ROBOTIC VISION SYSTEMS INC - 10-K Annual Report

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

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2003

COMMISSION FILE NUMBER 0-8623

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

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

486 AMHERST STREET, NASHUA, NH 03063
(Address of Principal Executive Offices)

REGISTRANT'S TELEPHONE NUMBER (603) 598-8400

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]

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2) of the Exchange Act) Yes [ ] No [X]

The aggregate market value of the common stock held by non-affiliates of
the Registrant was $10,865,026 as of March 31, 2003, the last business day of
the Registrant's most recently completed second fiscal quarter.

The number of shares of the Registrant's common stock outstanding was
17,266,751 as of December 31, 2003.

DOCUMENTS INCORPORATED BY REFERENCE

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UNLESS OTHERWISE INDICATED, THE INFORMATION CONTAINED IN THIS ANNUAL REPORT
GIVES EFFECT TO A ONE-FOR-FIVE REVERSE STOCK SPLIT OF OUR COMMON STOCK EFFECTED
ON NOVEMBER 26, 2003.

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 have installed more
than 1800 of the 2300 lead scanners used by the semiconductor industry since we
entered that market. 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, based
in Hauppauge, New York, and the Acuity CiMatrix division, located in Nashua, New
Hampshire.

- The Semiconductor Equipment Group's primary business is the design,
manufacture and marketing of systems that employ lasers to provide
three-dimensional measurement and inspection of solder connection bumps
on semiconductor wafers and leads and ball-grid-arrays on assembled chip
packages. 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.

We were incorporated in New York in 1976 and reincorporated in Delaware in
1977. Our executive offices are located at 486 Amherst Street, Nashua, New
Hampshire 03063; our telephone number is (603) 598-8400.

As of September 26, 2003, we closed a private placement of our securities
raising $5.0 million in gross proceeds, $4.8 million of which was received by
September 30, 2003 and the balance in early October 2003. In December 2003, the
lead investor exercised an option to invest an additional $1.0 million on the
same terms and conditions as the original funding, increasing the total gross
proceeds to $6.0 million. The net proceeds of the financing will be used for
general corporate purposes, including working capital to support growth. A total
of 2.4 million shares of common stock were sold in the private placement at
$2.50 per share. The private placement also included warrants to purchase up to
1.2 million shares at $3.05 per share on or before September 26, 2008.

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On October 28, 2003, our common stock was delisted from The Nasdaq SmallCap
Market. The basis of the delisting was our failure to amend, before an October
24, 2003 deadline set by a Nasdaq Listing Qualification Hearing Panel, our
quarterly report on Form 10-Q for the quarter ended June 30, 2003 to include
financial results reviewed by our auditors. On October 31, 2003, we filed an
amended quarterly report on Form 10-Q for the quarter ended June 30, 2003. We
have appealed the delisting of our common stock from The Nasdaq SmallCap Market.
Our common stock is now quoted on the National Quotation Service.

On November 26, 2003, we amended our restated certificate of incorporation
to effect a one-for-five reverse split of our common stock.

On November 26, 2003, we replaced our $10.0 million revolving credit line
with a $13.0 million facility. The new facility has two revolving credit lines.
The first of which accords us a maximum of $10.0 million and is collateralized
by certain foreign receivables and inventory with availability subject to a
borrowing base formula. This line, which is guaranteed by the Export-Import Bank
of the United States, expires on November 30, 2005 and has a 7% interest rate.
The second line is for a maximum of $3.0 million and is collateralized by
certain domestic receivables. Availability under the line is subject to a
borrowing base formula, which, as defined in the credit agreement, includes a
$1.5 million overadvance feature. At November 26, 2003, the amount available
under the line was approximately $12.5 million against which we had $8.9 million
of borrowings, resulting in availability at November 26, 2003 of $3.6 million.
It expires on November 25, 2006 and has a 17% interest rate of which 5% can be
capitalized at our option. The facility contains covenants pertaining to our net
worth and to fixed charge coverage (as defined). We can prepay the facility at
our discretion. In the event of the sale of our Semiconductor Equipment Group,
we are required to repay in full the $10.0 million credit line. The $3.0 million
credit line would continue, subject to our meeting certain financial conditions.
The facility also includes an annual commitment fee of 0.5% based on the unused
portion of the facility. In connection with the financing, we issued a
three-year warrant to purchase 2.2 million shares of our common stock at an
exercise price of $0.01 per share.

(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

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wafers and the back-end packaging process that involves the assembly, test,
packaging 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 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 as a combination of lower-than-expected end-user demand and
over-production in 2000 resulted in a decrease in semiconductor industry sales
of 32%, to $138.4 billion in 2001. The industry grew by a very modest 1.8% in
2002 and the SIA has predicted that it will recover to $163.0 billion in 2003
representing growth of 15.8%. In November 2003, the SIA predicted industry
growth of 19.4% for 2004. Growth at these rates, which we cannot assure, would
result in semiconductor industry revenues of $194.6 billion in 2004, still
slightly lower than the industry's 2000 peak.

In December 2000, the Semiconductor Equipment and 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 SEMI 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 declined 60% to $19.8
billion in 2002. SEMI's most recent prediction, issued in July 2003, is for
industry growth of 4% in 2003 and 24% in 2004, and 18% in 2005. If these
predictions prove accurate, which we cannot assure, industry revenues in 2005
will be approximately $30.9 billion, still 35% below the 2000 peak.

Two forces generally drive the demand for semiconductor capital equipment.
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 production of ever smaller, lighter, and lower-profile
packages.

Sale of inspection equipment of the kind manufactured by RVSI, is driven by
many factors, including, among others:

- 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 a November 2003 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 approximately $1.0 billion,
and is forecast to grow at a compound annual rate of 10% 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.

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 a complete family. 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 automotive.
This has allowed us to become specialists 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.

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SEMICONDUCTOR EQUIPMENT GROUP

Our Semiconductor Equipment Group 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 for metrology applications, our WS-2510, 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.

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, 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 board-level machine vision
product, Visionscape, was first introduced in 1998 and today encompasses a
family of board-level machine vision systems. Visionscape 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. Acuity CiMatrix has also developed the HawkEye family of integrated
products incorporating cameras and machine vision circuit boards. The HawkEye
family is used both as a fixed-station Data Matrix imaging system and as a
smart-camera solution for industrial machine vision applications.

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

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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. 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.
Direct sales personnel handle group sales activities in the domestic market. The
Semiconductor Equipment Group also 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, value-added distributors, original equipment
manufacturers 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, Asia,
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, 2003 we employed over
80 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 $10.2 million,
$18.6 million and $28.4 million for the years ended September 30, 2003, 2002 and
2001, respectively. In the fiscal years ended September 30, 2003, 2002, and
2001, we capitalized $1.2 million, $1.4 million and $3.4 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 organiza-

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tions. 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 December 22, 2003, we owned over 120 issued U.S. patents, with
expiration dates ranging from January 2004 to July 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

No customers accounted for more than 10% of sales during the fiscal year
ended September 30, 2003. Intel Corporation accounted for 10% of our revenues
during the fiscal years ended September 30, 2002 and 2001.

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, 2003, bookings were $39.6 million. This
compares to bookings of $58.1 million for the twelve months ended September 30,
2002. The decline in our bookings in fiscal 2003 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, 2003, our backlog was $9.0 million, as compared to $12.9
million at September 30, 2002. We believe that most of our backlog at September
30, 2003 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 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.

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EMPLOYEES

At September 30, 2003 we employed 195 persons, of whom 81 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 $1.6 million, $1.8 million and $4.5 million for the years ended September
30, 2003, 2002 and 2001, respectively.

Total revenues to customers outside the U.S. were $25.8 million, $32.5
million and $65.6 million for the years ended September 30, 2003, 2002 and 2001,
respectively.

ITEM 2. PROPERTIES

Our executive offices, as well as our Acuity CiMatrix division, are located
in a 34,000 square foot facility in Nashua, New Hampshire and its Northeast
Robotics operations are located in an 18,000 square foot facility in Weare, New
Hampshire. The Symbology Research Center of our Acuity CiMatrix division is
located in a 5,415 square foot facility in Huntsville, Alabama. Our
Semiconductor Equipment Group is located in a 65,000 square foot facility in
Hauppauge, New York. We maintain a 13,820 square foot satellite office in
Canton, Massachusetts that provides offices for certain corporate functions as
well as for other company employees. 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. We maintain a
sales and service office in Singapore to support our Semiconductor Equipment
Group's operations.

All of our facilities are leased, with annual rental payments of
approximately $1.8 million and lease expiration dates ranging from 2004 to 2011.

ITEM 3. LEGAL PROCEEDINGS

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.

A number of purported securities class actions were filed beginning on or
about June 11, 2001, against us, Pat V. Costa, our Chief Executive Officer, and
Frank Edwards, our former Chief Financial Officer, in the Federal District Court
for the District of Massachusetts. The action was consolidated as In Re Robotic
Vision Systems, Inc. Securities Litigation, Master File No. 01-CV-10876 (RGS).
This matter was settled on July 21, 2003. The settlement amount was paid from
our directors and officers liability insurance policy.

In February 2003, four of the former shareholders of Auto Image ID, Inc.
filed an action in the United States District Court for the Eastern District of
Pennsylvania, C. A. No. 03-841, seeking payments of approximately $2 million of
amounts allegedly owed under promissory notes issued to them by us in connection
with our purchase of Auto Image ID, Inc. in January 2001. The parties to this
action have agreed to settle the matter. The plaintiffs agreed to forbear in
acting to collect on the promissory notes until May 1, 2004 or the earlier
occurrence of certain events and we agreed to issue to the plaintiffs warrants
to purchase 64,276 shares of our common stock. The parties filed a stipulation
of dismissal on July 7, 2003.

In addition, we are presently involved in other litigation matters in the
normal course of business. Based upon discussion with our legal counsel,
management does not expect that these matters will have a material adverse
impact on our consolidated financial statements.

9

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

A Special Meeting of Stockholders was held on November 11, 2003.

At that meeting, the shareholders ratified the proposal to grant
discretionary authority to our board of directors to amend our restated
certificate of incorporation to effect a reverse split of our common stock
within a band ranging from one-for-three to one-for-seven.

The vote was as follows:

For 11,073,943
Against 1,090,766
Abstain 30,169

PART II

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

The information below gives effect to the one-for-five reverse split of our
common stock effected on November 26, 2003.

MARKET INFORMATION

Our common stock is quoted on the National Quotation Service under the
symbol "RVSI". Between October 25, 2002 and October 27, 2003, our common stock
was quoted on The Nasdaq SmallCap Market. Prior to October 25, 2002, our common
stock was quoted on The Nasdaq National Market. The following table sets forth
the high and low closing prices for our common stock for the periods indicated:

On December 26, 2003 the closing price of our common stock was $3.35 per
share.

Reverse Stock Split -- Effective November 26, 2003, we effected a
one-for-five reverse stock split of our common stock. All information in the
consolidated financial statements related to common shares, share prices, per
share amounts, stock option plans and stock warrants have been restated
retroactively for the reverse stock split, unless otherwise noted.

HOLDERS

The number of holders of record of our common stock as of December 26, 2003
was approximately 3,500.

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.

10

RECENT SALES OF UNREGISTERED SECURITIES

On July 7, 2003, we entered into an agreement with certain holders of our
notes issued in connection with the acquisition of Auto Image ID, Inc. in
January 2001. As partial consideration for their agreement to forbear from
exercising their rights with respect to these notes, we issued to these
noteholders warrants to purchase an aggregate of 64,276 shares of common stock.
The warrants are exercisable at $3.60 per share through September 2, 2006.

On July 10, 2003, we issued to McDonald Investments, Inc. warrants to
purchase 30,000 shares of our common stock as partial consideration for
settlement of a dispute arising from an agreement between the parties. The
warrants are exercisable at $0.05 per share commencing July 10, 2003 and ending
May 19, 2006.

On September 26, 2003, we closed a private placement of our securities
raising $5.0 million in gross proceeds. A total of 2.0 million shares of common
stock were sold to accredited investors at $2.50 per share. We also issued
warrants to these investors to purchase up to 1.0 million shares at $3.05 per
share on or before September 26, 2008. The placement agent, Barrington Research
Associates, Inc., received fees of $250 thousand and warrants to purchase 40,000
shares of common stock at an exercise price of $2.50 per share.

During the fiscal year ended September 30, 2003, we issued 439,785 shares
of our common stock to certain suppliers in exchange for the cancellation of
approximately $2.8 million of trade indebtedness owed to such suppliers. This
debt restructuring also included the cancellation of certain of our purchase
order commitments totaling approximately $2.8 million.

During the three months ended September 30, 2003, we issued 664 shares of
our common stock and options to purchase 28,054 shares of our common stock to
non-employee members of our Board of Directors as compensation for their
attendance at board and committee meetings held during that period.

Our securities that were issued in the foregoing transactions were not
registered under the Securities Act of 1933 because they were offered and sold
in transactions not involving a public offering, and as such, exempt from such
registration.

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 data as of September 30, 2003 and 2002 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, 2001, 2000 and 1999 and the Statement of Operations Data for years
September 30, 2001, 2000 and 1999 have been derived from our audited financial
statements, which are not contained in this Report. The weighted average shares
and net income (loss) per share amounts for all year presented give effect to
the one-for-five reverse split of our common stock effected on November 26,
2003.

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

(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 $1.14 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.

Our consolidated financial statements have been prepared assuming that we
will continue as a going concern. We have incurred net losses in fiscal 2003,
2002 and 2001 amounting to $30.1 million, $41.8 million, and $104.4 million,
respectively. Net cash used in operating activities amounted to $2.8 million,
$25.9 million and $12.6 million in fiscal 2003, 2002 and 2001 respectively.
Further, we have debt payments past due which relate to prior years'
acquisitions. 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 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 included 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 $250,000.
The material handling business had revenues and operating income of
approximately $16.1 million and $200,000, respectively, in fiscal 2001. The sale
of the business reduced our revenues and operating expenses in future quarters.
On June 5, 2003, we came to an agreement with SICK AG on the remaining escrow in
the amount of $350,000 and recorded the amount as a net gain in the year ended
September 30, 2003.

In November 2002, we adopted a formal plan to sell the SEG business. In the
period since the formal plan was adopted, the semiconductor equipment industry
has entered the early stages of a growth cycle driven by rising semiconductor
industry sales. Also, during this period the SEG business has (a) lowered its
fixed costs and breakeven level of revenues, (b) reduced its liabilities through
a series of debt-for-equity exchanges, and (c) recruited an experienced high
technology executive to run the operations and oversee its eventual sale. While
there can be no assurance of a successful outcome, we believe that given these
changes in the business and the concurrent improvement in the semiconductor
capital spending environment, the SEG business has the potential to generate
positive cash flow from operations and return to profitability. Accordingly, we
believe the timing of the SEG business' sale should be lengthened to allow for
the realization of a sale price that more closely reflects what we believe is
the business' inherent value. We have not changed our belief that the sale of
the SEG business is in the best interests of shareholders, nor have we changed
our desire to consummate a sale of the SEG business at the earliest date. We are
in continuing discussions with interested buyers.

On October 20, 2003 we sold certain assets of our Systemation Business,
primarily consisting of inventory and intellectual property for $40,000 in cash
and a promissory note for the principal amount of approximately $3.6 million.

The sale of SEG, if completed, is expected to result in sufficient proceeds
to pay down a significant portion of our debt, reduce accounts payable, and
provide working capital for our remaining business, however, no assurance can be
given that SEG will be sold at a price, or on sufficient terms, to allow for
such a result. Because the timing and proceeds of a prospective sale of SEG is
uncertain, we took steps during fiscal 2003 to improve our long-term
self-sufficiency of working capital. On December 4, 2002, Pat V. Costa, our
Chairman, President and CEO, loaned us $0.5 million and we issued a 9%
Convertible Senior Note.

13

On September 26, 2003, we raised $5.0 million in gross proceeds ($4.6
million, net of offering expenses) in a private placement of our shares and
warrants to accredited investors. In December 2003 the lead investor in the
September 26, 2003 private placement exercised an option to invest an additional
$1.0 million.

On November 26, 2003, we completed a new revolving credit line with an
aggregate $13.0 million of availability, a $3.0 million increase from our
previous facility. The net proceeds of these financing activities will be used
for general corporate purposes, including working capital to support growth. Our
plans also call 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.

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 going concern
considerations, 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 including acceptance
provisions.

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 inventory. The entire
receivable and entire inventory balance is then recorded with an offsetting
adjustment to deferred gross profit. When client acceptance is received,
deferred gross profit is relieved and total sales and cost of sales are
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 customer's payment history and information regarding customers'
creditworthiness

14

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

In June 2001, the FASB issued SFAS 141, "Business Combinations", and SFAS
142, "Goodwill and Other Intangible Assets", effective for fiscal years
beginning after December 15, 2001 with early adoption permitted for companies
with fiscal years beginning after March 15, 2001. We adopted the new rules on
accounting for goodwill and other intangible assets beginning in the first
quarter of fiscal 2003. Under the new rules, goodwill and intangible assets
deemed to have indefinite lives will no longer be amortized but will be subject
to annual impairment tests in accordance with the statements. Other intangible
assets will continue to be amortized over their useful lives.

In accordance with SFAS 142, we initiated a goodwill impairment assessment
during the first quarter of fiscal 2003. The results of this analysis concluded
that there was no impairment charge.

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, 2003 and September 30,
2002.

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, and revisions to the estimated warranty
liability may be required. We recorded warranty provisions totaling $0.2
million, $0.8 million and $2.0 million during fiscal 2003, 2002 and 2001,
respectively.

RESTRUCTURING PROVISIONS

In July 2002, the FASB issued SFAS 146, "Accounting for Costs Associated
with Exit or Disposal Activities", which nullifies EITF Issue No. 94-3. SFAS 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 adopted the
provisions of SFAS 146 effective for exit or disposal activities initiated after
December 31, 2002. The effect of adopting SFAS 146 is recognized in the
consolidated financial statements.

STOCK-BASED COMPENSATION

In December 2002, the FASB issued SFAS 148, "Accounting for Stock-Based
Compensation" -- Transition and Disclosure, which amends SFAS 123. SFAS 148
provides alternative methods of transition for a voluntary change to the fair
value based method of accounting for stock-based employee compensation. SFAS 148
also requires prominent disclosures in both annual and interim financial
statements about the

15

method of accounting for stock-based employee compensation and the effect of the
method used on reported results. As permitted by SFAS 123, we have 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 have adopted the disclosure-only provisions of SFAS 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 our stock at the date of the grant over the amount an
employee must pay to acquire the stock. Equity instruments issued to
nonemployees are accounted for in accordance with FAS 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 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.

RESULTS OF OPERATIONS

FISCAL YEARS ENDED SEPTEMBER 30, 2003 AND 2002

Bookings and revenues in the fiscal year ended September 30, 2003 were
$39.6 million and $43.4 million, respectively, as compared to $58.1 million and
$59.2 million in the fiscal year ended September 30, 2002. The bookings and
revenues in the fiscal year ended September 30, 2002, included $1.7 million and
$2.8 million, respectively, associated with our material handling business.
Excluding the material handling business, bookings and revenues were each $56.4
million in the fiscal year ended September 30, 2002. The decline in our bookings
and revenues in the current fiscal year is a reflection of a general industry
slowdown, as a result of which our customers have decreased demand for our
products, the uncertainty surrounding the potential sale of SEG as well as our
financial constraints impacting our ability to procure inventory necessary to
satisfy customer orders.

Revenues for our Semiconductor Equipment Group were $25.4 million for the
fiscal year ended September 30, 2003, which represented 58.6% of our total
revenues, compared to $34.2 million or 57.8% of revenues in fiscal 2002. This
decline in revenues of 25.6% versus fiscal 2002 is a result of decreased demand
for our products, the uncertainty surrounding the potential sale of SEG as well
as our financial constraints impacting our ability to procure inventory
necessary to satisfy customer orders.

Revenues for our Acuity CiMatrix division were $18.0 million for the fiscal
year ended September 30, 2003, which represented 41.4% of our total revenues,
compared to $25.1 million or 42.2% of total revenues in fiscal 2002. This
decline in revenues of 28.4% versus fiscal 2002 is a result of decreased demand
for our products as well as our financial constraints impacting our ability to
procure inventory necessary to satisfy customer orders. Excluding the material
handling business revenues of $2.8 million in fiscal 2002, the decline in
revenues during fiscal 2003 was 19.3%.

Our gross profits in fiscal 2003 declined by approximately $1.2 million
from fiscal 2002. The decrease is due to the lower level of revenues in fiscal
2003. Offsetting the lower level of revenues is an increase in our gross
margins, as a percentage of revenues, in fiscal 2003 in comparison to fiscal
2002. Our gross margins in fiscal 2003 were 30.2% compared to 24.1% in fiscal
2002. The increase is largely attributable to a lower level of manufacturing
overhead expenses in fiscal 2003 as a result of cost reduction measures
initiated during fiscal

16

2003. The improvement in gross margins also reflects greater charges of $4.7
million recorded in fiscal 2002 in comparison with $3.7 million in fiscal 2003
for excess and obsolete inventory reserves.

Research and development expenses were $10.2 million, or 23.5% of revenues,
in the fiscal year ended September 30, 2003, compared to $18.6 million, or 31.4%
of revenues, in the fiscal year ended September 30, 2002. Excluding the effects
of the material handling business, research and development expenses were $18.2
million or 30.7% of revenues in the fiscal year ended September 30, 2002. The
lower level of expenses reflects a lower level of fixed costs as a result of
cost reductions taken in fiscal years 2002 and 2003. We intend to continue to
invest in new wafer scanning systems and enhanced capabilities for our lead
scanning systems in our Semiconductor Equipment Group and to enhance our machine
vision and two-dimensional barcode reading products in our Acuity CiMatrix
division.

In the fiscal year ended September 30, 2003, we capitalized approximately
$1.2 million in software development costs under SFAS 86, "Accounting for the
Costs of Software to be Sold, Leased, or Otherwise Marketed", as compared with
$1.4 million in the fiscal year ended September 30, 2002. The related
amortization expense was $2.8 million during fiscal 2003 compared to $3.4
million during fiscal 2002. The amortization costs are included in cost of
sales.

Selling, general and administrative expenses were $30.9 million, or 71.1%
of revenues, in the fiscal year ended September 30, 2003, compared to $36.9
million, or 62.3% of revenues, in the fiscal year ended September 30, 2002.
Excluding the effects of the material handling business, selling, general and
administrative expenses in fiscal 2002 were $36.2 million, or 61.0% of revenues.
The lower level of expenses in fiscal 2003 reflects a combination of lower
levels of variable selling expenses associated with the decrease in revenues and
the lower level of fixed costs, as a result of the many cost reductions taken.
Also, as a result of the slowdown experienced by SEG, we identified certain
purchase commitments for products that have been discontinued. We have recorded
a $1.1 million charge to selling, general and administrative expenses related to
these commitments during fiscal 2003.

Restructuring -- In February 2003, we closed our New Berlin, Wisconsin and
Tucson, Arizona facilities, and consolidated these SEG operations into our
Hauppauge, New York facility. This restructuring included costs related to the
closing of these facilities, writing off tangible and intangible assets and a
reduction of approximately 50 employees. The charge for this restructuring
totaling $3.5 million was comprised of facility exit costs of $2.5 million,
property plant and equipment write-offs of $0.4 million, severance charges of
$0.2 million, and other asset write-offs of $0.4 million. As of September 30,
2003, we had substantially reached an agreement pertaining to our lease for the
New Berlin, Wisconsin facility and on October 31, 2003, we reached a settlement.
In exchange for the release of all past and future obligations, we issued the
landlord a $1.0 million note payable in 36 equal payments of approximately
$31,000 each. The note reflects an effective interest rate of approximately 8.7%
and is payable in full upon the occurrence of certain events, including the sale
of SEG. In addition to the note, we issued a three-year warrant to purchase
20,000 shares of common stock at an exercise price of $0.05 per share. The
effect of this settlement was to reduce the facility exit costs recorded in
February 2003 of $2.5 million by $1.1 million, resulting in a facility exit cost
charge of $1.4 million for the fiscal year ended September 30, 2003.

Also during the fiscal year period ended September 30, 2003, we took
additional steps in order to reduce our costs, including a reduction of
approximately 25 employees at our Hauppauge, New York and Canton, Massachusetts
facilities, resulting in severance costs of approximately $0.2 million.

In November 2002, certain SEG senior management and technical employees
were granted retention agreements. These agreements allow for employees to
receive cash and stock benefits for remaining with us and continuing through the
anticipated sale of SEG. The current cash value of the award is approximately
$0.7 million. We are accruing these agreements over the expected service period,
which has been based upon the estimated timing of the sale of SEG. We accrued
approximately $0.6 million as of September 30, 2003.

During the quarter ended September 30, 2003, we incurred costs related to
the closing of a foreign office, totaling approximately $0.1 million. In
connection with this closing, employee severance costs relating to two employees
were recorded in addition to facility exit costs.

17

Impairments -- In accordance with SFAS No. 142, "Goodwill and Other
Intangible Assets", we conduct a periodic assessment, annually or more
frequently, if impairment indicators exist, on the carrying value of our
goodwill. The assessment is based on estimates of future income from the
reporting units and estimates of the market value of the units. These estimates
of future income are based upon historical results, adjusted to reflect our best
estimate of future markets and operating conditions, and are continuously
reviewed based on actual operating trends. Actual results may differ materially
from these estimates. In addition, the estimated future market value for our
reporting units is based on management's judgment.

In accordance with SFAS No. 144, "Accounting for the Impairment or Disposal
of Long-Lived Assets", we review the carrying value of long-lived assets when
circumstances indicate that they should be reevaluated, based upon the expected
future operating cash flows of our business. These future cash flow estimates
are based on historical results, adjusted to reflect our best estimate of future
markets and operating conditions, and are continuously reviewed based on actual
operating trends. Actual results may differ materially from these estimates, and
accordingly could result in additional impairment of our long-lived assets.

During the year ended September 30, 2003, we recorded charges related to
the impairment of certain long-lived assets and intangible assets, which totaled
$0.6 million.

A summary of the 2003 remaining restructuring and impairment costs is as
follows (in thousands):

During the fiscal year ended September 30, 2003, we issued 439,785 shares
of our common stock to certain suppliers in exchange for the cancellation of
approximately $2.8 million of indebtedness owed to such suppliers. This debt
restructuring also included the cancellation of certain of our purchase order
commitments totaling approximately $2.8 million. We have reported a gain from
debt restructuring of $1.5 million in other gains for the fiscal year ended
September 30, 2003.

Other gains for the fiscal year ended September 30, 2003, also included a
gain relating to a settlement with a major customer in the amount of $1.0
million. On April 11, 2003, we entered into a Settlement and Release Agreement
with this customer, which provided for the release of certain claims among the
parties and the $1.0 million payment to us.

Net interest expense was $1.3 million in the fiscal year ended September
30, 2003, as compared to $1.2 million in the fiscal year ended September 30,
2002. The applicable interest rate under the revolving credit facility is prime
plus 2% as of September 30, 2003.

There were no tax provisions in the fiscal years ended September 30, 2003
and 2002, due to the losses incurred and full valuation allowance provided
against net operating loss carryforwards.

In fiscal 2003, we had a net loss of $30.1 million or a loss of $2.44 per
share. For fiscal 2002, we had a net loss of $41.8 million, or a loss of $4.19
per share.

18

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 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

19

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 and 2001 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 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.

20

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 (in thousands):

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 restructuring also included costs related to closing a foreign
office, which included the write-off of tangible assets of $0.3 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.

21

All charges were paid within our fiscal year ended 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 $4.19 per
share. For fiscal 2001, we had a net loss of $104.4 million, or $14.72 per
diluted share.

LIQUIDITY AND CAPITAL RESOURCES

Our cash balance increased $147,000, to $367,000, in fiscal 2003, primarily
as a result of $2.9 million of net cash used in operating activities, $1.2
million of net cash used by investing activities, and $4.3 million of net cash
provided by financing activities.

The $2.9 million of net cash used in operating activities was primarily a
result of the $30.1 million loss in fiscal 2003, offset in part by a decrease in
inventory of $8.1 million, depreciation and amortization of $6.3 million,
inventory provisions of $3.7 million, a $2.7 million increase in accrued
expenses, and a loss on the retirement of assets of $1.4 million.

Additions to plant and equipment were $0.4 million in fiscal 2003, as
compared to $0.8 million in fiscal 2002. The capitalized software development
costs for fiscal 2003 were $1.2 million as compared with $1.4 million in fiscal
2002.

Funds from financing activities were $4.3 million in fiscal 2003, as
compared to $14.7 million in fiscal 2002. During fiscal 2003, we received net
proceeds from various financing activities of $7.1 million offset by reduction
of our revolving line of credit and repayment of long-term borrowings of
approximately $2.8 million.

Our consolidated financial statements have been prepared assuming that we
will continue as a going concern. However, because of continuing negative cash
flow, there is no certainty that we will have the financial resources to
continue in business. We have incurred net losses in fiscal 2003, 2002 and 2001
amounting to $30.1 million, $41.8 million, and $104.4 million, respectively. Net
cash used in operating activities amounted to $2.9 million, $25.9 million and
$12.6 million in fiscal 2003, 2002 and 2001 respectively.

We have prepared and are executing a plan to meet our financial needs. We
have undertaken several measures during fiscal 2003 and subsequently to reduce
our losses, strengthen our working capital position and provide additional
liquidity. During fiscal 2003 we reduced our fixed costs significantly, reduced
our operating losses and lowered our breakeven level of revenues. In November
2002, we began the process of selling the SEG business. On December 4, 2002, we
received $0.5 million from the issuance of a convertible note. On April 11,
2003, we received a $1.0 million settlement payment and the first one-half of a
$4.0 million loan from

22

a major customer. On September 26, 2003, we completed a private placement of our
common stock, which, along with the exercise on December 1, 2003, of an option
to purchase additional shares by our lead investor, raised gross proceeds of
$6.0 million. The net proceeds as of September 30, 2003, net of offering
expenses, totaled $4.6 million. On November 26, 2003, we refinanced our existing
revolving credit facility with a new facility, which increased our maximum
borrowing availability to $13.0 million. In December 2003, we informed the
Lender of our desire to draw down the second tranche of the loan. In response,
the Lender stated that it will advance the second tranche loan only if we agree
to substantial modifications to the settlement and release agreement. We have
not as yet determined whether we are prepared to accept such modifications.

In November 2002, we adopted a formal plan to sell the SEG business. In the
period since the formal plan was adopted, the semiconductor equipment industry
has entered the early stages of a growth cycle driven by rising semiconductor
industry sales. Also, during this period the SEG business has 1) lowered its
fixed costs and breakeven level of revenues, 2) reduced its liabilities through
a series of debt-for-equity exchanges, and 3) recruited an experienced high
technology executive to run the operations and oversee its eventual sale. While
there can be no assurance of a successful outcome, we believe that given these
changes in the business and the concurrent improvement in the semiconductor
capital spending environment, the SEG business has the potential to generate
positive cash flow from operations and return to profitability. Accordingly, we
believe the timing of the SEG business' sale should be lengthened to allow for
the realization of a sale price that more closely reflects what we believe is
the business' inherent value.

We have not changed our belief that the sale of the SEG business is in the
best interests of shareholders, nor have we changed our desire to consummate a
sale of the SEG business at the earliest date. We are in continuing discussions
with interested buyers.

On December 4, 2002, Pat V. Costa, our Chief Executive Officer, loaned us
$0.5 million and we issued a 9% Convertible Senior Note in the amount of $0.5
million. Under the terms of this note, 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 note allows Mr.
Costa to require earlier redemption by us in certain circumstances including the
sale of a division at a purchase price at least equal to the amounts then due
under this note. Thus, Mr. Costa may require redemption at the time of the sale
of SEG. This note also allows for conversion into shares of common stock. The
note is convertible at the option of Mr. Costa into approximately 238,000 shares
of our common stock at a conversion price of $2.10 per share. As an inducement
to make this loan, Mr. Costa received a warrant to purchase approximately 60,000
shares of our common stock at an exercise price of $3.15 per share. We did not
make the semiannual interest payment due on May 15, 2003. On October 28, 2003,
Mr. Costa agreed to forbear from exercising his rights with respect to this
interest payment until January 14, 2005.

On April 11, 2003, we entered into a settlement and release agreement with
a major customer, which provided for the release of certain claims among the
parties and the payment of $1.0 million to us. On the same date, we entered into
a loan agreement with this customer, which afforded us the right to borrow an
aggregate of $4.0 million, in two equal tranches, subject to the conditions of
each closing. The first closing occurred on April 11, 2003, at which time we
delivered to Lender a secured promissory note in the amount of $2.0 million with
a maturity date of April 11, 2004, bearing an interest rate of 10%. In December
2003, we informed the Lender of our desire to draw down the second tranche of
the loan. In response, the Lender stated that it will advance the second tranche
loan only if we agree to substantial modifications to the settlement and release
agreement. We have not as yet determined whether we are prepared to accept such
modifications.

As of September 26, 2003, we closed a private placement of our securities
raising $5.0 million in gross proceeds, $4.8 million of which was received by
September 30, 2003 and the balance in early October 2003. In December 2003, the
lead investor exercised an option to invest an additional $1.0 million on the
same terms and conditions as the original funding, including warrants to
purchase up to 0.2 million shares, increasing the total gross proceeds to $6
million. The net proceeds of the financing will be used for general corporate
purposes, including working capital to support growth. A total of 2.4 million
shares of common stock were sold in the private placement at $2.50 per share.
The private placement also included warrants to purchase up to 1.2 million
shares at $3.05 per share on or before September 26, 2008. Warrants were also
issued to the

23

placement agent to purchase up to 40,000 shares of common stock at $2.50 per
share on or before September 26, 2007. All of such warrants may be exercised six
months after September 26, 2003. Additionally, we are required to file a
registration statement within 60 days of the closing date and to cause such
registration statement to become effective within 120 days of the closing date,
or pay to each investor 1% of the purchase price paid by such investor, as
liquidated damages for each of the next two months and 2% per month thereafter.

On November 26, 2003, we replaced our $10.0 million revolving credit line
with a $13.0 million facility. The new facility has two revolving credit lines.
The first of which accords us a maximum of $10.0 million and is collateralized
by certain foreign receivables and inventory with availability subject to a
borrowing base formula. This line, which is guaranteed by the Export-Import Bank
of the United States, expires on November 30, 2005 and has a 7% interest rate.
The second line is for a maximum of $3.0 million and is collateralized by
certain domestic receivables. Availability under this line is subject to a
borrowing base formula which, as defined in the credit agreement, includes a
$1.5 million overadvance feature. At November 26, 2003, the amount available
under the line was approximately $12.5 million against which we had $8.9 million
of borrowings, resulting in availability at November 26, 2003 of $3.6 million.
It expires on November 25, 2006 and has a 17% interest rate of which 5% can be
capitalized at our option. The facility contains covenants pertaining to our net
worth and to fixed charge coverage (as defined). We can prepay the facility at
our discretion. In the event of the sale of SEG, we are required to repay in
full the $10.0 million credit line. The $3.0 million credit line continues
subject to our meeting certain financial conditions. The facility also includes
a commitment fee of 0.5% annually upon the unused portion of the facility. In
connection with the facility, we issued a warrant to purchase 2.2 million shares
of our common stock at an exercise price of $0.01 per share to the lender and a
warrant to purchase 60,000 shares of our common stock at an exercise price of
$0.01 per share to the placement agent. We recorded a deferred financing cost
asset for the fair value of the warrants (determined using Black-Scholes pricing
model), of approximately $7.2 million, which is being amortized and charged to
interest expense over the life of the facility. In December 2003, the lender
notified us that it intends to exercise the warrant.

We had a $10.0 million credit facility, which was due to expire on April
28, 2003. The termination date was extended eight times by the lender. This
credit facility allowed for borrowings of up to 90% of eligible foreign
receivables up to $10.0 million of availability provided under the Export-Import
Bank of the United States guarantee of certain foreign receivables and
inventories, less the aggregate amount of drawings under letters of credit and
bank reserves. At September 30, 2003, the amount available under the line was
$9.6 million, against which we had $4.6 million of borrowings, resulting in
availability at September 30, 2003 of $4.9 million, subject to the terms of the
credit facility. Outstanding balances bear interest at a variable rate as
determined periodically by the bank (6% at September 30, 2003). At September 30,
2003, we were not in compliance with certain covenants of the credit agreement,
and therefore in technical default on the facility, although, the bank continued
to make funds available for borrowings. Such borrowings were paid with the
proceeds of the new credit facility.

As of September 30, 2003, we had issued 439,785 shares of our common stock
to certain suppliers in exchange for the cancellation of our debt obligations to
such suppliers, which in the aggregate equaled approximately $2.8 million. This
debt restructuring also included the cancellation of certain purchase order
commitments of ours totaling approximately $2.8 million. We are in continued
discussions with other suppliers regarding the exchange of debt for common
stock. We believe that these steps will enhance the prospects for an eventual
sale of SEG at a higher price than would otherwise be obtained.

As of December 15, 2003, we were in default of an aggregate of $4.4 million
of our borrowings.

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. On
November 21, 2001, the first of five annual installments on the Abante payable
also became due, in the amount of $0.5 million. Pursuant to an oral agreement
with the

24

former principals of Abante, we paid on November 21, 2001 the interest, $250
thousand of note principal and approximately $112 thousand 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. We continued to make certain payments in accordance with the terms of that
agreement, paying the interest, $250 thousand of note principal and
approximately $150 thousand of the first annual installment on February 21,
2002, and paying approximately $238 thousand 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 a significant portion of the November 2002 annual installment
payment of $0.5 million . In addition, we did not make a significant portion of
the November 2003 annual installment payment of $0.5 million. On December 19,
2003, we entered into a settlement agreement with the former principals of
Abante, who agreed to forbear from taking action against us for fifteen months.
We agreed to pay them approximately $300 thousand on January 5, 2004, to make
additional monthly payments of at least $35 thousand, and to pay the remaining
balance due upon the sale of SEG, subject to certain conditions.

On January 3, 2002, a payment of $1.85 million under notes 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
$240 thousand of note principal to certain of these shareholders. We reached an
agreement with the other former shareholders to pay the sums originally due on
January 3, 2002 in three approximately equal principal installments in April
2002, August 2002 and December 2002. In exchange for the deferral, we issued
warrants to purchase 183,188 shares of our common stock at an exercise price of
$5.70 per share. The fair value of these warrants (determined using
Black-Scholes pricing model), totaling approximately $0.1 million, was 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 $0.5 million and $31 thousand, respectively, and note
principal and interest payments on August 1, 2002 of $0.5 million and $29
thousand, respectively. We did not make the December 2002 and January 2003
installment payments due of $0.5 million and $1.9 million, respectively, and are
therefore in default. Seven of the former shareholders filed lawsuits against us
seeking payment of all amounts currently past due. In July 2003, we reached a
settlement with certain of these noteholders. These noteholders agreed to
forbear from taking action to enforce their notes until May 1, 2004 or the
earlier occurrence of certain events. On October 29, 2003, additional
noteholders agreed to forbear from taking action until May 1, 2004. We agreed to
issue these noteholders warrants to purchase 59,031 shares of our common stock
at exercise prices ranging from $2.50 per share to $3.60 per share and paid
these noteholders the outstanding interest that had accrued through June 1,
2003.

If we do not succeed is selling the Semiconductor Equipment Group, we may
not have sufficient 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 may be forced either to seek additional financing
or to sell some or all of the remaining product lines.

We have operating lease agreements for equipment, and manufacturing and
office facilities. The minimum noncancelable lease payments under these
agreements are as follows (in thousands):

Purchase Commitments -- As of September 30, 2003, we had approximately
$14.2 million of purchase commitments with vendors. Approximately $12.9 million
was for the Semiconductor Equipment Group, and

25

included computers, handling equipment, and manufactured components for the
division's lead scanning, wafer scanning, handling and ball attach product
lines. Approximately $1.3 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:

RECENT ACCOUNTING PRONOUNCEMENTS

In August 2001, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets."
The Statement supersedes SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." This Statement
also supersedes APB No. 30 provisions related to accounting and reporting for
the disposal of a segment of a business. This Statement establishes a single
accounting model, based on the framework established in SFAS 121, for long-lived
assets to be disposed of by sale. The Statement retains most of the requirements
in related to the recognition of impairment of long-lived assets to be held and
used. We adopted this Statement in fiscal 2003. The adoption of SFAS No. 144 did
not have a material effect on our financial statements.

In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities," which nullifies EITF Issue No.
94-35. SFAS 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
adopted the provisions of SFAS No. 146 effective for exit or disposal activities
initiated after December 31, 2002. The effect of adopting SFAS No. 146 is
recognized in the consolidated financial statements.

In November 2002, the FASB issued Interpretation No. 45 ("FIN 45"),
"Guarantor's Accounting And Disclosure Requirements For Guarantees, Including
Indirect Guarantees of Indebtedness of Others." FIN 45 addresses the disclosure
requirements of a guarantor in its interim and annual financial statements about
its obligations under certain guarantees that it has issued. FIN 45 also
requires a guarantor to recognize, at the inception of a guarantee, a liability
for the fair value of the obligation undertaken in issuing the guarantee. The
disclosure requirements of FIN 45 were effective for us in our quarter ended
December 31, 2002. The liability recognition requirements will be applicable
prospectively to all guarantees issued or modified after December 31, 2002. The
adoption of FIN 45 did not have a material effect on our financial statements.

In November 2002, the EITF issued EITF No. 00-21, "Revenue Arrangements
with Multiple Deliverables", which provides guidance on the timing and method of
revenue recognition for sales arrangements that include the delivery of more
than one product or service. EITF 00-21 is effective prospectively for
arrangements entered into in fiscal periods beginning after June 15, 2003. The
adoption of EITF No. 00-21 is not expected to have a material effect on our
consolidated financial position or results of operations.

On April 30, 2003, the FASB issued SFAS No. 149, "Amendment of SFAS No. 133
on Derivative Instruments and Hedging Activities". SFAS No. 149 is intended to
result in more consistent reporting of contracts as either freestanding
derivative instruments subject to SFAS 133 in its entirety, or as hybrid
instruments with debt host contracts and embedded derivative features. In
addition, SFAS No. 149 clarifies the definition of a derivative by providing
guidance on the meaning of initial net investments related to derivatives. SFAS
No. 149 is effective for contracts entered into or modified after June 30, 2003.
The adoption of SFAS No. 149 did not have a material effect on our financial
statements.

26

On May 15, 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity". SFAS
No. 150 establishes standards for classifying and measuring as liabilities
certain financial instruments that embody obligations of the issuer and have
characteristics of both liabilities and equity. SFAS No. 150 represents a
significant change in practice in the accounting for a number of financial
instruments, including mandatorily redeemable equity instruments and certain
equity derivatives that frequently are used in connection with share repurchase
programs. SFAS No. 150 is effective for all financial instruments created or
modified after May 31, 2003. The adoption of SFAS No. 150 did not have a
material effect on our financial statements.

EFFECT OF INFLATION

We believe that the effect of inflation has not been material during the
years ended September 30, 2003, 2002 and 2001.

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 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 and operating losses, there is no certainty that we will have the financial
resources to continue in business.

During fiscal 2003, we prepared and executed a plan to address our
financial needs. Our plan included the sale of additional equity, which we
completed in September 2003. It also includes the replacement of our existing
revolving line of credit with a larger facility, which we completed on November
26, 2003. In April 2003, we received the first $2.0 million tranche of a $4.0
million loan from a major customer, together with $1.0 million in settlement of
outstanding claims. In addition, our plan includes restoring our businesses to
positive cash flow and, thereafter, to profitability.

Ultimately, we believe it is in our interest to sell our Semiconductor
Equipment Group. To that end, in November 2002 we established a formal plan to
sell SEG and, from that date until April 2003, we worked actively to find a
buyer for that business. Because of improvements in the semiconductor and
semiconductor capital equipment industries, in April 2003 we elected to lengthen
out the sales process for this business to improve the likelihood that we will
receive the highest possible price for that business.

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. However, 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 recognize that we must also continue actions to control
operating expenses, inventory levels, and capital expenses; as well as to manage
accounts payable and accounts receivable to enhance cash flow.

27

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

Our Semiconductor Equipment Group sells 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 second quarter of fiscal 2003 when they were $8.1
million. This decline mirrors the steep decline in the industry, where reports
are that bookings rates are down significantly for manufacturers of test,
assembly, and packaging. There is no consensus as to how long it will endure.

As was the case in both the 1998-1999 and 2001-2002 downturns 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 provisions for excess and obsolete inventory of approximately $3.7
million, $4.9 million and $17.3 million during fiscal 2003, 2002 and fiscal
2001, respectively, as a consequence of an unexpected industry downturn.

OUR ACUITY CIMATRIX BUSINESS FACES SIGNIFICANT COMPETITION

Our machine vision business, Acuity CiMatrix, competes against both larger
companies and specialized smaller organizations in its chosen markets. Our
larger competitors are able to field more sales personnel and they offer
customers greater financial strength. The smaller, specialized organizations
against which we compete are generally private companies that may price their
equipment without regard to profit. To win and hold customers in the machine
vision market, we must show customers that our products are demonstrably
superior in performance and offer features not found on competitors' offerings.
There can be no assurance that customers will recognize our products as
distinctive or offering superior performance for price.

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 $30.1 million, $41.8 million and $104.4 million
for the fiscal years ended September 30, 2003, 2002 and 2001, 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.

28

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 43.1%, 34.4% and 30.0% of total revenues
in fiscal years ended September 30, 2003, 2003 and 2001, respectively. One
customer accounted for 10% of our revenues in fiscal years 2002 and 2001. 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 55.7%, 54.5% and 61.0% of our revenues for the fiscal years ended
September 30, 2003, 2002 and 2001, respectively. In particular, sales to Taiwan,
Korea and other Asian countries accounted for approximately 40.4%, 44.6% and
51.0% of our revenues for the fiscal years ended September 30, 2003, 2002 and
2001, respectively. While our sales in Asia 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 were not able to develop new
products that 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, 2003.

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.

29

OUR COMMON STOCK IS QUOTED ON THE NATIONAL QUOTATION SERVICE

On October 28, 2003, our common stock was delisted from The Nasdaq SmallCap
Market. The delisting of our common stock could adversely affect (a) the
liquidity and marketability of our common stock; (b) the trading price of our
common stock; and (c) our relationships with vendors and customers.

The basis of the delisting was our failure to amend, before an October 24,
2003 deadline set by a Nasdaq Listing Qualification Hearing Panel, our quarterly
report on Form 10-Q for the quarter ended June 30, 2003 to include financial
results reviewed by our auditors. On October 31, 2003, we filed an amended
quarterly report on Form 10-Q for the quarter ended June 30, 2003. We have
appealed the delisting of our common stock from The Nasdaq SmallCap Market. Our
common stock is now quoted on the National Quotation Service.

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

As of September 30, 2003, 238,095 shares of common stock were issuable upon
conversion of convertible debt, 1,748,315 shares of common stock were issuable
upon exercise of outstanding stock options with a weighted average exercise
price of $6.48 per share, and 2,155,262 shares of common stock were issuable
upon exercise of outstanding warrants with substantially all of these warrants
having an exercise price of $3.05 to $25.00 per share. In addition, on November
26, 2003 we issued a warrant to purchase 2,200,000 shares of common stock at
$.01 per share, to the lender of our new credit facility and on December 11,
2003 we issued a warrant to purchase 60,000 shares of our common stock at $.01
per share to a placement agent for our financing. Substantially all of the
shares underlying these options and warrants have been registered for resale, or
will be registered for resale pursuant to the filing of a registration statement
as promptly as practicable, 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 December 26, 2003, the closing price
of our common stock has ranged from a low of $0.55 to a high of $6.65. 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;

- 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 have minimal exposure to the impact of fluctuation in interest rates,
primarily because our new revolving credit lines are based on fixed interest
rates.

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
30

U.S. dollar denominated. During fiscal 2003, 2002 and 2001, 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

Item 9 is hereby incorporated by reference from our definitive proxy
statement to be filed within 120 days of September 30, 2003.

ITEM 9A. CONTROLS AND PROCEDURES

Our management carried out an evaluation, with the participation of our
Chief Executive Officer and Chief Financial Officer, of the effectiveness of our
disclosure controls and procedures as of September 30, 2003. Based upon that
evaluation and after consultation with our audit committee, our Chief Executive
Officer and Chief Financial Officer concluded that our disclosure controls and
procedures were effective to ensure that information required to be disclosed by
us in reports that we file or submit under the Securities Exchange Act of 1934
is recorded, processed, summarized and reported, within the time periods,
specified in the rules and forms of the Securities and Exchange Commission.

There has not been any change in our internal control over financial
reporting in connection with the evaluation of Rule 13a-15(d) under the Exchange
Act that occurred during the quarter ended September 30, 2003 that has
materially affected, or is reasonably likely to materially affect, our internal
control over financial reporting.

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, 2003.

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, 2003.

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, 2003.

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, 2003.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

Item 14 is hereby incorporated by reference from our definitive proxy
statement to be filed within 120 days of September 30, 2003

31

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' Reports

Consolidated Balance Sheets at September 30, 2003 and September 30,
2002

Consolidated Statements of Operations for the Years Ended September
30, 2003, 2002 and 2001

Consolidated Statements of Stockholders' Equity (Deficit) for the
Years Ended September 30, 2003, 2002 and 2001

Consolidated Statements of Comprehensive Loss for the Years Ended
September 30, 2003, 2002 and 2001

Consolidated Statements of Cash Flows for the Years Ended September
30, 2003, 2002 and 2001

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 Annual Report on Form 10-K, for its
fiscal year ended September 30, 2001.

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

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

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

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

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

(7) Filed as an exhibit to Registrant's Quarterly Report on Form 10-Q, for its
fiscal quarter ended March 31, 2003.

(8) Filed as an exhibit to Registrant's Quarterly Report on Form 10-Q, for its
fiscal quarter ended June 30, 2003.

(9) Filed as an exhibit to Registrant's Annual Report on Form 10-K, for its
fiscal year ended September 30, 2002.

(10) Filed as an exhibit to Registrant's Current Report on Form 8-K dated
November 26, 2003.

(11) Filed as an exhibit to Registrant's Current Report on Form 8-K/A dated June
20, 2003.

(b) Reports on Form 8-K:

We filed a Current Report on Form 8-K dated August 5, 2003, with the
Securities and Exchange Commission. The item reported on such Form 8-K was Item
12. This Form 8-K stated that we had issued a press release announcing our
financial results for the quarter ended June 30, 2003.

We filed a Current Report on Form 8-K dated August 26, 2003, with the
Securities and Exchange Commission. The items reported on such Form 8-K were
Items 5 and 7. This Form 8-K stated that we had issued a press release with
respect to a change in our trading symbol and steps being taken to comply with
the Nasdaq Marketplace Rules.

We filed a Current Report on Form 8-K dated September 26, 2003, with the
Securities and Exchange Commission. The item reported on such Form 8-K was Item
4. This Form 8-K reported the appointment of Grant Thornton LLP as our new
independent auditor.

We filed a Current Report on Form 8-K dated September 29, 2003, with the
Securities and Exchange Commission. The items reported on such Form 8-K were
Items 5 and 7. This Form 8-K stated that we had issued two press releases, one
announcing the completion of a private offering of stock and one announcing the
appointment of Jeffrey P. Lucas as our Chief Financial Officer.

We filed a Current Report on Form 8-K dated November 26, 2003, with the
Securities and Exchange Commission. The items reported on such Form 8-K were
Items 5 and 7. This Form 8-K stated that we had issued refinanced our principal
credit line and that we had completed a one for five reverse split of our common
stock.

We filed a Current Report on Form 8-K dated December 1, 2003, with the
Securities and Exchange Commission. The items reported on such Form 8-K were
Items 5 and 7. This Form 8-K stated that we had issued two press releases, one
announcing the refinancing of our principal credit line and one announcing the
completion of a one for five reverse split of our common stock.

34

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

To the Board of Directors and Stockholders of
Robotic Vision Systems, Inc.
Nashua, New Hampshire

We have audited the accompanying consolidated balance sheet of Robotic
Vision Systems, Inc. and subsidiaries (the "Company") as of September 30, 2003,
and the related consolidated statements of operations, stockholders' equity
(deficit), comprehensive loss, and cash flows for the year ended September 30,
2003. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audit.

We conducted our audit 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 audit provides a
reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in
all material respects, the consolidated financial position of Robotic Vision
Systems, Inc. and subsidiaries at September 30, 2003, and the results of their
consolidated operations and their consolidated cash flows for the year ended
September 30, 2003, in conformity with accounting principles generally accepted
in the United States of America.

Our audit was made for the purpose of forming an opinion on the basic
financial statements taken as a whole. Schedule II is presented for purposes of
complying with the Securities and Exchange Commission rules and is not part of
the basic financial statements. The financial data in this schedule as of and
for the year ended September 30, 2003 has been subjected to the auditing
procedures applied in the audit of the basic financial statements and, in our
opinion, fairly states, in all material respects, the financial data required to
be set forth herein in relation to the basic financial statements taken as a
whole.

As discussed in Note 18 to the consolidated financial statements, effective
October 1, 2002, the Company adopted Statement of Financial Accounting Standards
No. 142, "Goodwill and Other Intangible Assets".

The accompanying consolidated financial statements for the year ended
September 30, 2003 have been prepared assuming that the Company will continue as
a going concern. As discussed in Note 1 to the consolidated 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 consolidated financial statements do not include any adjustments that
might result from the outcome of this uncertainty.

GRANT THORNTON LLP

Boston, Massachusetts
December 22, 2003

35

INDEPENDENT AUDITORS' REPORT

To the Board of Directors and Stockholders of
Robotic Vision Systems, Inc.
Nashua, New Hampshire

We have audited the accompanying balance sheets of Robotic Vision Systems,
Inc. and subsidiaries (the "Company") as of September 30, 2002, and the related
consolidated statements of operations, stockholders' equity, comprehensive loss,
and cash flows for the two years in the period ended September 30, 2002. Our
audits also included the financial statements schedule listed in the Index at
Item 14 for each of the two years in the period ended September 30, 2002. 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 the results of their operations and
their cash flows for each of the two years in the period 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. 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

36

ROBOTIC VISION SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2003 AND 2002

See notes to consolidated financial statements.

37

ROBOTIC VISION SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED SEPTEMBER 30, 2003, 2002 AND 2001

See notes to consolidated financial statements.

38

ROBOTIC VISION SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED SEPTEMBER 30, 2003, 2002 AND 2001

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

* As adjusted for 5-for-1 reverse stock split. See Note 2

See notes to consolidated financial statements.

39

ROBOTIC VISION SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
FOR THE YEARS ENDED SEPTEMBER 30, 2003, 2002 AND 2001

See notes to consolidated financial statements.

40

ROBOTIC VISION SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED SEPTEMBER 30, 2003, 2002 AND 2001

See notes to consolidated financial statements.
41

ROBOTIC VISION SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 2003, 2002 AND 2001
(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.

The accompanying consolidated financial statements have been prepared
assuming the Company will continue as a going concern. The Company has incurred
operating losses for fiscal 2003, 2002 and 2001 amounting to $31,488, $40,539
and $83,226, respectively, and negative cash flows from operations for fiscal
2003, 2002 and 2001 amounting to $2,872, $25,905 and $12,584, respectively.
Further, the Company has debt payments due which relate to acquisitions the
Company has made and, as of September 30, 2003, is not in compliance with the
debt covenants on its line of credit. These conditions raise doubt about the
Company's ability to continue as a going concern.

The Company has prepared and is executing a plan to meet its financial
needs. The Company has undertaken several measures during fiscal 2003 and
subsequently to reduce its losses, strengthen its working capital position and
provide additional liquidity. During fiscal 2003 it reduced its fixed costs
significantly, reduced its operating losses and lowered its breakeven level of
revenues. In November 2002, it began the process of selling the Semiconductor
Equipment Group ("SEG") business. On December 4, 2002, the Company received $500
from the issuance of a convertible note. On April 11, 2003, the Company received
a $1,000 settlement payment and the first one-half of a $4,000 loan from a major
customer. On September 26, 2003, the Company completed a private placement of
its common stock, which, along with the exercise on December 1, 2003, of an
option to purchase additional shares by its lead investor, raised gross proceeds
of $6,000. The proceeds as of September 30, 2003, net of offering expenses,
totaled $4,602. On November 26, 2003, the Company refinanced its existing
revolving credit facility with a new facility, which increased its maximum
borrowing availability to $13,000. In December 2003, the Company informed the
Lender of its desire to draw down the second tranche of the loan. In response,
the Lender stated that it will advance the second tranche loan only if the
Company agrees to substantial modifications to the settlement and release
agreement. The Company has not as yet determined whether it is prepared to
accept such modifications.

In November 2002, the Company adopted a formal plan to sell the SEG
business. In the period since the formal plan was adopted, the semiconductor
equipment industry has entered the early stages of a growth cycle driven by
rising semiconductor industry sales. Also, during this period the SEG business
has (a) lowered its fixed costs and breakeven level of revenues, (b) reduced its
liabilities through a series of debt-for-equity exchanges, and (c) recruited an
experienced high technology executive to run the operations and oversee its
eventual sale. While there can be no assurance of a successful outcome, the
Company believes that given these changes in the business and the concurrent
improvement in the semiconductor capital spending environment, the SEG business
has the potential to generate positive cash flow from operations and return to
profitability. Accordingly, the Company believes the timing of the SEG business'
sale should be lengthened to allow for the realization of a sale price that more
closely reflects what it believes is the business' inherent value.

The sale of SEG, if completed, is expected to result in sufficient proceeds
to pay down a significant portion of the Company's debt, reduce accounts
payable, and provide working capital for the Company's remaining business.
However, no assurance can be given that SEG will be sold at a price, or on
sufficient terms, to allow for such a result. Because the timing and proceeds of
a prospective sale of SEG is uncertain, the Company took steps during fiscal
2003 to increase its working capital.

If the Company does not succeed in selling the Semiconductor Equipment
Group, it may not have sufficient working capital to continue in business. While
management believes that it will complete such a

42

ROBOTIC VISION SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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, the Company may be
forced either to seek additional financing or to sell some or all of the
remaining product lines.

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 including acceptance provisions.

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
(20% or less), 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.

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

43

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 -- In accordance with SFAS No. 142, "Goodwill and Other
Intangible Assets", the Company conducts a periodic assessment, annually or more
frequently, if impairment indicators exist, on the carrying value of our
goodwill. The assessment is based on estimates of future income from the
reporting units and estimates of the market value of the units. These estimates
of future income are based upon historical results, adjusted to reflect our best
estimate of future markets and operating conditions, and are continuously
reviewed based on actual operating trends. Actual results may differ materially
from these estimates. In addition, the estimated future market value for our
reporting units is based on management's judgement.

In accordance with SFAS No. 144, "Accounting for the Impairment or Disposal
of Long-Lived Assets", the Company reviews the carrying value of long-lived
assets when circumstances dictate that they should be reevaluated, based upon
the expected future operating cash flows of its business. These future cash flow
estimates are based on historical results, adjusted to reflect the Company's
best estimate of future markets and operating conditions, and are continuously
reviewed based on actual operating trends. Actual results may differ materially
from these estimates, and accordingly, could result in additional impairment of
long-lived assets. See Note 15 for the discussion of impairments recorded in
fiscal 2003 and 2002. Also, as discussed later in this Note, the Company adopted
the provisions of SFAS No. 144 in fiscal 2003.

Software Development Costs -- Software development costs are capitalized in
accordance with SFAS No. 86, "Accounting for the Costs of Computer Software to
Be Sold, Leased, or Otherwise Marketed." 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 $1,197, $1,409 and $3,409 have been
capitalized during the fiscal years ended September 30, 2003, 2002 and 2001,
respectively. Amortization expense relating to software
44

ROBOTIC VISION SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

development costs for the fiscal years ended September 30, 2003, 2002, and 2001
was $2,834, $3,418 and $4,409, respectively. See Note 15 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 Loss Per Share -- Basic 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. The Company believes that the most significant estimates
include the reserve for doubtful accounts receivable, reserve for inventory
excess and obsolescence, warranty reserves and the assessment of impairment of
long-lived assets.

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
45

ROBOTIC VISION SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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 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."

The Company accounts for equity-based compensation arrangements in
accordance with the provisions of APB No. 25 and complies with the disclosure
provisions of SFAS No. 123, as amended by SFAS 148. All equity-based awards to
non-employees are accounted for at their fair value in accordance with SFAS No.
123 and 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. Under APB No. 25, compensation expense is based upon the
difference, if any, on the date of grant, between the fair value of the
Company's stock and the exercise price.

Had compensation cost for the Company's stock based compensation plans and
employee stock purchase plan been determined on the fair value at the grant
dates for awards under those plans, consistent with SFAS No. 123, the Company's
net loss and net loss per share would have been reported at the pro-forma
amounts indicated below.

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.

Reverse Stock Split -- Effective November 26, 2003, the Company effected a
one-for-five reverse stock split of its common stock. All information in the
consolidated financial statements related to common shares, share prices, per
share amounts, stock option plans and stock warrants have been restated
retroactively for the reverse stock split, unless otherwise noted.

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

RECENT ACCOUNTING PRONOUNCEMENTS --

In August 2001, FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." The Statement supersedes SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of." This Statement also supersedes APB No. 30 provisions related to
accounting and reporting for the disposal of a segment of a business. This
Statement establishes a single accounting model, based on the framework
established in SFAS No. 121, for long-lived assets to be
46

ROBOTIC VISION SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

disposed of by sale. The Statement retains most of the requirements in SFAS No.
121 related to the recognition of impairment of long-lived assets to be held and
used. The Company adopted this Statement in fiscal 2003. The adoption of SFAS
No. 144 did not have a material effect on the Company's financial statements.

In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities," which nullifies EITF Issue No.
94-35. SFAS 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 adopted the provisions of SFAS No. 146 effective for exit or disposal
activities initiated after December 31, 2002. The effect of adopting SFAS No.
146 is recognized in the consolidated financial statements.

In November 2002, the FASB issued Interpretation No. 45 ("FIN 45"),
"Guarantor's Accounting And Disclosure Requirements For Guarantees, Including
Indirect Guarantees of Indebtedness of Others." FIN 45 addresses the disclosure
requirements of a guarantor in its interim and annual financial statements about
its obligations under certain guarantees that it has issued. FIN 45 also
requires a guarantor to recognize, at the inception of a guarantee, a liability
for the fair value of the obligation undertaken in issuing the guarantee. The
disclosure requirements of FIN 45 were effective for the Company in its quarter
ended December 31, 2002. The liability recognition requirements will be
applicable prospectively to all guarantees issued or modified after December 31,
2002. The adoption of FIN 45 did not have a material effect on the Company's
financial statements.

In November 2002, the EITF issued EITF No. 00-21, "Revenue Arrangements
with Multiple Deliverables", which provides guidance on the timing and method of
revenue recognition for sales arrangements that include the delivery of more
than one product or service. EITF 00-21 is effective prospectively for
arrangements entered into in fiscal periods beginning after June 15, 2003. The
adoption of EITF No. 00-21 is not expected to have a material effect on the
Company's consolidated financial position or results of operations.

On April 30, 2003, the FASB issued SFAS No. 149, Amendment of SFAS No. 133
on Derivative Instruments and Hedging Activities. SFAS No. 149 is intended to
result in more consistent reporting of contracts as either freestanding
derivative instruments subject to SFAS 133 in its entirety, or as hybrid
instruments with debt host contracts and embedded derivative features. In
addition, SFAS No. 149 clarifies the definition of a derivative by providing
guidance on the meaning of initial net investments related to derivatives. SFAS
No. 149 is effective for contracts entered into or modified after June 30, 2003.
The adoption of SFAS No. 149 did not have a material effect on the Company's
financial statements.

On May 15, 2003, the FASB issued SFAS No. 150, Accounting for "Certain
Financial Instruments with Characteristics of both Liabilities and Equity". SFAS
No. 150 establishes standards for classifying and measuring as liabilities
certain financial instruments that embody obligations of the issuer and have
characteristics of both liabilities and equity. SFAS No. 150 represents a
significant change in practice in the accounting for a number of financial
instruments, including mandatorily redeemable equity instruments and certain
equity derivatives that frequently are used in connection with share repurchase
programs. SFAS No. 150 is effective for all financial instruments created or
modified after May 31, 2003. The adoption of SFAS No. 150 did not have a
material effect on the Company's financial statements.

47

ROBOTIC VISION SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

3. ACCOUNTS RECEIVABLE

Accounts receivable at September 30, 2003 and 2002, consisted of the
following:

4. INVENTORIES

Inventories at September 30, 2003 and 2002, consisted of the following:

Finished goods inventory includes $386 and $1,671 that have been placed on
consignment with distributors at September 30, 2003 and 2002, respectively.

5. INCOME TAXES

The components of loss before income tax provision (benefit), for the
fiscal years ended September 30, 2003, 2002 and 2001 are as follows:

The income tax provision (benefit) for the fiscal years ended September 30,
2003, 2002 and 2001 consisted of the following:

48

ROBOTIC VISION SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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, 2003, 2002
and 2001 is as follows:

The net deferred tax asset at September 30, 2003 and 2002 is comprised of
the following:

49

ROBOTIC VISION SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

As of September 30, 2003, the Company had net operating loss carryforwards
of approximately $209,000 subject to any annual limitations because of changes
in ownership, as defined in the Internal Revenue Code. Such loss carryforwards
expire in the fiscal years 2004 through 2023 as follows:

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

2004........................................................ $ 380
2005........................................................ 2,585
2006........................................................ 2,937
2007........................................................ 1,129
2008........................................................ 814
2009........................................................ 2,623
2010........................................................ 2,097
2011........................................................ 8,520
2012........................................................ 1,187
2018........................................................ 32,340
2019........................................................ 18,542
2021........................................................ 57,640
2022........................................................ 27,958
2023........................................................ 49,932
--------
$208,684
========

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 2003 and 2002 is attributable to the significant operating loss incurred
in 2003 and 2002.

6. PLANT AND EQUIPMENT

Plant and equipment at September 30, 2003 and 2002 consisted of the
following:

50

ROBOTIC VISION SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

7. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

Accrued expenses and other current liabilities at September 30, 2003 and
2002 consisted of the following:

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

REVOLVING CREDIT FACILITY

The Company had a $10,000 revolving credit facility, which was due to
expire on April 28, 2003. The termination date had been extended eight times by
the lender. The fifth extension contained modifications to certain conditions of
the loan agreement. This credit facility allowed 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 the aggregate amount of drawings under letters of credit
and any bank reserves. At September 30, 2003, the amount available under the
line was $9,561 against which the Company had $4,635 of borrowings, resulting in
availability at September 30, 2003 of $4,926, subject to the terms of the credit
facility. Outstanding balances bear interest at a variable rate as determined
periodically by the bank (6% at September 30, 2003). At September 30, 2003, the
Company was not in compliance with certain covenants of the credit agreement,
and therefore in technical default, although the bank continued to make funds
available for borrowings.

On November 26, 2003, the Company replaced its $10,000 revolving credit
line with a $13,000 facility. The new facility has two revolving credit lines.
The first of which accords the Company a maximum of $10,000 and is
collateralized by certain foreign receivables and inventory with availability
subject to a borrowing base formula. This line, which is guaranteed by the
Export-Import Bank of the United States expires on November 30, 2005 and has a
7% interest rate. The second line is for a maximum of $3,000 and is
collateralized by certain domestic receivables. Availability under this line is
subject to a borrowing base formula, which, as defined in the credit agreement,
includes a $1,500 overadvance feature. At November 26, 2003, the amount
available under the line was approximately $12,533, against which the Company
had $8,941 of borrowings, resulting in availability at November 26, 2003 of
$3,612. It expires on November 25, 2006 and has a 17% interest rate of which 5%
can be capitalized at the Company's option. The facility contains covenants
pertaining to the Company's net worth and to fixed charge coverage (as defined).
The Company can prepay the facility at its discretion. In the event of the sale
of SEG, the Company is required to repay in full the $10,000 credit line. The
$3,000 credit line continues subject to the Company meeting certain financial
conditions. The facility also includes an annual commitment fee of 0.5% based on
the unused portion of the facility.

51

ROBOTIC VISION SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

In connection with the facility, the Company issued a warrant to purchase
2,200 shares of the Company's common stock at an exercise price of $0.01 per
share to the lender and a warrant to purchase 60 shares of the Company's common
stock at an exercise price of $0.01 per share to the placement agent. Subsequent
to year end, the Company recorded a deferred financing asset for the fair value
of the warrant, of approximately $7,200 using the Black-Scholes valuation model
with the following assumptions: volatility of 185% and risk-free interest rate
of 2.48%. The deferred financing cost is being amortized and charged to interest
expense over the life of the facility. In December 2003, the lender notified the
Company that it intends to exercise the warrant.

In addition, the Company incurred costs in connection with the financing of
approximately $680 which are being amortized and charged to interest expense
over the life of the facility. Upon the maturity or payoff of the facility the
Company will also be obligated to pay $400 reflecting deferred interest and
closing costs and which are being amortized and charged to interest expense over
the life of the facility.

NOTES PAYABLE AND LONG-TERM DEBT:

Notes payable and long-term debt at September 30, 2003 and 2002 consisted
of the following:

The subordinated note payable to General Scanning matured in June 2003,
bearing interest at prime (4% at September 30, 2003) and called for quarterly
payments of $281 commencing September 12, 2001. The Company did not make either
the March 12, 2003 or June 12, 2003 note principal payments. The Company is
currently a defendant in an action entitled GSI Lumonics Inc. v. Robotic Vision
Systems, Inc., C.A. No. CV-03-4474 (E.D.N.Y.) in which the plaintiff, GSI
Lumonics Inc. ("GSLI") as successor to General Scanning, alleges breach of
contract and conversion, and seeks injunctive relief and unspecified damages.
GSLI alleges that RVSI breached a 1998 Settlement Agreement by failing to
terminate a license relating to certain lead scanning technology in March 2003.
The Magistrate Judge recommended that a preliminary injunction be granted,
enjoining RVSI from, among other things, disclosing, licensing, selling or
assigning the disputed technology. RVSI has objected to the Magistrate's
recommendation, and the District Court judge will rule on the objections and
decide whether to grant the preliminary injunction. Meanwhile, RVSI has
terminated the disputed license. Plaintiff has moved for summary judgment on its
breach of contract claim, and RVSI has moved to dismiss the case as moot and for
failure to state a claim.

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

52

ROBOTIC VISION SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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 November 21, 2001, 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. The Company 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 a significant portion of the November 2002 annual installment payment of
$500. In addition, the Company did not make a significant portion of the
November 2003 annual installment payment of $500. On December 19, 2003, the
Company entered into a settlement agreement with the former principals of Abante
who agreed to forbear from taking action against the Company for fifteen months.
The Company agreed to pay $300 on January 5, 2004, to make additional monthly
payments of at least $35, and to pay the remaining balance due upon the sale of
SEG, subject to certain conditions.

On January 3, 2002, a payment of $1,855 under notes 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 reached an
agreement with the other former shareholders to pay the sums originally due on
January 3, 2002, in three approximately equal principal installments in April
2002, August 2002 and December 2002. In exchange for the deferral, the Company
issued warrants to purchase 183 shares of its common stock with an exercise
price of $5.70 per share. The fair value of these warrants (determined using
Black-Scholes pricing model), totaling approximately $137, was 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, respectively, and is therefore in default. Seven of the
former shareholders filed lawsuits against the Company seeking payment of all
amounts currently past due. These noteholders agreed to forbear from taking
action to enforce their notes until May 1, 2004 or the earlier occurrence of
certain events. On October 29, 2003, additional noteholders agreed to forbear
from taking action until May 1, 2004. The Company agreed to issue these
noteholders warrants to purchase 59 shares of its common stock at exercise
prices ranging from $2.50 per share to $3.60 per share and paid these
noteholders the outstanding interest that had accrued through June 1, 2003.

On December 4, 2002, Pat V. Costa, the Company's Chief Executive Officer,
loaned the Company $500 and the Company issued a 9% Convertible Senior Note in
the amount of $500. Under the terms of this note, 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 note
allows Mr. Costa to require earlier redemption by the Company in certain
circumstances including the sale of a division at a purchase price at least
equal to the amounts then due under this note. Thus, Mr. Costa may require
redemption at the time of the sale of SEG. This note also allows for conversion
into shares of common stock. The note may be converted at any time by Mr. Costa
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 price. Mr. Costa's
conversion price is equal to 125% of the average closing price of the Company's
common stock for the thirty consecutive trading days ending December 3, 2002, or
$2.10 per share. This convertible debt contained a beneficial conversion
feature, and as the debt is immediately convertible, the Company recorded a
dividend in the amount of approximately $18 on

53

ROBOTIC VISION SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

December 4, 2002. The Company did not make the semiannual interest payment due
on May 15, 2003. On October 28, 2003, Mr. Costa agreed to forbear from
exercising his rights with respect to this interest payment until January 14,
2005.

In connection with the 9% Convertible Senior Note, on December 4, 2002, the
Company issued warrants to Mr. Costa. Under the terms of the warrants, Mr. Costa
is entitled to purchase from the Company shares equal to 25% of the total number
of shares of Common Stock into which the Convertible Senior Note may be
converted or approximately 60 shares. The warrants have an exercise price of
$3.15. The Company recorded the fair value of these warrants of approximately
$65 as a discount to the debt using the Black-Scholes valuation model with the
following assumptions: volatility of 107% and risk-free interest rate of 2.49%.
This discount is being amortized over the period from December 4, 2002 to
December 4, 2005.

On December 4, 2002, as a condition to making the loan mentioned above and
in order to secure the prompt and complete repayment, the Company entered into a
Security Agreement with Mr. Costa. Under the terms of this agreement, the
Company granted Mr. Costa a security interest in certain of the Company's
assets.

On April 11, 2003, the Company entered into a settlement and release
agreement with a major customer, which provided for the release of certain
claims among the parties and the payment of $1,000 to the Company. On the same
date, the Company entered into a loan agreement with this customer which
afforded the Company the right to borrow an aggregate of $4,000, in two equal
tranches, subject to the conditions of each closing. The first closing occurred
on April 11, 2003, at which time the Company delivered to the lender a secured
promissory note in the amount of $2,000 with a maturity date of April 11, 2004,
bearing an interest rate of 10%. The second closing for the delivery of a
separate promissory note is subject to terms and conditions. In December 2003,
the Company informed the Lender of its desire to draw down the second tranche of
the loan. In response, the Lender stated that it will advance the second tranche
loan only if the Company agrees to substantial modifications to the settlement
and release agreement. The Company has not as yet determined whether it is
prepared to accept such modifications. During the three month period ended June
30, 2003, the Company recorded a $1,000 other gain relating to the settlement.

As of December 15, 2003, the Company was in default on an aggregate of
approximately $4,351 of its borrowings.

Principal maturities of notes payable and long-term debt as of September
30, 2003 are as follows:

2004........................................................ $ 8,835
2005........................................................ 1,285
-------
Total.................................................. $10,120
=======

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.

54

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,
2003, 2002 and 2001 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, 2003 and 2002 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.

55

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
$234, $416 and $546 for matching employer contributions to the Plans in 2003,
2002 and 2001, 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 sub-lessee payments described below,
under these agreements are as follows:

Rent expense for the fiscal years ended September 30, 2003, 2002 and 2001
was $1,831, $2,910 and $3,563, 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 sublet 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. This sublet arrangement
terminated as of July 2003, at which time the Company engaged in a new one-year
facility lease for the space occupied at the Canton, Massachusetts location,
which did not include a sublet provision to SICK.

Purchase Commitments -- As of September 30, 2003, the Company had
approximately $14,200 of purchase commitments with vendors. Approximately
$12,900 were 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
$1,300 were for the Acuity CiMatrix

56

ROBOTIC VISION SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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 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 2003 and 2002, the
Company identified certain purchase commitments for products that have been
discontinued. The Company has recorded losses during the years ended September
30, 2003 and September 30, 2002 totaling $1,100 and $150, respectively, related
to these commitments.

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 Company's May 2001
restatement of its financial results for fiscal year 2000 and for the first
quarter of fiscal 2001. The Company is cooperating in the investigation.

A number of purported securities class actions were filed beginning on or
about June 11, 2001, against the Company, Pat V. Costa, its Chief Executive
Officer, and Frank Edwards, its former Chief Financial Officer, in the Federal
District Court for the District of Massachusetts. The action was consolidated as
In Re Robotic Vision Systems, Inc. Securities Litigation, Master File No.
01-CV-10876 (RGS). This matter was settled on July 21, 2003. The settlement
amount was paid by the Company's directors and officers liability insurance
policy.

In February 2003, four of the former shareholders of Auto Image ID, Inc.
filed an action in the United States District Court for the Eastern District of
Pennsylvania, C. A. No. 03-841, seeking payments of approximately $2,000 of
amounts allegedly owed under promissory notes issued to them by the Company in
connection with the Company's purchase of Auto Image ID, Inc. in January 2001.
The parties to this action have agreed to settle the matter. The plaintiffs
agreed to forbear in acting to collect on the promissory notes until May 1, 2004
or the earlier occurrence of certain events and the Company agreed to issue to
the plaintiffs warrants to purchase 64 shares of our common stock. The parties
filed a stipulation of dismissal on July 7, 2003.

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

11. STOCKHOLDERS' EQUITY

Reverse Stock Split -- Effective November 26, 2003, the Company effected a
one-for-five reverse stock split of its common stock. All information in the
consolidated financial statements related to common shares, share prices, per
share amounts, stock option plans and stock warrants have been restated
retroactively for the reverse stock split, unless otherwise noted.

57

ROBOTIC VISION SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Warrants Outstanding -- As of September 30, 2003, there were outstanding
warrants to purchase the Company's common stock as described below:

In addition to the above warrants outstanding on September 30, 2003, as more
fully disclosed in Note 8, the Company issued warrants to purchase 2,200 shares
of its common stock in connection with its debt refinancing.
- ---------------

(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
$19.80 per share.

(b) In conjunction with the sale of common stock, the Company issued 5-year
incentive warrants at an exercise price of $19.80 per share, subject to
anti-dilution adjustments. The incentive warrants are exercisable,
beginning in October 2000.

(c) The Company sold warrants to purchase 618 shares of the Company's common
stock at an exercise price of $20.10 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 $25.00 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 $5.70 per share.

(g) The Company issued 5 year common stock warrants to a consultant for
services rendered at an exercise price of $6.70 per share.

(h) In connection with a private placement of its equity, the Company issued
warrants to purchase up to 400 shares on or before June 30, 2002, which was
then extended to August 31, 2002 at $7.30 per share. The Company also
issued warrants to purchase up to 514 shares at $7.50 per share on or
before May 1, 2005. The private placement also included warrants issued to
the placement agent to purchase up to 113 shares of common stock at $7.50
per share on or before May 1, 2005.

(i) The Company issued warrants in connection with the issuance of a
convertible note.

(j) Warrants issued to consultant in settlement of fees.

(k) Warrants issued in exchange for forbearance on promissory notes.

58

ROBOTIC VISION SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(l) The Company issued warrants to purchase up to 1,000 shares of common stock
at $3.05 per share in connection with a private placement of equity. The
private placement also included warrants issued to the placement agent to
purchase up to 40 shares of common stock at $2.50 per share.

Private Placement -- On September 26, 2003, the Company closed a private
placement, raising $5,000 in gross proceeds, approximately $4,800 of which was
received by September 30, 2003 and the balance in early October 2003. In
December 2003, the lead investor exercised an option to invest an additional
$1,000 on the same terms and conditions as the original funding, including
warrants to purchase up to 200 shares of common stock, increasing the total
gross proceeds to $6,000. A total of 2,400 shares of common stock were sold in
the private placement at $2.50 per share. The private placement also included
warrants to purchase up to 1,200 shares at $3.05 per share on or before
September 26, 2008. Warrants were also issued to the placement agent, to
purchase up to 40 shares of common stock at $2.50 per share on or before
September 26, 2007. All of such warrants may be exercised six months after
September 26, 2003. Additionally, the Company is required to file a registration
statement within 60 days of the closing date, and to cause such registration
statement to become effective within 120 days after the closing date or pay to
each investor 1% of the purchase price paid by such investor , as liquidated
damages for each of the next two months and 2% per month thereafter. The Company
intends to register the shares sold in this offering and the shares underlying
the warrant as promptly as practicable. The fair value of the warrants
(determined using Black-Scholes pricing model: volatility of 185% and risk-free
interest rate of 2.95%), totaling approximately $2,941 was credited to
additional paid-in capital.

Private Placement -- On May 2, 2002, the Company completed a private
placement, which raised approximately $13,591, net of offering expenses. A total
of 2,100 shares of common stock were sold at $7.30 per share. The placement also
included warrants to purchase up to 400 shares at $7.30 per share on or before
June 30, 2002 (the "60-day Warrants"), and warrants to purchase up to 500 shares
at $7.50 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 approximately 120 shares of common stock at $7.50 per share on or
before May 1, 2005. The Company may call the $7.50 warrants, effectively forcing
conversion, if the price of the Company's common stock trades above $11.75 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-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 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 $5.70
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 119 shares of the Company's common stock upon payment of
an exercise price of $19.80 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

59

ROBOTIC VISION SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

placement agent 5-year incentive warrants to purchase 126 shares of common stock
at an exercise price of $19.80 per share. The market price of the Company's
common stock on the placement closing date was $15.15 per share.

Each prepaid warrant was exercisable at the lower of $19.80 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, 2003, 2002 and 2001, the warrant
premium accrued was $0, $0 and $1,712, respectively, of which the Company paid
$0, $2,442, and $217, respectively, in cash and the remainder in shares of
common stock. During the years ended September 30, 2003, 2002 and 2001, 0, 2,871
and 136 shares were issued upon exercise of prepaid warrants at average exercise
prices of $0.00, $4.10, $8.55, respectively. At September 30, 2003 and 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.

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

60

ROBOTIC VISION SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Weighted average option exercise price information for the fiscal years
ended September 30, 2003, 2002 and 2001 was as follows:

AS OF SEPTEMBER 30, 2003

The weighted average fair value of the options granted during fiscal 2003,
2002 and 2001 is estimated at $1.80, $6.25 and $15.00 on the date of grant
(using Black-Scholes option pricing model) with the following weighted average
assumptions for fiscal 2003, 2002 and 2001, respectively: volatility of 182%,
107% and 107%, risk-free interest rate of 2.38%, 2.49% and 3.90%, and an
expected life of five years in fiscal 2003, 2002 and 2001, respectively.

Debt Exchanged for Common Stock -- During the fiscal year ended September
30, 2003, the Company issued approximately 440 shares of its common stock to
certain suppliers in exchange for the cancellation of approximately $2,800 of
trade indebtedness owed to such suppliers. This debt restructuring also included
the cancellation of certain purchase order commitments of the Company's totaling
approximately $2,800. The Company has reported a gain from debt restructure of
$1,492 in other gains for the fiscal year ended September 30, 2003.

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 "2002 Plan"). The
2002 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 400. Each option under the Plan is fully exercisable
upon grant or in installments as specified by the Compensation Committee or the
Board of Directors.

2003 OPTION PLAN

On July 1, 2003, the Board of Directors of the Company approved the Robotic
Vision Systems, Inc. 2003 Stock Plan (the "Plan"). The Plan allows for the grant
of Non-Qualified Options to employees or individuals

61

ROBOTIC VISION SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

who render services to the Company. The aggregate number of shares for which
options may be granted under this Plan is 700. Options to purchase 698 shares
have been granted as of September 30, 2003. Each 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

During fiscal 2003 no customer accounted for more than 10% of total
revenues. In fiscal 2002 and fiscal 2001, revenues from one customer represented
10% of total revenues at September 30, 2002 and September 30, 2001.

GEOGRAPHIC OPERATIONS

Operations by geographic area are summarized as follows:

Total revenues from customers outside the U.S. were $25,838, $32,532 and
$65,640 for the fiscal years ended September 30, 2003, 2002 and 2001,
respectively.

62

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, 2003, 2002 and 2001 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 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 $71, $200 and $965 for fiscal 2003, 2002
and 2001, 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
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.

63

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). 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.

64

ROBOTIC VISION SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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. On June 5, 2003, the Company came
to an agreement with SICK on the remaining escrow in the amount of $350 and
recorded the amount as a net gain in the quarter ended June 30, 2003, related to
the sale of the material handling business.

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

65

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, 2003, 2002 and 2001 are as follows:

Reverse Stock Split -- Effective November 26, 2003, the Company effected a
one-for-five reverse stock split of its common stock. All information in the
consolidated financial statements related to common shares, share prices, per
share amounts, stock option plans and stock warrants have been restated
retroactively for the reverse stock split, unless otherwise noted.

For the years ended September 30, 2003, 2002 and 2001, the Company had
potential common shares, representing outstanding stock options and warrants,
excluded from the earnings per shares calculation of 2,800, 2,304, and 2,389
respectively, as they were considered anti-dilutive.

15. RESTRUCTURING AND IMPAIRMENTS

In February 2003, the Company closed its New Berlin, Wisconsin and Tucson,
Arizona facilities, and consolidated these SEG operations into its Hauppauge,
New York facility. This restructuring included costs related to the closing of
these facilities, writing off tangible and intangible assets and a reduction of
approximately 50 employees. The charge for this restructuring totaling $3,529
was comprised of facility exit costs of $2,486, property plant and equipment
write-offs of $427, severance charges of $228, and other asset write-offs of
$388. As of September 30, 2003, the Company had substantially reached an
agreement pertaining to its lease for the New Berlin, Wisconsin facility and on
October 31, 2003, the Company reached a settlement. In exchange for the release
of all past and future obligations, the Company issued the landlord a $1,000
note payable in 36 equal payments of approximately $31 each. The note reflects
an effective interest rate of approximately 8.7%. The note is payable in full
upon the occurrence of certain events, including the sale of SEG. In addition to
the note, the Company issued a three-year warrant to purchase 20 shares of
common stock at an exercise price of $0.05 per share. The Company determined the
fair value of the warrant of approximately $65 using the Black-Scholes valuation
model with the following assumptions: volatility of 185% and risk-free interest
rate of 2.28%. The effect of this settlement was to reduce the facility exit
costs recorded in February 2003 of $2,486 by approximately $1,100, resulting in
a facility exit cost charge of approximately $1,400 for the fiscal year ended
September 30, 2003.

Also during the nine month period ended June 30, 2003, the Company took
additional steps in order to reduce its costs, including a reduction of
approximately 25 employees at its Hauppauge, NY and Canton, MA facilities,
resulting in severance costs of approximately $180.

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ROBOTIC VISION SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

In November 2002, certain SEG senior management and technical employees
were granted retention agreements. These agreements allow for employees to
receive cash and stock benefits for remaining with the Company and continuing
through the sale of SEG. The current cash value of the award is approximately
$720. The Company is accruing these agreements over the expected service period,
which has been based upon the estimated timing of the sale of SEG. The Company
accrued approximately $600 as of September 30, 2003.

During the quarter ended September 30, 2003, the Company incurred costs
related to the closing of a foreign office, totaling approximately $119. In
connection with this closing, employee severance costs relating to two employees
were recorded in addition to facility exit costs.

Impairments -- In accordance with SFAS No. 142, "Goodwill and Other
Intangible Assets", the Company conducts a periodic assessment, annually or more
frequently, if impairment indicators exist on the carrying value of our
goodwill. The assessment is based on estimates of future income from the
reporting units and estimates of the market value of the units. These estimates
of future income are based upon historical results, adjusted to reflect the
Company's best estimate of future markets and operating conditions, and are
continuously reviewed based on actual operating trends. Actual results may
differ materially from these estimates. In addition, the estimated future market
value for the Company's reporting units is based on management's judgment.

In accordance with SFAS No. 144, "Accounting for the Impairment or Disposal
of Long-Lived Assets", the Company reviews the carrying value of long-lived
assets when circumstances indicate that they should be reevaluated, based upon
the expected future operating cash flows of its business. These future cash flow
estimates are based on historical results, adjusted to reflect the Company's
best estimate of future markets and operating conditions, and are continuously
reviewed based on actual operating trends. Actual results may differ materially
from these estimates, and accordingly, could result in additional impairment of
long-lived assets.

During the year ended September 30, 2003, the Company recorded charges
related to the impairment of certain long-lived assets and intangible assets,
which totaled $564.

A summary of the 2003 remaining restructuring costs is as follows:

Restructuring Fiscal 2002 -- 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

67

ROBOTIC VISION SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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
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 were paid within the
Company's fiscal year ending September 30, 2003.

Impairments Fiscal 2002 -- 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.

68

ROBOTIC VISION SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

A summary of these restructuring costs and impairment charges during fiscal
2002 is as follows:

16. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)

FOR THE FISCAL YEARS ENDED SEPTEMBER 30, 2003 AND 2002:

17. WARRANTY COSTS

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

69

ROBOTIC VISION SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

required. We recorded warranty provisions totaling $158, $777 and $1,990 during
the fiscal years ended September 30, 2003, September 30, 2002 and September 30,
2001.

18. GOODWILL

In June 2001, the FASB issued SFAS No. 141, Business Combinations, and SFAS
No. 142, Goodwill and Other Intangible Assets, effective for fiscal years
beginning after December 15, 2001 with early adoption permitted for companies
with fiscal years beginning after March 15, 2001. The Company adopted the new
rules on accounting for goodwill and other intangible assets beginning in the
first quarter of fiscal 2003. Under the new rules, goodwill and intangible
assets deemed to have indefinite lives will no longer be amortized but will be
subject to annual impairment tests in accordance with the statements. Other
intangible assets will continue to be amortized over their useful lives.

In accordance with SFAS No. 142, The Company initiated a goodwill
impairment assessment during the first quarter of fiscal 2003. The results of
this analysis concluded that there was no impairment charge. The following table
presents the fiscal year results of the Company on a comparable basis assuming
goodwill is not amortized:

19. OTHER SUBSEQUENT EVENTS

On October 20, 2003 the Company entered into an agreement with
International Product Technology, Inc. ("IPT"), to sell IPT certain assets of
its Systemation Business, primarily consisting of inventory and intellectual
property. Under the terms of this agreement, the Company sold IPT certain assets
and received $40 in cash and a promissory note for the principal amount of
approximately $3,629.

70

SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS AND RESERVES

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

(1) Amounts written off.

71

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 13, 2004.

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.