Leasehold improvements are amortized over the lesser of their respective
estimated useful lives or lease terms.

Intangible Assets -- Goodwill is being amortized over the expected useful
life of the related investment, ranging from 7 to 15 years; a technology
license, other purchased technology and non-competition agreement are being
amortized over the term of the agreements or expected life of the technology,
ranging from 5 years to 10 years. The Company reviews its long-lived assets,
including goodwill and other identifiable intangibles for impairment whenever
events or changes in circumstances indicate that the carrying amount of the
assets may not be fully recoverable. A review for impairment includes comparing
the carrying value of an asset to an estimate of the undiscounted net future
cash inflows over the life of the asset. An asset is considered to be impaired
when the carrying value exceeds the calculation of the undiscounted net future
cash inflows. An impairment loss is measured as the amount of the excess of the
carrying value over the fair market value of the asset. See Note 15 for the
discussion of impairments recorded in fiscal 2002. Also, as discussed later in
this Note, the Company will be required to adopt the provisions of SFAS No. 144,
"Accounting for Impairment or Disposal of Long-Lived Assets", in fiscal 2003.

Software Development Costs -- Software development costs are capitalized in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 86.
Such costs are capitalized only to the extent of costs of producing product
masters subsequent to the establishment of their technological feasibility and
capitalization ends when the product is available for general release to
customers. Capitalized software development costs are amortized over the
estimated useful lives (generally five years) on a straight-line basis or the
ratio of current revenues to total expected revenues in a product's expected
life, if greater. Amortization begins in the period in which the related product
is available for general release to customers. The Company reviews the
unamortized capitalized costs of its underlying products compared to the net
realizable value of these products. An impairment loss is recorded in an amount
by which the unamortized capitalized costs of a computer software product
exceeds the net realizable value of that asset. Certain software development
costs totaling $1,409, $3,409 and $4,211 have been capitalized during the fiscal
years ended September 30, 2002, 2001 and 2000, respectively. Amortization
expense relating to software development costs for the fiscal years

42

ROBOTIC VISION SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

ended September 30, 2002, 2001, and 2000 was $3,418, $4,409 and $3,987,
respectively. See Note 14 for the discussion of impairments recorded in fiscal
2002.

Research and Development Costs -- The Company charges research and
development costs for Company-funded projects to operations as incurred.

Income Taxes -- The Company accounts for income taxes under the provisions
of SFAS No. 109, "Accounting for Income Taxes," which requires recognition of
deferred tax assets and liabilities for the expected future tax consequences of
events that have been included in the Company's consolidated financial
statements or tax returns. Under this method, deferred tax assets and
liabilities are determined based on the differences between the financial
accounting and tax bases of assets and liabilities using enacted tax rates
expected to be in effect for the year in which the differences are expected to
reverse. Valuation allowances are provided against assets that are not likely to
be recognized. U.S. federal income taxes are not required on the unremitted
accumulated earnings of foreign subsidiaries, since such earnings are considered
to be permanently reinvested abroad.

Net Income (Loss) Per Share -- Basic income (loss) per share is computed
using the weighted average number of common shares outstanding during each year.
Diluted net income per common share reflects the effect of the Company's
outstanding options and warrants (using the treasury stock method), except where
such options would be anti-dilutive.

Fair Value of Financial Instruments -- The following methods and
assumptions were used to estimate the fair value of each class of financial
instruments:

a) Receivables -- The carrying amount approximates fair value because
of the short maturity of these instruments.

b) Debt -- The carrying amounts approximate fair value based on
borrowing rates currently available to the Company for loans with similar
terms.

Use of Estimates -- The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.

Concentrations of Credit Risk -- Financial instruments that potentially
subject the Company to concentrations of credit-risk consist principally of cash
equivalents and trade receivables. Cash equivalents are placed with high-quality
financial institutions, which limits the amount of credit exposure to any one
institution, and the Company has established investment guidelines relative to
diversification and maturities designed to maintain safety and liquidity. Trade
receivables result primarily from sales to semiconductor manufacturers located
in North America, Japan, the Pacific Rim and Europe. Receivables are mostly from
major corporations or distributors or are supported by letters of credit.

Equity-based Compensation -- SFAS No. 123, "Accounting for Stock-Based
Compensation," encourages but does not require companies to record compensation
cost for stock-based employee compensation plans at fair value. As permitted by
SFAS No. 123, the Company has elected to account for stock-based compensation
using the intrinsic value method prescribed in Accounting Principles Board
("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," and related
interpretations including Financial Accounting Standards Board ("FASB")
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation -- an Interpretation of APB Opinion No. 25," and has adopted the
disclosure-only provisions of SFAS No. 123. Accordingly, for financial reporting
purposes, compensation cost for stock options granted to employees is measured
as the excess, if any, of the estimated fair market value of the Company's stock
at the date of the grant over the amount an employee must pay to acquire the
stock. Equity
43

ROBOTIC VISION SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

instruments issued to nonemployees are accounted for in accordance with SFAS No.
123 and Emerging Issues Task Force ("EITF") Abstract No. 96-18, "Accounting for
Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in
Conjunction with Selling Goods or Services."

LITIGATION CONTINGENCIES -- The Company assesses its exposure to pending
litigation and possible unasserted claims against it in order to establish
appropriate litigation reserves. In establishing such reserves, the Company
works with its counsel to consider the availability of insurance coverage, the
likelihood of prevailing on a claim, the probable costs of defending the claim,
and the prospects for, and costs of, resolution of the matter. It is possible
that the litigation reserves established by the Company will not be sufficient
to cover the Company's actual liability and future results of operations for any
particular quarterly or annual period could be materially adversely affected by
the outcome of certain litigation or claims.

Reclassifications -- Certain amounts in the prior year's financial
statements have been reclassified to conform with the current year's
presentation.

RECENT ACCOUNTING PRONOUNCEMENTS --

Business Combinations -- In June 2001, the FASB issued SFAS No. 141,
"Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible
Assets." SFAS No. 141 requires business combinations initiated after June 30,
2001 to be accounted for using the purchase method of accounting, and broadens
the criteria for recording intangible assets separate from goodwill. Recorded
goodwill and intangibles will be evaluated against these new criteria. SFAS No.
142 requires, among other things, the discontinuance of goodwill amortization.
Under this approach, goodwill and certain intangibles will not be amortized into
results of operations, but instead would be reviewed for impairment and written
down and charged to operations only in the periods in which the recorded value
of goodwill and certain intangibles is more than its fair value. SFAS No. 142
also requires a transitional goodwill impairment test six months from the date
of adoption of SFAS No. 142. The Company is required to adopt SFAS No. 142 on
October 1, 2002.

The adoption of SFAS No. 142 is expected to result in certain intangible
assets, including amounts capitalized for workforce, to be reclassified to
goodwill. In addition, SFAS No. 142 requires that the Company discontinue the
amortization of goodwill. For fiscal 2002, goodwill amortization totaled
approximately $415. The Company does not expect the transitional goodwill
impairment test to have a significant impact on its financial statements.

Impairments -- In August 2001, the FASB issued SFAS No. 144, "Accounting
for Impairment or Disposal of Long-Lived Assets," which replaces SFAS No. 121.
The new statement establishes a single accounting model for long-lived assets to
be disposed of by sale. Under its provisions, which apply to both continuing and
discontinued operations, companies must measure long-lived assets at the lower
of fair value, less cost to sell, or the carrying amount. As a result, amounts
reported as discontinued operations should no longer be reported at net
realizable value or include any losses that have not yet occurred. The Company
is required to adopt SFAS No. 144 on October 1, 2002. The Company is currently
assessing, but has not yet determined, the impact of SFAS No. 144 on its
financial position and results of operations.

Early Retirement of Debt -- In April 2002, the FASB issued SFAS 145,
"Rescission of FASB Statements SFAS 4, 44 and 64, Amendment of FASB Statement
No. 13 and Technical Corrections". SFAS 145 rescinds Statement No. 4, "Reporting
Gains and Losses from Extinguishments of Debt", and an amendment of that
Statement, FASB Statement No. 64, "Extinguishments of Debt Made to Satisfy
Sinking-Fund Requirements". SFAS 145 also rescinds FASB Statement No. 44,
"Accounting for Intangible Assets of Motor Carriers". SFAS 145 amends FASB
Statement No. 13, "Accounting for Leases", to eliminate an inconsistency between
the required accounting for sale-leaseback transactions and the required
accounting for

44

ROBOTIC VISION SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

certain lease modifications that have economic effects that are similar to sale
leaseback transactions. SFAS 145 also amends other existing authoritative
pronouncements to make various technical corrections, clarify meanings, or
describe their applicability under changed conditions. The provision of SFAS 145
related to the rescission of Statement No. 4 shall be applied in fiscal year
beginning after May 15, 2002. The provisions of SFAS 145 related to Statement
No. 13 should be for transactions occurring after May 15, 2002. Early
application of the provisions of this Statement is encouraged. The Company does
not expect the adoption of SFAS 145 will have a significant impact on its
consolidated results of operations, financial position or cash flows.

Restructuring -- In July 2002, the FASB issued Statement No. 146,
Accounting for Costs Associated with Exit or Disposal Activities (FAS 146),
which nullifies EITF Issue No. 94-3. FAS 146 requires that a liability for a
cost associated with an exit or disposal activity be recognized when the
liability is incurred, whereas EITF No. 94-3 had recognized the liability at the
commitment date to an exit plan. The Company is required to adopt the provisions
of FAS 146 effective for exit or disposal activities initiated after December
31, 2002.

3. ACCOUNTS RECEIVABLE

Accounts receivable at September 30, 2002 and 2001 consisted of the
following:

4. INVENTORIES

Inventories at September 30, 2002 and 2001 consisted of the following:

Finished goods inventory includes $1,671 and $1,701 that have been placed
on consignment with distributors at September 30, 2002, and September 30, 2001,
respectively.

5. INCOME TAXES

The components of income (loss) before income tax provision (benefit), for
the fiscal years ended September 30, 2002, 2001 and 2000 are as follows:

45

ROBOTIC VISION SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The income tax provision (benefit) for the fiscal years ended September 30,
2002, 2001 and 2000 consisted of the following:

The income tax benefits related to the exercise of stock options reduce
taxes currently payable or increase net deferred tax assets, and are credited to
additional paid-in capital.

A reconciliation between the statutory U.S. Federal income tax rate and the
Company's effective tax rate for the fiscal years ended September 30, 2002, 2001
and 2000 is as follows:

46

ROBOTIC VISION SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The net deferred tax asset at September 30, 2002 and 2001 is comprised of
the following:

As of September 30, 2002, the Company had U.S. Federal net operating loss
carryforwards of approximately $179,000, net of any annual limitation because of
changes in ownership, as defined in the Internal Revenue Code. Such loss
carryforwards expire in the fiscal years 2003 through 2022 as follows:

The Company's net operating loss carryforwards expire as follows:

2007........................................................ $ 380
2008........................................................ 380
2009........................................................ 380
2010........................................................ 2,585
2011........................................................ 2,937
2012........................................................ 1,150
2013........................................................ 814
2014........................................................ 2,623
2015........................................................ 2,096
2016........................................................ 8,519
2017........................................................ 1,167
2018........................................................ 32,340
2019........................................................ 18,542
2021........................................................ 57,640
2022........................................................ 46,979
--------
$178,532
========

The utilization of the carryforwards to offset future tax liabilities is
dependent upon the Company's ability to generate sufficient taxable income
during the carryforward periods. The Company has recorded a valuation allowance
to reduce the net deferred tax asset to an amount that management believes is
more likely than not to be realized. The change in the valuation allowance in
fiscal 2002 is attributable to the significant operating

47

ROBOTIC VISION SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

loss incurred in 2002. The change in the valuation allowance in 2001 is
attributable to the significant operating loss incurred in 2001 and the
provision of a valuation allowance against the Company's net deferred tax asset
of $9,220.

6. PLANT AND EQUIPMENT

Plant and equipment at September 30, 2002 and 2001 consisted of the
following:

7. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

Accrued expenses and other current liabilities at September 30, 2002 and
2001 consisted of the following:

8. REVOLVING CREDIT FACILITY, NOTES PAYABLE AND LONG-TERM DEBT

REVOLVING CREDIT FACILITY

The Company has a $10,000 credit facility that expires in April 2003. This
agreement allows for borrowings of up to 90% of eligible foreign receivables up
to $10,000 of availability provided under the Export-Import Bank of the United
States guarantee of certain foreign receivables and inventories, less a reserve
and the aggregate amount of drawings under letters of credit. At September 30,
2002, the amount available under the line was $8,600, against which the Company
had $7,132 of borrowings, resulting in an availability at September 30, 2002 of
$1,462, subject to the terms of the credit facility. Outstanding balances bear
interest at a variable rate as determined periodically by the bank (5.75% at
September 30, 2002). At September 30, 2002, the Company was not in compliance
with certain covenants of the credit agreement, and therefore in technical
default, however, the bank continues to make funds available for borrowings.
There can be no certainty that the bank will continue to make funds available
and the bank may immediately call for repayment of outstanding borrowings.

48

ROBOTIC VISION SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTES PAYABLE AND LONG-TERM DEBT:

Notes payable and long-term debt at September 30, 2002 and 2001 consisted
of the following:

On November 21, 2001, the $1,500 note payable issued to the former
principals of Abante Automation, Inc. ("Abante") came due, together with 8%
interest thereon from November 29, 2000. In connection with the acquisition of
Abante, the Company agreed to make post-closing installment payments to the
selling shareholders of Abante. These non-interest bearing payments were payable
in annual installments of not less than $500 through November 2005. On the same
date, the first of five annual installments on the Abante payable also became
due, in the amount of $500. Pursuant to an oral agreement with the former
principals of Abante, the Company paid on November 21, 2001 the interest, $250
of note principal and approximately $112 of the first annual installment. The
balance of the sums originally due on November 21, 2001 were rescheduled for
payment in installments through the first quarter of fiscal 2003. In January
2002, the principals demanded current full payment of these amounts or
collateralization of the Company's future payment obligations. The Company did
not agree to the request for collateralization but continued to make certain
payments in accordance with the terms of that agreement, paying the interest,
$250 of note principal and approximately $150 of the first annual installment on
February 21, 2002, and paying approximately $238 of the first annual installment
on May 21, 2002. The Company did not make either the November 2002 note
principal payment of $1,000 or the November 2002 annual installment payment of
$500, and is therefore in default. Although the Company has failed to make the
installment payment, there is no provision in the agreements that would require
the acceleration of future payments due under this arrangement. As a result, the
Company has classified the payments due during fiscal 2004, 2005 and 2006 in the
amount of $1,195 as long-term debt in the accompanying consolidated financial
statements.

On January 3, 2002, a payment of $1,855 under a note issued to the former
shareholders of Auto Image ID, Inc. ("AIID") came due together with interest at
prime rate. On the due date, the Company paid the interest and approximately
$240 of note principal to certain of these shareholders. The Company has reached
an agreement with the other former shareholders to pay the sums originally due
on January 3, 2002 in three equal principal installments in April 2002, August
2002 and December 2002. In exchange for the deferral, the Company issued
warrants with an exercise price of $1.14 per share. The fair value of these
warrants (determined using Black-Scholes pricing model), totaling approximately
$137, is being charged to operations through January 2003. In accordance with
the agreement with the other former stockholders, the Company made note
principal and interest payments on April 1, 2002 of approximately $516 and $31,
respectively, and note principal and interest payments on August 1, 2002 of $536
and $29, respectively. The Company did not make the December 2002 and January
2003 installment payments due of $535 and $1,855,

49

ROBOTIC VISION SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

respectively, and is therefore in default. There is no provision in the AIID
promissory notes giving rights of acceleration of the future installments due in
the event of default under the arrangement. As a result, the Company has
classified the payments due during fiscal 2004 in the amount of $1,855 as
long-term debt in the accompanying consolidated financial statements.

In total, therefore, the Company is in default of $11.0 million of its
borrowings as of January 14, 2003.

Principal maturities of notes payable and long-term debt as of September
30, 2002 are as follows:

2003........................................................ $4,781
2004........................................................ 2,382
2005........................................................ 500
2006........................................................ 194
------
Total.................................................. $7,857
======

On December 4, 2002, Pat V. Costa (the "Holder"), loaned the Company $500
and the Company issued a 9% Convertible Note in the amount of $500. Under the
terms of this agreement, the Company is required to make semiannual interest
payments in cash on May 15 and November 15 of each year commencing May 2003, and
pay the principal amount on December 4, 2005. This agreement also allows for
conversion into shares of common stock. The note may be converted at any time by
the Holder until the note is paid in full or by the Company, if at any time
following the closing date, the closing price of the Company's Common Stock is
greater, for 30 consecutive trading days, than 200% of the conversion. The
Holder's conversion price is equal to 125% of the average closing price of our
common stock for the thirty consecutive trading days ending December 3, 2002, or
$0.42 per share.

In connection with the 9% Convertible Senior Note, on December 4, 2002, the
Company issued Common Stock Warrants to Pat V. Costa. Under the terms of the
agreement, the Holder is entitled to acquire from the Company, warrants to
purchase shares equal to 25% of the total number of shares of Common Stock into
which the Convertible Senior Note may be converted or approximately 300,000
shares. The warrants have an exercise price of $0.63.

On December 4, 2002, the Company entered into a Security Agreement with Pat
V. Costa, in connection with the 9% Convertible Senior Note. As a condition to
making the loan mentioned above and in order to secure the prompt and complete
payment, Mr. Costa has required the Company to perform all of its obligations
and liabilities under the Note. Under the terms of this Note, the Company
granted Mr. Costa a security interest in certain of the Company's assets.

9. EMPLOYEE BENEFIT PLANS

Defined Benefit Plan -- The Company has a noncontributory pension plan for
certain employees hired prior to September 1996 that meet certain minimum
eligibility requirements. The level of retirement benefit is based on a formula,
which considers both employee compensation and length of credited service.

Plan assets are invested in pooled bank investment accounts and mutual
funds, and the fair value of such assets is based on the quoted market prices of
underlying securities in such accounts. The Company funds pension plan costs
based on minimum and maximum funding criteria as determined by independent
actuarial consultants.

50

ROBOTIC VISION SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The components of net pension cost for the fiscal years ended September 30,
2002, 2001 and 2000 are summarized as follows:

The funded status of the plan compared with the accrued expense included in
the Company's consolidated balance sheet at September 30, 2002 and 2001 is as
follows:

The curtailment and settlements were a result of the partial termination of
the plan as well as a result of the employee terminations resulting from the
Company's restructuring efforts.

51

ROBOTIC VISION SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Significant assumptions used in determining net periodic pension cost and
related pension obligations are as follows:

Defined Contribution Plans -- The Company merged three defined contribution
plans in early 2002 into the Robotic Vision Systems, Inc. 401(k) Retirement
Savings Plan (the "Plan") formerly the CiMatrix Retirement Savings Plan. The
Plan is available to all eligible employees as defined by the Plan and matching
contributions are made in accordance with plan documents. The Company incurred
$416, $546 and $751 for matching employer contributions to the Plans in 2002,
2001 and 2000, respectively. The Plan experienced partial plan terminations due
to the number of participants separated from employment.

During fiscal year 2001, the RVSI Vanguard Savings Plan and the RVSI
Retirement Investment Plan experienced partial plan terminations due to the
number of participants separated from employment. Consequently, all participants
who were involuntarily separated from the company due to a reduction in
workforce received 100% of the company matching funds in their accounts.

10. COMMITMENTS AND CONTINGENCIES

Operating Leases -- The Company has entered into operating lease agreements
for equipment, and manufacturing and office facilities. The minimum
noncancelable scheduled rentals, net of the sublessee payments described below,
under these agreements are as follows:

Rent expense for the fiscal years ended September 30, 2002, 2001 and 2000
was $2,910, $3,563 and $3,447, respectively.

In connection with the sale of the material handling business (see Note 13)
as of December 15, 2001, to affiliates of SICK AG of Germany ("SICK"), the
Company sublets a portion its Canton, Massachusetts facility, totaling
approximately 34,100 square feet to SICK. Under the terms of the sale
transaction, SICK agreed to occupy the space through July 2003 and pay a monthly
sublet amount to the Company of approximately $38.

Purchase Commitments -- As of September 30, 2002, the Company had
approximately $22.7 million of purchase commitments with vendors. Approximately
$20.5 million was for the Semiconductor Equipment Group, and included computers,
handling equipment, and manufactured components for the division's lead
scanning, wafer scanning, handling and ball attach product lines. Approximately
$2.2 million was for the Acuity CiMatrix Division, and included computers, PC
boards, cameras, and manufactured components for the division's machine vision
and two-dimensional inspection product lines. The Company is required to take

52

ROBOTIC VISION SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

delivery of this inventory over the next three years. Substantially all
deliveries are expected to be taken in the next eighteen months. A schedule of
the commitments is as follows:

As a result of the slowdown experienced during fiscal 2002, the Company
identified certain purchase commitments for products that have been
discontinued. The Company has recorded a loss in the amount of $0.15 million
related to these commitments.

LITIGATION

A number of purported securities class actions were filed against the
Company, Pat V. Costa, the Chief Executive Officer, and Frank Edwards, the
former Chief Financial Officer, in Federal District Court for the District of
Massachusetts. The consolidated action is now pending as In Re Robotic Vision
Systems, Inc. Securities Litigation, Master File No. 01-CV-10876 (RGS). The
plaintiffs seek damages for alleged false and misleading statements made prior
to the Company's announcement that it would restate its financial results for
fiscal year 2000 and the first quarter of fiscal year 2001. In December 2002,
the parties agreed in principle to settle this matter, subject to the parties
drafting and executing appropriate settlement documents, conducting certain
limited confirmatory discovery and obtaining court approval. The Company expects
the settlement amount to be covered by proceeds from its directors and officers
liability insurance policy.

In May 2002, a purported shareholder derivative action entitled Mead Ann
Krim v. Pat V. Costa, et al., Civil Action No. 19604-NC, was filed in the Court
of Chancery of the State of Delaware against the members of the Company's Board
of Directors, and against the Company as a nominal defendant. The individual
defendants deny the wrongdoing alleged and intend to vigorously defend the
litigation.

In March 2002, the Company learned that the staff of the Securities and
Exchange Commission had commenced a formal investigation into the statements
that preceded, and the accounting practices that led to, the May 2001
restatement of the Company's financial results for fiscal year 2000 and for the
first quarter of fiscal 2001. The Company is cooperating in the investigation.

In September 2002, McDonald Investments Inc. filed a demand for arbitration
with the American Arbitration Association claiming entitlement to certain
advisory fees in connection with the financing the Company completed in May
2002. The matter remains at a preliminary stage. The Company believes that this
claim is without merit and intends to defend vigorously against it.

The Company is presently involved in other litigation matters in the normal
course of business. Based upon discussion with Company's legal counsel,
management does not expect that these matters will have a material adverse
impact on the Company's consolidated financial statements.

53

ROBOTIC VISION SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

11. STOCKHOLDERS' EQUITY

Warrants Outstanding -- As of September 30, 2002, there were outstanding
warrants to purchase the Company's common stock as described below:

- ---------------

(a) In connection with a private placement of its equity, the Company issued
5-year incentive common stock purchase warrants at an exercise price of
$3.96 per share.

(b) In conjunction with the sale of common stock, the Company issued 5-year
incentive warrants at an exercise price of $3.96 per share, subject to
anti-dilution adjustments. The incentive warrants are exercisable,
beginning in October 2000.

(c) The Company sold warrants to purchase 3,091 shares of the Company's common
stock at an exercise price of $4.02 per share for proceeds of $4,250, in a
private placement.

(d) Warrants issued to placement agent in connection with the sale of warrants
and common stock with an exercise price of $5.00 per share.

(e) Warrants assumed from the acquisition of Auto Image ID.

(f) In connection with the deferral of note payments, the Company issued 5 year
common stock warrants at an exercise price of $1.14 per share.

(g) The Company issued 5 year common stock warrants to a consultant for
services rendered at an exercise price of $1.34 per share.

(h) In connection with a private placement of its equity, the Company issued
warrants to purchase up to 2.1 million shares on or before June 30, 2002,
which was then extended to August 31, 2002 at $1.46 per share. The Company
also issued warrants to purchase up to 2.6 million shares at $1.50 per
share on or before May 1, 2005. The private placement also included
warrants issued to the placement agent to purchase up to 0.6 million shares
of common stock at $1.50 per share on or before May 1, 2005.

Private Placement Warrants -- On May 2, 2002, the Company completed a
private placement, which raised approximately $13,591, net of offering expenses.
A total of 10.3 million shares of common stock were sold at $1.46 per share. The
placement also included warrants to purchase up to 2.1 million shares at $1.46
per share on or before June 30, 2002 (the "60-day Warrants"), and warrants to
purchase up to 2.6 million shares at $1.50 per share on or before May 1, 2005
(the "3-year Warrants"). On June 27, 2002, the 60-day Warrants were modified to
expire on August 30, 2002 and all such warrants expired without exercise on that
date. The private placement also included warrants issued to the placement agent
(the "Placement Warrants"), to purchase up to 0.6 million shares of common stock
at $1.50 per share on or before May 1, 2005. The Company may call the $1.50
warrants, effectively forcing conversion, if the price of the Company's common
stock trades above $2.35 per share for twenty consecutive trading days at any
time prior to the warrants' expiration. The fair value of the 60-day Warrants
(determined using Black-Scholes pricing model: volatility of 107% and risk-

54

ROBOTIC VISION SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

free interest rate of 2.49%), totaling approximately $525, the 3-year Warrants,
totaling approximately $1,400, and the Placement Warrants, totaling
approximately $305, was credited to additional paid-in capital.

Warrants for Payment Deferral -- On January 3, 2002, a payment of $1,855
under a note issued to the former shareholders of Auto Image ID, Inc. ("AIID")
came due together with interest at prime rate. On the due date, the Company paid
the interest and approximately $240 of note principal to certain of these
shareholders. The Company has reached an agreement with the other former
stockholders to pay the sums originally due on January 3, 2002 in three equal
principal installments in April 2002, August 2002 and December 2002. In exchange
for the deferral, the Company issued warrants with an exercise price of $1.14
per share. The fair value of these warrants (determined using Black-Scholes
pricing model: volatility of 107% and risk-free interest rate of 2.49%),
totaling approximately $137, was credited to additional paid in capital.

Prepaid and Incentive Warrants -- On February 23, 1999, the Company
completed a private placement of its equity securities consisting of 5-year
prepaid common stock purchase warrants ("prepaid warrants") with a stated value
of $11,000 and 5-year incentive common stock purchase warrants ("incentive
warrants") to purchase 592 shares of the Company's common stock upon payment of
an exercise price of $3.96 per share. These securities were sold to four
institutional investors. At the closing, the Company received gross proceeds of
$11,000 from the issuance of the prepaid warrants and incentive warrants, and
net proceeds of $9,763 after placement agent fees and other expenses of the
transaction. The Company also issued to the placement agent 5-year incentive
warrants to purchase 630 shares of common stock at an exercise price of $3.96
per share. The market price of the Company's common stock on the placement
closing date was $3.03 per share.

Each prepaid warrant was exercisable at the lower of $3.96 per share or 95%
of the average of the three lowest closing bid prices of the Company's common
stock during the 20-day trading period ending on the date of notice of exercise.
The prepaid warrants included an annual premium of 7% per annum, payable in cash
or, at the Company's option, in shares of the Company's common stock. During the
years ended September 30, 2002, 2001 and 2000, the warrant premium accrued was
$0, $1,712 and $1,263, respectively, of which the Company paid $2,442, $217, and
$0, respectively, in cash and the remainder in shares of common stock. During
the years ended September 30, 2002, 2001 and 2000, 14,355, 682 and 0 shares were
issued upon exercise of prepaid warrants at average exercise prices of $0.82,
$1.71, $0.00, respectively. At September 30, 2002, there were no prepaid
warrants outstanding.

Stock Option Plans -- The Company has several stock option plans, which
provide for the granting of options to employees or directors at prices and
terms as determined by the Board of Directors' Stock Option Committee. Such
options generally vest over a period of one to five years. Generally, options
issued by the Company to date have exercise prices equal to or greater than the
fair market value of the Company's common stock at the date of grant.

55

ROBOTIC VISION SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The following table sets forth summarized information concerning the
Company's stock options:

Weighted average option exercise price information for the fiscal years
ended September 30, 2002, 2001 and 2000 was as follows:

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ROBOTIC VISION SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

AS OF SEPTEMBER 30, 2002

The Company applies Accounting Principles Board Opinion No. 25, "Accounting
For Stock Issued To Employees", and related interpretations in accounting for
its option plans. Accordingly, as all options have been granted at exercise
prices greater than or equal to fair market value on the date of grant, no
compensation expense has been recognized by the Company in connection with its
stock-based compensation plans. Had compensation cost for the Company's stock
option plans been determined based upon the fair value at the grant date for
awards under these plans consistent with the methodology prescribed under
Statement of Financial Accounting Standards No. 123, "Accounting For Stock-Based
Compensation", the Company's earnings (loss) available to common stockholders
and earnings (loss) per share would have been as follows:

The weighted average fair value of the options granted during fiscal 2002,
2001 and 2000 is estimated at $1.25, $2.27 and $7.96 on the date of grant (using
Black-Scholes option pricing model) with the following weighted average
assumptions for fiscal 2002, 2001 and 2000, respectively: volatility of 107%,
107% and 95%, risk-free interest rate of 2.49%, 3.90% and 5.94%, and an expected
life of five years in fiscal 2002, 2001 and 2000, respectively.

2002 OPTION PLAN

On November 13, 2002, the Board of Directors of the Company (the "Board")
approved the Robotic Vision Systems, Inc. 2002 Stock Plan (the "Plan"). The Plan
allows for the grant of Non-Qualified Options at any time from November 13, 2002
to June 30, 2003 to key employees or individuals who render services to the
Company. The aggregate number of shares for which options may be granted under
this Plan is 2,000,000.

57

ROBOTIC VISION SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Options to purchase 1,753,000 shares have been granted as of January 14, 2003.
Such option under the Plan is fully exercisable upon grant or in installments as
specified by the Compensation Committee or the Board of Directors.

12. CUSTOMERS, GEOGRAPHIC AND SEGMENT INFORMATION

MAJOR CUSTOMERS AND CREDIT CONCENTRATIONS

In fiscal 2002 and fiscal 2001, revenues from one customer represented 10%
of total revenues at September 30, 2002 and September 30, 2001. During fiscal
2000 and 1999, no customer accounted for more than 10% of total revenues.

During fiscal 2002, relations with this one customer have deteriorated. The
Company has been in an escalating dispute with this customer relating to a
number of the customer's practices. The Company alleges that this customer has
repeatedly interfered with the Company's business to the Company's detriment.
The Company and the customer have held discussions to settle their differences,
but there can be no assurance that a mutually agreeable conclusion will be
reached.

GEOGRAPHIC OPERATIONS

Operations by geographic area are summarized as follows:

Total revenues from customers outside the U.S. were $32,532, $65,640 and
$158,152 for the fiscal years ended September 30, 2002, 2001 and 2000,
respectively.

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ROBOTIC VISION SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Export sales from the Company's U.S. divisions to unaffiliated customers,
which are generally denominated in U.S. dollars, for the fiscal years ended
September 30, 2002, 2001 and 2000 were as follows:

SEGMENT INFORMATION

The Company's chief operating decision-maker is its Chief Executive
Officer. The Company operates in two reportable segments serving the machine
vision industry. The Company has determined segments primarily based on the
nature of the products offered by the Semiconductor Equipment Group and the
Acuity CiMatrix division. The Semiconductor Equipment Group is comprised of the
Electronics, Systemation and Vanguard subdivisions. The Electronics subdivision,
including Abante Automation, supplies inspection equipment to the semiconductor
industry; the Systemation subdivision offers tape and reel component processing
systems designed to handle and inspect chip scale packages ("CSP") and ball grid
array ("BGA") packages; and the Vanguard subdivision is a supplier of BGA and
CSP equipment for the semiconductor and connection industries. The Acuity
CiMatrix division designs, manufactures and markets 2-D data collection products
and barcode reading systems, as well as 2-D machine vision systems and lighting
products for use in industrial automation.

The accounting policies of each segment are the same as those described in
Note 2. Sales between segments are determined based on an intercompany price
that is consistent with external customers. Intersegment sales by the Acuity
CiMatrix division were approximately $200, $965 and $3,800 for fiscal 2002, 2001
and 2000, respectively. All intercompany profits are eliminated in
consolidation. Other income (loss) is comprised of unallocated corporate general
and administrative expenses. Other assets are comprised primarily of unallocated
deferred taxes and corporate accounts. Although certain research activities are
conducted by the Acuity CiMatrix division for the Semiconductor Equipment Group,
research and development expenses are reported in the segment where the costs
are incurred. The following table presents information about the Company's
reportable segments. All intercompany transactions have been eliminated.

59

ROBOTIC VISION SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

13. ACQUISITIONS AND DISPOSITIONS

On November 29, 2000, the Company acquired the outstanding shares of Abante
Automation, Inc. ("Abante") for approximately $1,850 in cash, a twelve-month
note of $1,500 at 8% interest and the net present value of future minimum
payments of $500 per year for 5 years using a discount rate of 8% (see Note 8).
Abante designs, manufactures and markets machine vision systems for
three-dimensional inspection in the semiconductor and electronics industries.

On January 3, 2001, the Company acquired the outstanding shares of Auto
Image ID, Inc. ("AIID") for approximately $1,200 in cash and three-year notes
payable at $1,855 per year at prime rate (see Note 8).

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ROBOTIC VISION SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

AIID designs, manufactures and markets products for reading direct part marks
and two-dimensional bar codes.

The acquisitions have been accounted for as purchases and, accordingly, the
results of Abante and AIID are included in the consolidated statements of
operations of the Company since the respective dates of acquisition. Under the
purchase method of accounting, the acquired assets and assumed liabilities have
been recorded at their estimated fair values at the dates of acquisition.

The allocation of the total cost of the acquisitions in 2001 of
approximately $12,550 was as follows: approximately $5,300 was allocated to
existing technologies; $1,050 to in-process research and development;
approximately $1,800 to other identified intangible assets and $4,400 to
goodwill. The intangible lives range from 4 to 5 years and the goodwill was
being amortized over 7 years. Future minimum payments under non-cancelable
commitments are discounted using applicable rates. The operations of Abante and
AIID prior to their acquisitions by the Company are not material to the
Company's statement of operations.

The valuation of the existing technology and in-process research and
development was determined using the income method. Revenue and expense
projections as well as technology assumptions were prepared through 2006. The
projected cash flows were discounted using a 25% rate. The value assigned to
in-process technology relates primarily to one research project, as yet to reach
technological feasibility and which had no alternative use at the date of
purchase. The in-process research and development related to a single project
for the development of 3-D inspection technology. Management is primarily
responsible for estimating the fair value of the acquired in-process research
and development, and the valuation was determined separately from all other
acquired assets using the percentage of completion method. The significant
assumptions underlying the valuation of this technology included revenues
commencing in 2001, a completion ratio of 64% which was calculated by dividing
the total expenditures to date for the project by the total estimated
expenditures, and a discount rate of 30%. The efforts required to develop the
in-process technologies into commercially viable products principally relate to
the completion of all planning, designing, prototyping, verification and testing
activities that are necessary to establish that the products can be designed to
meet their design specifications, including function, features and technical
performance requirements. At September 30, 2001, this project was substantially
concluded.

As of December 15, 2001 the Company sold its one-dimensional material
handling product line ("material handling business"), which had been part of the
Company's Acuity CiMatrix division, to affiliates of SICK AG of Germany
("SICK"). The material handling business had designed, manufactured and marketed
one-dimensional bar code reading and machine vision systems and related products
used in the automatic identification and data collection market to track
packages for the parcel delivery services and material handling industries. The
sales price was $11,500, which includes the right to receive $500 following the
expiration of a 16-month escrow to cover indemnification claims. The costs of
the transaction were approximately $800. The Company recorded a net gain of
$6,935 in the first quarter of fiscal 2002, related to the sale of the material
handling business. For the period from October 1, 2001 through December 15,
2001, the material handling business had revenues of approximately $2,800 and
had an operating loss of approximately $250.

14. EARNINGS PER SHARE

Basic net income (loss) per share is computed using the weighted average
number of shares outstanding during each period. Diluted net income per share
reflects the effect of the Company's outstanding stock options and warrants
(using the treasury stock method), except where such options and warrants would
be

61

ROBOTIC VISION SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

anti-dilutive. The calculations for earnings per share for the three years ended
September 30, 2002, 2001 and 2000 are as follows:

For the years ended September 30, 2002, 2001 and 2000, the Company had
potential common shares, representing outstanding stock options and warrants,
excluded from the earnings per shares calculation of 11,522, 11,945, and 514
respectively, as they were considered anti-dilutive.

62

ROBOTIC VISION SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

15. RESTRUCTURING

In response to the lower level of revenues in fiscal 2002, the Company took
steps to reduce its operating costs. In addition, the Company reviewed its
long-lived assets for impairment. A summary of these restructuring costs and
impairment charges is as follows:

Restructuring -- The Company experienced a decline in orders and revenues
during fiscal 2002. Management's response was to develop and implement headcount
reduction plans designed to reduce costs and expenses. As the downturn in the
economy worsened, management reviewed its operational plan and made further
headcount reductions. During the quarters ended December 31, 2001, March 31,
2002 and June 30, 2002, management made decisions to terminate employees in
response to lower revenues. In addition to headcount reductions, the Company
incurred costs related to the closing of a foreign office. Certain tangible and
intangible assets were also abandoned in connection with the restructuring
efforts. Restructuring charges, totaling approximately $1,688 after reversals,
were recorded during fiscal 2002. The charges can be summarized as follows:

- During the quarter ended December 31, 2001, approximately $169 of
employee severance was recorded. Headcount reductions were made in the
Semiconductor Equipment Group and the Acuity CiMatrix division.
Approximately 30 employees were terminated throughout all functions of
these operations.

- In the quarter ended March 31, 2002, approximately $542 of severance was
recorded. Approximately 30 employees were terminated throughout all
functions of the Semiconductor Equipment Group. Also, approximately $335
of severance and facility cost restructuring charges was reversed during
the quarter. The reversal of charges was due to a change in operating
plans by the Company which abandoned plans to close a facility. Severance
for employees at that facility and facility exit costs previously accrued
were reversed.

- In the quarter ended June 30, 2002, approximately $1,225 of severance and
other charges was recorded. Approximately 100 employees were terminated
throughout all functions of the Semiconductor Equipment Group, the Acuity
CiMatrix division as well as within the Corporate staff. The

63

ROBOTIC VISION SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

restructuring also included costs related to the closing of foreign
offices, which included the write-off of tangible assets of $269.

- In the quarter ended September 30, 2002, approximately $177 of severance
and other charges were recorded, relating primarily to the finalization
of a foreign office closing in the Semiconductor Equipment Group, which
included the write-off of certain tangible property totaling $85. Also,
approximately $90 of severance was reversed during the quarter relating
to the Acuity CiMatrix division, an adjustment to an estimated amount
accrued in the prior quarter.

All accrued charges remaining at September 30, 2002 are expected to be paid
within the Company's fiscal year ending September 30, 2003.

Impairments -- Because of the continued decline in revenues in 2002, the
Company reviewed its long-lived assets, including capitalized software,
purchased technologies and goodwill for impairment. To evaluate and measure the
impairment of capitalized software the Company considered the estimated future
gross revenues reduced by estimated future costs, including costs of performing
maintenance and customer support. To evaluate the impairment of purchased
technologies and goodwill, the Company compared the carrying amount to estimated
undiscounted net future cash flows. If an impairment was indicated, the amount
was measured as the excess of the carrying amount over the fair market value of
the asset, which the Company generally estimated using a discounted cash flow
model. As a result of this review, the Company recorded in fiscal 2002
impairment charges relating to capitalized software, goodwill and other
intangible assets totaling $260, $2,296, and $2,000, respectively.

In response to the lower level of revenues in fiscal 2001, the Company took
steps to reduce its operating costs. In addition, the Company reviewed its
long-lived assets for impairment. A summary of these restructuring costs and
impairment charges is as follows:

Restructuring -- The Company experienced a significant decline in orders
and revenues commencing with the first quarter of fiscal 2001. Its response was
to develop and implement headcount reduction plans

64

ROBOTIC VISION SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

designed to reduce costs and expenses. As the downturn in the economy worsened,
the Company reviewed its operational plan and made further headcount reductions.
During all quarters of fiscal 2001, we made decisions to terminate employees in
response to lower revenues. In addition to headcount reductions, the Company
exited certain facilities, including substantially all European locations. The
remaining lease obligations were accrued when an exit plan was determined.
Certain tangible and intangible assets were also abandoned in connection with
the restructuring efforts. Restructuring charges, totaling approximately $5.2
million after reversals, were recorded during fiscal 2001. The charges can be
summarized as follows:

- During the quarter ended December 31, 2000, approximately $1.5 million of
employee severance was recorded. Headcount reductions were made in the
Semiconductor Equipment Group, the Acuity CiMatrix division, as well as
within the Corporate staff. Approximately 110 employees were terminated
throughout all functions of these operations. In addition, a
restructuring of the European operations led to lease termination costs,
a write-off of facility leasehold improvement costs and write-off of
intangible assets considered impaired with the closure of the European
businesses, all of which totaled approximately $1.2 million.

- In the quarter ended March 31, 2001, approximately $0.8 million of
severance was recorded. Approximately 90 employees were terminated
throughout all functions of the Semiconductor Equipment Group and the
Acuity CiMatrix division. Approximately $0.1 million of severance was
reversed as a result of lower termination costs than anticipated.
Continued efforts to downsize the European operations led to lease
termination costs and write-off of facility leasehold improvements,
totaling approximately $0.4 million.

- In the quarter ended June 30, 2001, approximately $0.5 million of
severance was recorded. Approximately 100 employees were terminated
throughout all functions of the Semiconductor Equipment Group and the
Acuity CiMatrix division.

- In the quarter ended September 30, 2001, approximately $0.9 million of
severance was recorded, representing 100 employees throughout all
functions of the Semiconductor Equipment Group and the Acuity CiMatrix
division. Finalization of the European facilities' closures and other
restructuring activities resulted in a $0.9 million write-off of
abandoned property and equipment and certain intangibles, totaling $0.2
million. As a result of favorable negotiations, the estimated lease
obligations on a facility in the U.K. were reduced by $0.9 million.

Impairments -- Because of the significant decline in revenues in 2001, the
Company reviewed its long-lived assets, including capitalized software,
purchased technologies and goodwill for impairment. To evaluate and measure the
impairment of capitalized software the Company considered the estimated future
gross revenues reduced by estimated future costs, including costs of performing
maintenance and customer support. To evaluate the impairment of purchased
technologies and goodwill, the Company compared the carrying amount to estimated
undiscounted net future cash flows. If an impairment was indicated, the amount
was measured as the excess of the carrying amount over the fair market value of
the asset, which the Company estimated using a discounted cash flow model.

65

ROBOTIC VISION SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

16. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)

FOR THE FISCAL YEARS ENDED SEPTEMBER 30, 2002 AND 2001:

66

SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS AND RESERVES

- ---------------

(1) Amounts written off.

67

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the Town of Canton,
Commonwealth of Massachusetts, on the day of January 14, 2003.

ROBOTIC VISION SYSTEMS, INC.

By: /s/ PAT V. COSTA
------------------------------------
Pat V. Costa
Chairman, President and Chief
Executive Officer

Pursuant to the requirements of the Securities Act of 1934, this Report has
been signed below by the following persons on behalf of the registrant and in
the capacities and on the dates indicated.

68

I, Pat V. Costa, certify that:

1. I have reviewed this annual report on Form 10-K of Robotic Vision
Systems, Inc. (the "registrant")

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

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

4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

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

b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and

c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):

a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and

6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.

/s/ PAT V. COSTA
--------------------------------------
Pat V. Costa
Chairman, President and
Chief Executive Officer

Date: January 14, 2003

69

I, John J. Connolly, certify that:

1. I have reviewed this annual report on Form 10-K of Robotic Vision
Systems, Inc. (the "registrant")

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

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

4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

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

b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and

c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):

a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and

6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.

/s/ JOHN J. CONNOLLY
--------------------------------------
John J. Connolly
Chief Financial Officer
and Treasurer

Date: January 14, 2003

70