ROBOTIC VISION SYSTEMS INC - 10-Q Quarterly Report

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

FORM 10-Q

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

For Quarterly Period Ended June 30, 2004 Commission File Number 0-8623

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

DELAWARE 11-2400145
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)

486 AMHERST STREET, NASHUA, NH 03063
(Address of principal executive offices)

Registrant's telephone number, including area code (603) 598-8400

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 twelve months (or for such shorter period that the Registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]

Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).

Yes [ ] No [X]

Number of shares of common stock outstanding as of August 6, 2004: 21,008,125

Unless otherwise indicated, the information contained in this quarterly
report gives effect to a one-for-five reverse split of our common stock effected
on November 26, 2003.

PART I. FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

ROBOTIC VISION SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

(UNAUDITED)
JUNE 30, SEPTEMBER 30,
2004 2003
----------- -----------

ASSETS

Current Assets:
Cash and cash equivalents............................................. $ 30 $ 367
Accounts receivable, net.............................................. 12,941 9,501
Inventories........................................................... 10,312 10,995
Prepaid expenses and other current assets............................. 2,291 1,561
----------- -----------
Total current assets................................................ 25,574 22,424
Plant and equipment, net.............................................. 3,647 2,218
Goodwill.............................................................. 1,333 1,333
Software development costs, net....................................... 4,231 5,227
Other assets.......................................................... 2,296 2,791
Deferred financing costs.............................................. 6,730 --
----------- -----------
$ 43,811 $ 33,993
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY

Current Liabilities:
Revolving credit facility............................................. $ 13,605 $ 4,635
Notes payable and current portion of long-term debt................... 5,741 8,835
Accounts payable current.............................................. 5,096 3,019
Accounts payable past-due............................................. 4,873 6,546
Accrued expenses and other current liabilities........................ 15,496 18,430
Deferred gross profit................................................. 2,038 1,693
----------- -----------
Total current liabilities............................................ 46,849 43,158
Long-term debt........................................................ 4,015 1,285
----------- -----------
Total liabilities.................................................... 50,864 44,443
Commitments and contingencies.........................................
Stockholders' Deficit:
Common stock, $.01 par value; shares authorized, 100,000 shares;
issued and outstanding, June 30, 2004 - 19,031 and September 30,
2003 - 14,724........................................................ 190 147
Additional paid-in capital............................................ 314,465 299,768
Accumulated deficit................................................... (320,380) (308,920)
Accumulated other comprehensive loss.................................. (1,328) (1,445)
----------- -----------
Total stockholders' deficit.......................................... (7,053) (10,450)
----------- -----------
$ 43,811 $ 33,993
=========== ===========

See notes to consolidated financial statements.

2

ROBOTIC VISION SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30, JUNE 30,
------------------------- -------------------------
2004 2003 2004 2003
--------- ----------- --------- -----------

Revenues......................................... $ 13,624 $ 10,125 $ 39,540 $ 29,901
Cost of revenues................................. 7,483 6,036 21,692 22,198
--------- ----------- --------- -----------
Gross profit................................... 6,141 4,089 17,848 7,703
--------- ----------- --------- -----------
Operating costs and expenses:
Research and development expenses.............. 2,786 2,456 7,915 7,973
Selling, general and administrative expenses... 6,015 6,873 19,349 23,743
Restructuring and other charges................ -- 140 -- 4,311
Gain on sale of assets......................... (1,259) (350) (1,441) (350)
--------- ----------- --------- -----------
Loss from operations............................. (1,401) (5,030) (7,975) (27,974)
Other gains (losses)........................... -- 2,126 (193) 2,322
Interest expense, net.......................... (1,475) (348) (3,292) (966)
--------- ----------- --------- -----------
Loss before income taxes......................... (2,876) (3,252) (11,460) (26,618)
Provision for income taxes....................... -- -- -- --
--------- ----------- --------- -----------
Net loss....................................... $ (2,876) $ (3,252) $ (11,460) $ (26,618)
========= =========== ========= ===========
Loss per share:
Basic and diluted.............................. $ (0.15) $ (0.26) $ (0.66) $ (2.17)
========= =========== ========= ===========
Weighted average shares:
Basic and diluted.............................. 18,968 12,309 17,325 12,240
========= =========== ========= ===========

See notes to consolidated financial statements.

3

CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT

FOR THE NINE MONTHS ENDED JUNE 30, 2004
(UNAUDITED)
(IN THOUSANDS)

COMMON STOCK ACCUMULATED
----------------------- ADDITIONAL OTHER TOTAL
NUMBER PAID-IN ACCUMULATED COMPREHENSIVE STOCKHOLDERS'
OF SHARES AMOUNT CAPITAL DEFICIT LOSS DEFICIT
--------- ------ ---------- ----------- ------------- -------------

BALANCE, OCTOBER 1, 2003..... 14,724 $ 147 $ 299,768 $ (308,920) $ (1,445) $ (10,450)
Shares issued in
connection with the
exercise of stock
options and warrants....... 2,319 23 7,415 -- -- 7,438
Shares and warrants issued
for professional services.. 21 -- 119 -- -- 119
Shares and warrants issued
in connection with the
private placement of
common stock............... 1,969 20 5,375 -- -- 5,395
Shares issued in exchange
for debt................... 60 -- 227 -- -- 227
Warrants issued.............. -- -- 1,561 -- -- 1,561
Cancellation of restricted
shares..................... (62) -- -- -- -- --
Translation adjustment....... -- -- -- -- 117 117
Net loss..................... -- -- -- (11,460) -- (11,460)
------ ------ --------- ---------- -------- ---------
BALANCE, JUNE 30, 2004....... 19,031 $ 190 $ 314,465 $ (320,380) $ (1,328) $ (7,053)
====== ====== ========= ========== ======== =========

See notes to consolidated financial statements.

4

ROBOTIC VISION SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)

NINE MONTHS
ENDED JUNE 30,
------------------------
2004 2003
----------- -----------

OPERATING ACTIVITIES:
Net loss..................................................................................... $ (11,460) $ (26,618)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization of operating assets.......................................... 2,982 4,745
Amortization of deferred financing costs................................................... 2,320 --
Non-cash interest.......................................................................... 118 12
Loss (gain) on shares exchanged for debt................................................... 177 (1,126)
Loss on retirement of fixed assets......................................................... 117 693
Gain on settlement of accounts payable..................................................... (182) --
Issuance of warrants and shares in lieu of cash............................................ -- 93
Bad debt provision......................................................................... 33 886
Inventory provision........................................................................ -- 3,703
Warranty provision......................................................................... 27 158
Gain on sale of assets..................................................................... (1,441) (350)
Deferred gross profit...................................................................... 345 1,413
Accretion income on note receivable........................................................ (190) --
Accretion expense on note payable.......................................................... 125 --
Changes in operating assets and liabilities:
Accounts receivable.................................................................... (3,473) 2,213
Inventories............................................................................ (302) 6,011
Prepaid expenses and other current assets.............................................. (704) 156
Other assets........................................................................... (8) 668
Accounts payable current............................................................... 2,259 (4,884)
Accounts payable past-due.............................................................. (1,623) 5,015
Accrued expenses and other current liabilities......................................... (2,064) 3,404
----------- -----------
Net cash used in operating activities...................................................... (12,944) (3,808)
----------- -----------
INVESTING ACTIVITIES:
Additions to plant and equipment, net........................................................ (2,074) (197)
Additions to software development costs...................................................... (568) (993)
Payments received from sale of assets........................................................ 1,958 350
Payments received on note receivable......................................................... 149 --
----------- -----------
Net cash used in investing activities...................................................... (535) (840)
----------- -----------
FINANCING ACTIVITIES:
Issuance of convertible note................................................................. -- 500
Issuance of promissory note.................................................................. -- 2,000
Proceeds from exercise of stock options and warrants......................................... 187 --
Proceeds from private placement of common stock, net of offering costs....................... 5,062 --
Loan refinancing costs....................................................................... (535) --
Net proceeds from revolving credit facility.................................................. 8,970 2,854
Increase in notes payable and current portion of long-term debt.............................. 261 --
Repayment of long-term borrowings............................................................ (920) (213)
----------- -----------
Net cash provided by financing activities.................................................. 13,025 5,141
----------- -----------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS................................. 117 (18)
----------- -----------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS......................................... (337) 475
CASH AND CASH EQUIVALENTS:
Beginning of period........................................................................ 367 220
----------- -----------
End of period.............................................................................. $ 30 $ 695
=========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid.............................................................................. $ 509 $ 481
=========== ===========
Taxes paid................................................................................. $ 51 $ 43
=========== ===========

5

NONCASH INVESTING AND FINANCING ACTIVITIES:
Discount on convertible debt.................................................. $ -- $ 65
=========== ===========
Trade payables exchanged with shares of common stock.......................... $ 50 $ 1,735
=========== ===========

6

See notes to consolidated financial statements.

ROBOTIC VISION SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

1. BUSINESS OVERVIEW AND GOING CONCERN CONSIDERATIONS

The unaudited consolidated financial statements of Robotic Vision Systems,
Inc. and its subsidiaries (the "Company") which include the consolidated balance
sheet as of June 30, 2004, the consolidated statements of operations for the
three and nine months ended June 30, 2004 and June 30, 2003, the consolidated
statements of cash flows for the nine months ended June 30, 2004 and June 30,
2003, and the consolidated statement of stockholders' deficit for the nine
months ended June 30, 2004 have been prepared by the Company. In the opinion of
management, all adjustments (which include mainly recurring adjustments)
necessary to present fairly the financial condition, results of operations and
cash flows as of June 30, 2004 and for all periods presented have been made.

Certain information and footnote disclosures normally included in the
financial statements prepared in accordance with accounting principles generally
accepted in the United States of America have been condensed or omitted. It is
suggested that these consolidated financial statements be read in conjunction
with the consolidated financial statements and notes thereto included in the
Company's annual report on Form 10-K for the year ended September 30, 2003. The
operating results for the three and nine months ended June 30, 2004 are not
necessarily indicative of the operating results for the full fiscal year.
Certain previously reported amounts have been reclassified to conform with the
current period presentation.

The accompanying consolidated financial statements have been prepared
assuming the Company will continue as a going concern. The Company has incurred
operating losses for the nine months ended June 30, 2004, fiscal 2003, 2002 and
2001 amounting to $8.0 million, $31.5 million, $40.5 million and $83.2 million,
respectively, and negative cash flows from operations for the nine months ended
June 30, 2004, fiscal 2003, 2002 and 2001 amounting to $12.9 million, $2.9
million, $25.9 million and $12.6 million, respectively. For the quarter ended
June 30, 2004, the Company incurred an operating loss of $1.4 million and used
net cash of $2.4 million in operations, compared with $2.8 million and $4.1
million, respectively, for the quarter ended March 31, 2004. Further, the
Company has debt payments due which relate primarily to acquisitions the Company
has made. These conditions among others, 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 pared its fixed costs
significantly, reduced its operating losses and lowered its breakeven level of
revenues. On December 4, 2002, the Company received $500,000 from the issuance
of a convertible note. On April 11, 2003, the Company received a $1.0 million
settlement payment and a $2.0 million 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 $6.0 million. On November
26, 2003, the Company replaced its existing revolving credit facility with a new
facility, which increased its maximum borrowing availability to $13.0 million.
In February 2004, the Company completed private placements of its common stock
and warrants, which raised $4.4 million in gross proceeds ($4.1 million, net of
offering expenses). A total of approximately 1.5 million shares of common stock
were sold to accredited investors at $3.00 per share. The Company also issued to
these accredited investors warrants to purchase up to approximately 1.4 million
shares at $3.10 per share. On June 25, 2004, the Company amended its revolving
credit facility to increase the maximum borrowing availability from $13.0
million to $16.0 million. To increase the availability to the full $16.0
million, the agreement with the lender required the Company to separately add at
least $2.0 million of additional working capital. On July 23, 2004 the Company
raised an additional $2.4 million ($2.2 million, net of offering expenses) in
equity in the form of a private placement for 1,175,605 shares at $2.05 per
share. The buyers of the shares also acquired warrants to purchase up to an
additional 529,023 shares of common stock. In connection with the June 2004
revolving credit facility amendment, the Company issued to the lender a warrant
to purchase up to 450,000 shares of common stock, at an exercise price of $0.01
per share through November 30, 2008. As of June 25, 2004, the warrant was
exercisable for 200,000 shares of common stock. Additional shares will become
available for exercise if the maximum amount of borrowings outstanding under the
Company's credit facility reaches certain thresholds specified in the warrant.
The lender exercised the warrant with respect to 200,000 shares on June 28, 2004
and the shares were issued on July 1, 2004.

The Company is exploring the sale of its Semiconductor Equipment Group
("SEG") business and on June 18, 2004, the Company announced that it had
selected William Blair & Company LLC to research the level of interest, timing
and valuation of a sale of SEG. The sale of SEG, if completed, is expected to
result in sufficient proceeds to pay down all or a significant portion of the
Company's debt, reduce accounts payable, and provide working capital for the
Company's remaining businesses. However, no assurance can be

7

given that SEG will be sold at a price, or on sufficient terms, to allow for
such a result. If the Company does not succeed in selling SEG, it may not have
sufficient working capital to continue in business. 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. INVENTORIES

Inventories consisted of the following (in thousands):

(UNAUDITED)
JUNE 30, 2004 SEPTEMBER 30, 2003
------------- ------------------

Raw Materials..... $ 4,839 $ 4,875
Work-in-Process... 2,686 1,588
Finished Goods.... 2,787 4,532
--------- ----------
Total........ $ 10,312 $ 10,995
========= ==========

Finished goods inventory includes $214,000 and $386,000 that have been
placed on consignment with distributors at June 30, 2004 and September 30, 2003,
respectively.

3. LOSS PER SHARE

Basic net loss per share is computed using the weighted average number of
shares outstanding during each period. Diluted net loss 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
anti-dilutive. The calculations of unaudited net loss per share for the
following periods are as follows (in thousands, except per share amounts):

THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30, JUNE 30,
--------------------------- ---------------------------
2004 2003 2004 2003
---------- ------------ ---------- ------------

BASIC AND DILUTED EPS
Net loss - numerator........................................... $ (2,876) $ (3,252) $ (11,460) $ (26,618)
Weighted average number of common shares - denominator......... 18,968 12,309 17,325 12,240
--------- ----------- --------- -----------
Net loss per share - basic and diluted......................... $ (0.15) $ (0.26) $ (0.66) $ (2.17)
========= =========== ========= ===========

For the three and nine months ended June 30, 2004 and 2003, potential
common shares were anti-dilutive due to the loss for the period. For the three
months ended June 30, 2004 and 2003 and for the nine months ended June 30, 2004
and 2003, the Company had potential common shares, representing outstanding
options and warrants, excluded from the earnings per share calculations of
approximately 3,570,000, 1,663,000, 3,074,000, and 2,175,000, respectively, as
they were considered anti-dilutive.

4. COMPREHENSIVE LOSS

In addition to net income or loss, the only item that the Company
currently records as other comprehensive income or loss is the change in the
cumulative translation adjustment resulting from the changes in exchange rates
and the effect of those changes upon translation of the financial statements of
the Company's foreign operations. The following table presents information about
the Company's unaudited comprehensive loss for the following periods (in
thousands):

THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------- --------------------------
2004 2003 2004 2003
---------- ------------ ---------- ------------

Net loss............................................ $ (2,876) $ (3,252) $ (11,460) $ (26,618)
Effect of foreign currency translation adjustments.. (22) 107 117 (117)
---------- ----------- --------- -----------
Comprehensive loss.................................. $ (2,898) $ (3,145) $ (11,343) $ (26,735)
========= =========== ========= ===========

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

REVOLVING CREDIT FACILITY

The Company had a $10.0 million revolving credit facility with a
commercial bank. The facility's original expiration date was April 28, 2003, but
was extended several 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 any bank reserves.

On November 26, 2003, the Company replaced its $10.0 million revolving
credit line with a $13.0 million facility. On June 25, 2004, the Company amended
the facility to increase the maximum borrowing availability from $13.0 million
to $16.0 million. To increase the availability to the full $16.0 million, the
agreement with the lender required the Company to separately add at least $2.0
million of additional working capital. On July 23, 2004 the Company raised an
additional $2.4 million ($2.2 million, net of offering expenses) in equity in
the form of a private placement for 1,175,605 shares at $2.05 per share. The
buyers of the shares also acquired warrants to purchase up to an additional
529,023 shares of common stock, exercisable at $2.50 per share until January 31,
2005 and exercisable at $3.05 per share from February 1, 2005 until July 31,
2007.

The amended facility has two revolving credit lines which expire on
November 30, 2005. The first accords the Company 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 is guaranteed by the
Export-Import Bank of the United States and has a 7% interest rate. The second
line is for a maximum of $6.0 million and is collateralized by certain domestic
and foreign receivables. Availability under this line is subject to a borrowing
base formula, which, as defined in the credit agreement, includes a $1.5 million
over-advance feature. It has a 17% interest rate of which 5% can be capitalized
at the Company's option (as defined in the agreement). 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. Any sale of
assets not in the ordinary course of business would require the use of proceeds
to pay down the principal of both lines. The facility also includes an annual
commitment fee of 0.5% based on the unused portion of the facility. At June 30,
2004, the aggregate amount available under the lines was approximately $14.0
million, against which the Company had $13.6 million of borrowings. At March 31,
2004, the Company did not meet the fixed charge covenant related to the facility
and received a waiver from the lender for the covenant violation. At June 30,
2004, the Company was in compliance with its financial covenants, including the
fixed charge covenant under the amended facility.

In connection with the facility, during the first quarter of fiscal 2004
the Company issued a warrant to purchase 2.2 million shares of the Company's
common stock at an exercise price of $0.01 per share to the lender and a warrant
to purchase 60,000 shares of the Company's common stock at an exercise price of
$0.01 per share to the placement agent. The Company recorded a deferred
financing cost for the fair value of the warrants of approximately $7.4 million
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. The lender exercised its warrant on December 18, 2003. In addition,
the Company incurred costs in connection with the financing of approximately
$465,000 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 $400,000 reflecting deferred interest and closing costs
and which are being amortized and charged to interest expense over the life of
the facility.

In connection with the June 2004 amendment, the Company issued to the
lender a warrant to purchase up to 450,000 shares of common stock, at an
exercise price of $0.01 per share through November 30, 2008. As of June 25,
2004, the warrant was exercisable for 200,000 shares of common stock. Additional
shares will become available for exercise if the maximum amount of borrowings
outstanding under the Company's credit facility reaches certain thresholds
specified in the warrant. The lender exercised the warrant with respect to
200,000 shares on June 28, 2004 and the shares were issued on July 1, 2004. The
Company recorded a deferred financing cost asset for the fair value of the
200,000 exercisable warrants of approximately $512,000 using the Black-Scholes
valuation model with the following assumptions: volatility of 143% and risk-free
interest rate of 1.52%. The deferred financing cost is being amortized and
charged to interest expense over the life of the facility. In addition, the
Company incurred costs in connection with the financing of approximately
$100,000 which are being amortized and charged to interest expense over the life
of the facility.

9

NOTES PAYABLE AND LONG-TERM DEBT

Notes payable and long-term debt at June 30, 2004 and September 30, 2003
consisted of the following (in thousands):

(UNAUDITED)
JUNE 30, SEPTEMBER 30,
2004 2003
--------- ---------

Subordinated note payable to General Scanning - 8.25%, payable in equal quarterly installments of
$281 commencing September 12, 2001, currently due.................................................. $ 565 $ 565
Abante note payable - 8%............................................................................. 204 1,000
Abante payable - non-interest bearing, discounted at 8%, payable in annual installments of $500,
through November 2006.............................................................................. 1,839 1,786
Auto Image ID, Inc. notes payable - (7.00% at June 30, 2004 and 4.00% September 30, 2003)............ 3,410 4,245
Promissory note, 10%, currently due.................................................................. 2,000 2,000
9% Convertible Senior Note - due December 4, 2005.................................................... 468 454
Promissory note, 8.7%, due September 20, 2006........................................................ 779 --
Other long-term debt................................................................................. 491 70
--------- ---------
Total notes payable and long-term debt............................................................... 9,756 10,120
Less notes payable and current portion of long-term debt............................................. (5,741) (8,835)
--------- ---------
Long-term debt....................................................................................... $ 4,015 $ 1,285
========= =========

As of June 30, 2004, deferred financing costs totaled $6.7 million and
consisted of the fair value of placement agent and lender warrants of $5.9
million and deferred interest, closing costs and financing costs of $794,000.

The subordinated note payable to General Scanning matured in June 2003,
bearing interest at the prime lending rate (4.25% at June 30, 2004) 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. vs.
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,
among other things, breach of contract and conversion, and seeks declaratory and
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. On or about January 30, 2004, the court
entered an injunction against the Company enjoining it from, among other things,
disclosing, licensing, selling or assigning the disputed technology. 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 $1.5 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, 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 $500,000 through November 2005. On
November 21, 2001, the first of five annual installments on the Abante payable
also became due, in the amount of $500,000. Pursuant to an oral agreement with
the former principals of Abante, the Company paid on November 21, 2001 the
interest, $250,000 of note principal and approximately $112,000 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, $250,000 of note principal and
approximately $150,000 of the first annual installment on February 21, 2002, and
paying approximately $238,000 of the first annual installment on May 21, 2002.
The Company 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 $500,000. In addition, the Company did not make a significant portion of the
November 2003 annual installment payment of $500,000. 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.
Pursuant to this agreement, the Company paid $300,000 in January 2004, agreed to
make additional monthly payments of at least $35,000, and agreed to pay the
remaining balance due upon the sale of SEG, subject to certain conditions. As of
June 30, 2004, the remaining outstanding balances on the note payable and
post-closing installment payments were $204,000 and $1.8 million, respectively.

In connection with the acquisition of Auto Image ID, Inc. in January 2001,
the Company issued notes having an initial principal amount of approximately
$5.6 million. The Company did not make all payments on the notes as scheduled.
Beginning in January 2002, the Company entered into a series of forbearance
agreements with some of the 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

10

noteholders agreed to forbear from taking action until May 1, 2004. The Company
agreed to issue these noteholders warrants to purchase approximately 59,000
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. In the third quarter of fiscal 2004, noteholders
representing approximately $4.1 million of the total principal owed agreed to
forbear on taking action to enforce their notes until the earlier of December 1,
2005, or certain events. The Company agreed to issue to these noteholders
warrants to purchase a total of approximately 217,000 shares of the Company's
common stock at an exercise price of $0.01 per share, valued at approximately
$803,000 using the Black-Scholes valuation model with the following assumptions:
volatility of 152% and risk-free interest rate of 2.32%, pay interest on the
outstanding balance at a 7% annual rate, make periodic principal and interest
payments and make an additional cash payment at maturity of approximately
$543,000. The notes payable have been recorded at estimated fair market value
reflecting a discount of approximately $1.3 million, equal to the combined value
of the warrants and the additional cash payment. The discount is being accreted
over the life of the notes in the form of additional interest expense. There was
no gain or loss recorded on this transaction. Noteholders representing
approximately $98,000 of the total principal did not respond to the forbearance
offer and therefore retain their rights under the notes.

On December 4, 2002, Pat V. Costa, the Company's Chief Executive Officer,
loaned the Company $500,000 and the Company issued a 9% Convertible Senior Note
in the amount of $500,000. 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 $18,000 on December 4, 2002. The Company
did not make the semiannual interest payments due on May 15, 2003, November 15,
2003, and May 15, 2004. Mr. Costa agreed to forbear from exercising his rights
with respect to these interest payments 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 60,000 shares. The warrants have an exercise price of
$3.15. The Company recorded the fair value of these warrants of approximately
$65,000 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 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 $1.0 million to the Company. On the same
date, the Company entered into a loan agreement with this customer and the
Company delivered 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%. The Company
did not pay the amount due on April 11, 2004 and is in default on the loan. The
customer has not formally declared the loan to be in default and is in
discussions with the Company regarding the indebtedness.

On October 31, 2003, the Company reached a settlement with the landlord of
its New Berlin, Wisconsin facility at which it had ceased operations in February
2003. In exchange for the release of all past and future obligations, the
Company 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%. 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 20,000 shares of common stock at an exercise
price of $0.05 per share. The Company determined the fair value of the warrant
of approximately $65,000 using the Black-Scholes valuation model with the
following assumptions: volatility of 185% and risk-free interest rate of 2.28%.

As of June 30, 2004, the Company was in default on an aggregate of $2.7
million of its borrowings.

11

Principal maturities of notes payable and long-term debt as of June 30,
2004 are as follows (in thousands):

2005....... $ 5,741
2006....... 3,906
2007....... 109
----------
Total...... $ 9,756
==========

6. RESTRUCTURING CHARGES

During the first quarter of fiscal 2003, 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 $678,000. During the three-month and nine-month periods ended June
30, 2003, the Company recorded restructuring charges relating to these retention
agreements of $0 and $600,000, respectively. No such charges have been recorded
during the first nine months of fiscal 2004.

A summary of the remaining restructuring costs as of June 30, 2004 is as
follows (in thousands):

LIABILITY AT CASH NON-CASH LIABILITY AT
SEPTEMBER 30, AMOUNTS AMOUNTS JUNE 30,
2003 INCURRED INCURRED 2004
------------- -------- -------- ------------

Severance payments to employees..... $ 46 $ 28 $ -- $ 18
Exit costs from facilities.......... 1,316 26 1,064 226
Retention agreements................ 600 -- -- 600
--------- ------ -------- ------
Total......................... $ 1,962 $ 54 $ 1,064 $ 844
========= ====== ======== ======

7. WARRANTY COSTS

The Company estimates the cost of product warranties at the time revenue
is recognized. While the Company engages in extensive product quality programs
and processes, including actively monitoring and evaluating the quality of its
component suppliers, the Company's 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 the Company's estimates, revisions to the
estimated warranty liability may be required. The Company recorded warranty
provisions totaling $0 and $71,000 for the three months ended June 30, 2004 and
June 30, 2003, respectively, and $27,000 and $158,000 for the nine months ended
June 30, 2004 and 2003, respectively.

8. PENSION EXPENSE

The Company has a noncontributory pension plan for employees that meet
certain minimum eligibility requirements. The level of retirement benefits is
based on a formula, which considers both employee compensation and length of
credited service.

The components of pension expense for the three and nine months ended June
30, 2004 and 2003 are summarized as follows (in thousands):

THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30, JUNE 30,
--------------------- ----------------------
2004 2003 2004 2003
------ ------ ------ -------

Service cost...... $ 60 $ 57 $ 180 $ 171
Interest cost..... 52 51 156 153
Actuarial gain.... (15) (62) (46) (186)
Other............. 18 -- 55 --
------ ------ ------ -------
Pension expense... $ 115 $ 46 $ 345 $ 138
====== ====== ====== =======

The Company has not made any contributions to the pension plan during the
first nine months of fiscal 2004.

12

9. SALE OF CERTAIN ASSETS

On October 20, 2003 the Company entered into an agreement to sell certain
assets of its Systemation Business consisting primarily of inventory and
intellectual property. Under the terms of the sale agreement, the Company
received $40,000 in cash and a promissory note for the nominal amount of
approximately $3.6 million. The note was repayable in increasing periodic
payments through November 15, 2008. The Company recorded the note at its
estimated fair value of approximately $2.3 million at an estimated effective
interest rate of 15%. The Company made certain assumptions in valuing the
promissory note including existing market conditions, marketability of the note,
and other market variables affecting the realization of the note during the long
period involved. The Company also concluded that collection of the note could
not be reasonably assured on the basis that the buyer was a new entity with
limited financial history upon which to make a determination. Accordingly, the
Company deferred the gain on this sale of approximately $1.9 million, which was
being recognized as payments were received on the note. Prior to June 2004, the
Company received principal payments of $149,000 and recognized $79,000 of the
deferred gain. The Company also recorded during the period interest income of
$59,000 and accretion income on the note of $190,000. In May 2004, the Company
entered into a new agreement with the buyer of the assets, whereby in June 2004
the Company received $1.8 million in cash in full satisfaction of the note. As a
result of this payment, the Company recorded a net gain of $1.2 million,
consisting of the recognition of the remaining deferred gain of $1.8 million,
partially offset by a loss on the payment of $608,000.

10. SEGMENT INFORMATION

The Company operates in two reportable segments within the machine vision
industry. The Company has determined its reporting segments primarily based on
the nature of the products offered by SEG and the Acuity CiMatrix division. SEG,
which is comprised of the Electronics subdivision, including Abante Automation,
supplies inspection equipment to the semiconductor industry. 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 Company categorizes as "Other" in
the table below activities relating primarily to corporate.

13

The accounting policies of each segment are the same as those described in
the annual report on Form 10-K. 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 $191,000 and $30,000
for the three months ended June 30, 2004 and 2003, respectively, and $340,000
and $56,000 for the nine months ended June 30, 2004 and 2003, respectively. All
intercompany profits are eliminated in consolidation. Other income (loss)
includes unallocated corporate general and administrative expenses. Other assets
are comprised primarily of corporate accounts. Although certain research
activities are conducted by the Acuity CiMatrix division for SEG, research and
development expenses are reported in the segment where the costs are incurred.
The following table presents information about the Company's unaudited
reportable segments (in thousands). All intercompany transactions have been
eliminated.

THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------- --------------------------
2004 2003 2004 2003
--------- ----------- --------- -----------

REVENUES:
Semiconductor Equipment.............................................. $ 6,898 $ 5,032 $ 20,384 $ 16,078
Acuity CiMatrix...................................................... 6,726 5,093 19,156 13,823
--------- ----------- --------- -----------
Total revenues................................................. $ 13,624 $ 10,125 $ 39,540 $ 29,901
========= =========== ========= ===========
LOSS FROM OPERATIONS:
Semiconductor Equipment.............................................. $ (277) $ (1,830) $ (2,243) $ (17,311)
Acuity CiMatrix...................................................... 1,006 (871) 1,654 (3,718)
Other................................................................ (2,130) (2,329) (7,386) (6,945)
--------- ----------- --------- -----------
Total loss from operations..................................... $ (1,401) $ (5,030) $ (7,975) $ (27,974)
========= =========== ========= ===========
DEPRECIATION AND AMORTIZATION:
Semiconductor Equipment.............................................. $ 553 $ 873 $ 1,506 $ 2,805
Acuity CiMatrix...................................................... 458 551 1,408 1,804
Other................................................................ 28 38 68 136
--------- ----------- --------- -----------
Total depreciation and amortization............................ $ 1,039 $ 1,462 $ 2,982 $ 4,745
========= =========== ========= ===========
TOTAL ASSETS:
Semiconductor Equipment.............................................. $ 22,347 $ 24,452 $ 22,347 $ 24,452
Acuity CiMatrix...................................................... 13,819 13,486 13,819 13,486
Other................................................................ 7,645 1,538 7,645 1,538
--------- ----------- --------- -----------
Total assets................................................... $ 43,811 $ 39,476 $ 43,811 $ 39,476
========= =========== ========= ===========
EXPENDITURES FOR PLANT AND EQUIPMENT, NET:
Semiconductor Equipment.............................................. $ 1,952 $ (43) $ 1,952 $ 173
Acuity CiMatrix...................................................... 43 6 114 24
Other................................................................ 8 -- 8 --
--------- ----------- --------- -----------
Total expenditures for plant and equipment, net................ $ 2,003 $ (37) $ 2,074 $ 197
========= =========== ========= ===========
CAPITALIZED AMOUNTS OF SOFTWARE
DEVELOPMENT COSTS:
Semiconductor Equipment.............................................. $ -- $ 146 $ -- $ 534
Acuity CiMatrix...................................................... 177 153 568 459
--------- ----------- --------- -----------
Total capitalized amounts of software development costs........ $ 177 $ 299 $ 568 $ 993
========= =========== ========= ===========

11. LONG-LIVED ASSETS

In accordance with Statement of Financial Accounting Standards ("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 operating conditions and market
opportunities, and are continuously reviewed based on actual operating trends.
Actual results may differ materially from these estimates.

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 dictate 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 Management's best
estimate of future operating conditions and market opportunities, and are
continuously reviewed based on actual operating trends. Actual results may
differ materially from these estimates.

14

The Company conducted an impairment review at June 30, 2004 in accordance
with SFAS Nos. 142 and 144 and concluded there was no impairment of long-lived
assets.

12. STOCK-BASED COMPENSATION

The Company accounts for equity-based compensation arrangements in
accordance with the provisions of Accounting Principles Board Opinion ("APB")
No. 25 "Accounting for Stock Issued to Employees," and complies with the
disclosure provisions of SFAS No. 123, "Accounting for Stock-Based Compensation"
as amended by SFAS No. 148, "Accounting for Stock-Based Compensation -
Transition and Disclosure - An Amendment of FASB Statement No. 123." All
equity-based awards to non-employees are accounted for at their fair value in
accordance with SFAS No. 123 and Emerging Issues Task Force ("EITF") Issue 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
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 (in
thousands, except per share amounts).

THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30, JUNE 30,
------------------------- -------------------------
2004 2003 2004 2003
--------- ----------- --------- -----------

Net loss............................................. $ (2,876) $ (3,252) $ (11,460) $ (26,618)
Deduct: Total stock-based compensation expense
determined under the fair value based method for
all stock option awards (net of related tax
effects)........................................... (504) (352) (1,703) (1,322)
--------- ----------- --------- -----------
Net loss - pro forma................................ $ (3,380) $ (3,604) $ (13,163) $ (27,940)
========= =========== ========= ===========
Earnings per share:
Basic and diluted - as reported.................... $ (0.15) $ (0.26) $ (0.66) $ (2.17)
========= =========== ========= ===========
Basic and diluted - pro forma...................... $ (0.18) $ (0.29) $ (0.76) $ (2.28)
========= =========== ========= ===========

13. STOCKHOLDERS' EQUITY

On September 26, 2003, the Company raised $5.0 million in gross proceeds
($4.6 million, net of offering costs) in a private placement of the Company's
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.

During the three months ended December 31, 2003, the Company issued 25,000
shares of its common stock to a supplier in exchange for the cancellation of
approximately $19,000 of trade indebtedness owed to that supplier and purchase
commitments aggregating $355,000 and on which the Company reported a loss of
approximately $77,000 for the three months ended December 31, 2003. During the
three months ended March 31, 2004, the Company issued 35,000 shares of its
common stock to another supplier in exchange for the cancellation of
approximately $31,000 of trade indebtedness owed to that supplier and purchase
commitments aggregating $348,000 and on which the Company reported a loss of
approximately $100,000.

On February 23, 2004, the Company completed a private placement of 667,000
shares of common stock at $3.00 per share, raising $2.0 million in gross
proceeds. The buyer of the shares also acquired a warrant to purchase, within
six months, up to an additional 645,000 shares of common stock at a price of
$3.10 per share, or an aggregate purchase price of $2.0 million. On April 29,
2004, the buyer exercised 48,386 of these warrants, resulting in gross proceeds
to the Company of approximately $150,000.

Under terms of the Company's private placement completed in September
2003, participants in that placement had the right to purchase shares, on
equivalent terms, in the current private placement. These prior participants
exercised their right in February 2004 and acquired an additional 800,000 shares
of common stock at $3.00 per share, resulting in gross proceeds of $2.4 million
to the Company.

In April 2004, the Company issued 102,579 shares in satisfaction of
contractual obligations totaling $318,000 which resulted from delays in
registering shares issued in the September 2003 private placement.

In July 2004, the Company sold 1,175,605 shares of its common stock at a
price of $2.05 per share, or an aggregate of $2.4

15

million ($2.2 million, net of offering expenses) and warrants to purchase
529,023 shares of its common stock, exercisable at $2.50 per share until January
31, 2005 and exercisable at $3.05 per share from February 1, 2005 until July 31,
2007.

14. RECENT ACCOUNTING PRONOUNCEMENTS

In December 2003, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 132 (Revised 2003): "Employers' Disclosures about Pensions and Other
Postretirement Benefits - An Amendment of FASB Statements No. 87, 88, and 106."
This Statement revises employers' disclosures about pension plans and other
postretirement benefit plans. It does not change the measurement or recognition
of those plans required by FASB Statements No. 87, "Employers' Accounting for
Pensions," No. 88, "Employers' Accounting for Settlements and Curtailments of
Defined Benefit Pension Plans and for Termination Benefits," and No. 106,
"Employers' Accounting for Postretirement Benefits Other Than Pensions." This
Statement retains the disclosure requirements contained in FASB Statement No.
132, "Employers' Disclosures about Pensions and Other Postretirement Benefits,"
which it replaces. It requires additional disclosures to those in the original
Statement 132 about the assets, obligations, cash flows, and net periodic
benefit cost of defined benefit pension plans and other defined benefit
postretirement plans. The Company adopted this statement on January 1, 2004, as
required. However, the adoption of this pronouncement did not have a material
effect on the Company's financial position, results of operations, or cash
flows.

In December 2003, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin ("SAB") No. 104, "Revenue Recognition," which
codifies, revises and rescinds certain sections of SAB No. 101, "Revenue
Recognition in Financial Statements," in order to make this interpretive
guidance consistent with current authoritative accounting and auditing guidance
and SEC rules and regulations. The changes noted in SAB No. 104 did not have a
material effect on the Company's financial position, results of operations, or
cash flows.

16

ROBOTIC VISION SYSTEMS, INC. AND SUBSIDIARIES

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

OVERVIEW

Our business involves the development, manufacture, marketing and
servicing of machine vision equipment for a variety of industries, including the
global semiconductor industry. Our business operates in two primary segments
within the machine vision industry, the Semiconductor Equipment Group ("SEG")
and the Acuity CiMatrix division. SEG, which is comprised of the Electronics
subdivision, including Abante Automation, supplies inspection equipment to the
semiconductor industry. 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.

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 operating losses in the nine
months ended June 30, 2004 and the twelve months ended September 30, 2003, 2002
and 2001 amounting to $8.0 million, $31.5 million, $40.5 million, and $83.2
million, respectively. Net cash used in operating activities amounted to $12.9
million, $2.9 million, $25.9 million and $12.6 million in the nine months ended
June 30, 2004 and the twelve months ended September 30, 2003, 2002 and 2001,
respectively. For the quarter ended June 30, 2004, we incurred an operating loss
of $1.4 million and used net cash of $2.4 million in operating activities,
compared with $3.9 million and $4.1 million, respectively, for the quarter ended
March 31, 2004. Further, we have certain past due debt payments. These
conditions among others, raise doubt about the Company's ability to continue as
a going concern. However, 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.

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 pared its fixed costs
significantly, reduced its operating losses and lowered its breakeven level of
revenues. On December 4, 2002, the Company received $500,000 from the issuance
of a convertible note. On April 11, 2003, the Company received a $1.0 million
settlement payment and a $2.0 million 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 $6.0 million. On November
26, 2003, the Company replaced its existing revolving credit facility with a new
facility, which increased its maximum borrowing availability to $13.0 million.
In February 2004, the Company completed private placements of its common stock
and warrants, which raised $4.4 million in gross proceeds ($4.1 million, net of
offering expenses). A total of approximately 1.5 million shares of common stock
were sold to accredited investors at $3.00 per share. The Company also issued to
these accredited investors warrants to purchase up to approximately 1.4 million
shares at $3.10 per share. On June 25, 2004, the Company amended its revolving
credit facility to increase the maximum borrowing availability from $13.0
million to $16.0 million. To increase the availability to the full $16.0
million, the agreement with the lender required the Company to separately add at
least $2.0 million of additional working capital. On July 23, 2004 the Company
raised an additional $2.4 million ($2.2 million, net of offering expenses) in
equity in the form of a private placement for 1,175,605 shares at $2.05 per
share. The buyers of the shares also acquired warrants to purchase up to an
additional 529,023 shares of common stock. In connection with the June 2004
revolving credit facility amendment, the Company issued to the lender a warrant
to purchase up to 450,000 shares of common stock, at an exercise price of $0.01
per share through November 30, 2008. As of June 25, 2004, the warrant was
exercisable for 200,000 shares of common stock. Additional shares will become
available for exercise if the maximum amount of borrowings outstanding under the
Company's credit facility reaches certain thresholds specified in the warrant.
The lender exercised the warrant with respect to 200,000 shares on June 28, 2004
and the shares were issued on July 1, 2004.

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

17

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 represent
the most significant judgments and estimates used in the preparation of the
consolidated financial statements. 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. For a comprehensive summary of our significant
accounting policies, you should refer to the notes to our audited consolidated
financial statements included in our Annual Report on Form 10-K filed with the
Securities and Exchange Commission ("SEC") on January 13, 2004.

REVENUE RECOGNITION

In December 1999, the SEC issued Staff Accounting Bulletin ("SAB") No.
101, "Revenue Recognition in Financial Statements." In accordance with SAB No.
101, we 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.

In December 2003, the SEC issued SAB No. 104, "Revenue Recognition," which
codifies, revises and rescinds certain sections of SAB No. 101, in order to make
this interpretive guidance consistent with current authoritative accounting and
auditing guidance and SEC rules and regulations. Adoption of SAB No. 104 did not
have a material effect on our financial position, results of operations, or cash
flows.

PROVISION FOR DOUBTFUL ACCOUNTS

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 customers' payment histories and information regarding customers'
creditworthiness known to us. In addition, we record a provision based on the
size and age of all receivable balances against which we do not have specific
provisions. If the financial condition of our customers 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 accordance with Statement of Financial Accounting Standards ("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 operating conditions and market
opportunities, and are continuously reviewed based on actual operating trends.
Actual results may differ materially from these estimates.

18

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 dictate 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 Management's best
estimate of future operating conditions and market opportunities, and are
continuously reviewed based on actual operating trends. Actual results may
differ materially from these estimates.

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. We review the unamortized
capitalized costs of our 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. Actual results may differ materially from these
estimates.

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 June 30, 2004 and September
30, 2003.

RESTRUCTURING PROVISIONS

SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal
Activities" requires that a liability for a cost associated with an exit or
disposal activity be recognized when the liability is incurred. 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.

PROVISION FOR LITIGATION

We periodically assess our exposure to pending litigation and possible
unasserted claims against us in order to establish appropriate provisions for
litigation. In establishing such provisions, 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
provisions 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

Bookings and revenues in the three-month period ended June 30, 2004 were
$17.0 million and $13.6 million, respectively, as compared to $11.3 million and
$10.1 million in the three-month period ended June 30, 2003. Bookings and
revenues in the nine-month period ended June 30, 2004 were $48.3 million and
$39.5 million, respectively, as compared to $28.4 million and $29.9 million in
the nine-month period ended June 30, 2003. The increase in bookings and revenues
reflects growth in our markets and increasing demand for our products.

Revenues for SEG were $6.9 million for the three-month period ended June
30, 2004 which represented 50.6% of our total revenues, compared to $5.0
million, or 49.7% of revenues, in the three-month period ended June 30, 2003.
Revenues for SEG were $20.4 million for the nine-month period ended June 30,
2004 which represented 51.6% of our total revenues, compared to $16.1 million,
or 53.8% of revenues, in the nine-month period ended June 30, 2003. Revenues for
SEG decreased $2.0 million, or 22%, compared to the second quarter of fiscal
2004 largely as a result of increased revenue deferrals tied to customer
acceptance. In addition, we experienced longer selling cycles with certain
customers evaluating demo systems and we experienced shortages of various parts
that resulted in certain equipment not shipping during the quarter.

Revenues for our Acuity CiMatrix division were $6.7 million for the
three-month period ended June 30, 2004, which represented 49.4% of our total
revenues, compared to $5.1 million, or 50.3% of total revenues, in the
three-month period ended June 30, 2003.

19

Revenues for our Acuity CiMatrix division were $19.1 million for the nine-month
period ended June 30, 2004, which represented 48.4% of our total revenues,
compared to $13.8 million, or 46.2% of revenues, in the nine-month period ended
June 30, 2003. The increase in revenues is a result of growth in our markets and
increased demand for our products. Revenues for our Acuity CiMatrix division for
the three-month period ended June 30, 2004, were essentially unchanged from the
second quarter of fiscal 2004.

Our gross profits in the three-month period ended June 30, 2004 increased
by approximately $2.0 million in comparison to the same period of the prior
year. Our gross profits in the nine-month period ended June 30, 2004 increased
by approximately $10.1 million in comparison to the same period of the prior
year. The gross profit improvement reflects higher gross margins, as a
percentage of revenues. Our gross margin in the three-month period ended June
30, 2004 was 45.1% compared to 40.4% in the prior year period. Our gross margin
in the nine-month period ended June 30, 2004 was 45.1% compared to 25.8% in the
prior year period. The increase in gross profit during the three-month period
ended June 30, 2004 is largely attributable to higher revenues compared to the
prior year period and a lower level of manufacturing overhead expenses in fiscal
2004 as a result of cost reduction measures initiated during fiscal 2003. The
improvement in gross profit during the nine-month period ended June 30, 2004
also reflects higher revenues compared to the prior year period and a lower
level of manufacturing overhead expenses. In addition, the fiscal 2003 results
reflect a $3.7 million inventory provision recorded in the second quarter of
fiscal 2003 The improvement in gross profit during the nine-month period ended
June 30, 2004 was partially offset by higher expenses associated with the launch
of a new lead scanner product at SEG during the March 2004 quarter.

Research and development expenses were $2.8 million, or 20.4% of revenues,
in the three-month period ended June 30, 2004 compared to $2.5 million, or 24.2%
of revenues, in the three-month period ended June 30, 2003. Research and
development expenses were $7.9 million, or 20.0% of revenues, in the nine-month
period ended June 30, 2004 compared to $8.0 million, or 26.7% of revenues, in
the nine-month period ended June 30, 2003. We intend to continue to invest in
new wafer scanning systems and enhanced capabilities for our lead scanning
systems in SEG and to enhance our machine vision and two-dimensional bar code
reading products in our Acuity CiMatrix division.

In the three-month and nine-month periods ended June 30, 2004, we have
capitalized approximately $177,000 and $568,000, respectively, of software
development costs under SFAS No. 86, "Accounting for the Costs of Software to be
Sold, Leased, or Otherwise Marketed," as compared with $299,000 and $1.0 million
in the three-month and nine-month periods ended June 30, 2003, respectively. The
related amortization expense was $535,000 and $1.5 million during the
three-month and nine-month periods ended June 30, 2004, respectively, compared
to $693,000 and $2.1 million during the three-month and nine-month periods ended
June 30, 2003, respectively. The amortization expense is included in cost of
sales. We did not capitalize software development expenditures incurred at SEG
during the three months and nine months ended June 30, 2004 as the work
performed during these periods did not qualify for capitalization under SFAS No.
86.

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 operating
conditions and market opportunities, and are continuously reviewed based on
actual operating trends. Actual results may differ materially from these
estimates. 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 dictate 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 Management's best
estimate of future operating conditions and market opportunities, and are
continuously reviewed based on actual operating trends. Actual results may
differ materially from these estimates. We conducted an impairment review at
June 30, 2004 in accordance with SFAS Nos. 142 and 144 and concluded there was
no impairment of long-lived assets.

Selling, general and administrative expenses were $6.0 million, or 44.2%
of revenues, in the three-month period ended June 30, 2004, compared to $6.9
million, or 67.9% of revenues, in the three-month period ended June 30, 2003.
Selling, general and administrative expenses were $19.3 million, or 48.9% of
revenues, in the nine-month period ended June 30, 2004, compared to $23.7
million, or 79.4% of revenues, in the nine-month period ended June 30, 2003. The
lower level of expenses in fiscal 2004 reflects lower fixed costs as a result of
cost reductions undertaken during fiscal 2003, partially offset by higher
commission expense on increased revenues.

During the three-month and nine-month periods ended June 30, 2003, we
recorded restructuring charges of $140,000 and $4.3 million, respectively.
During the first quarter of fiscal 2003, 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

20

through the sale of SEG. The current cash value of the award is approximately
$700,000. We have accrued for these agreements over the expected service period
which was based upon the estimated timing of the sale of SEG. We accrued $0 and
$600,000 for the three-month and nine-month periods ended June 30, 2003,
respectively. No such accruals have been recorded during the first nine months
of fiscal 2004.

In the second quarter of fiscal 2003, we closed our New Berlin, Wisconsin
and Tucson, Arizona facilities and consolidated these SEG operations into our
Hauppauge, New York facility. This facility consolidation resulted in accruing
lease costs relating to these facilities, writing off tangible and intangible
assets, and a reduction of approximately 50 employees. The charge for this
facility consolidation totaling $6.9 million was comprised of inventory charges
of $3.4 million, 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. Also during the nine month period ended
June 30, 2003, we took additional steps 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.

On October 20, 2003 we entered into an agreement to sell certain assets of
our Systemation Business consisting primarily of inventory and intellectual
property. Under the terms of the sale agreement, we received $40,000 in cash and
a promissory note for the nominal amount of approximately $3.6 million. The note
was repayable in increasing periodic payments through November 15, 2008. We
reflected the note at its estimated fair value of approximately $2.3 million at
an estimated effective interest rate of 15%. We made certain assumptions in
valuing the promissory note, including existing market conditions, marketability
of the note, and other market variables affecting the realization of the note
during the long period involved. We concluded that collection of the note could
not be reasonably assured on the basis that the buyer was a new entity with
limited financial history upon which to make a determination. Therefore, we
deferred the gain on this sale of approximately $1.9 million, which was being
recognized as payments were received on the note. Prior to June 2004, we
received principal payments of $149,000 and recognized $79,000 of the deferred
gain. We also recorded during the period interest income of $59,000 and
accretion income on the note of $190,000. In May 2004, we entered into a new
agreement with the buyer of the assets, whereby in June 2004 we received $1.8
million in cash in full satisfaction of the note. As a result of this payment,
we recorded in other gains a net gain of $1.2 million, consisting of the
recognition of the remaining deferred gain of $1.8 million, partially offset by
a loss on the payment of $608,000.

Other gains for the three and nine month periods ended June 30, 2003
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 $1.5 million and $348,000 in the three-month
periods ended June 30, 2004 and 2003, respectively. Net interest expense was
$3.3 million and $1.0 million in the nine-month periods ended June 30, 2004 and
2003, respectively. The greater interest expense in fiscal 2004 primarily
results from the non-cash amortization of deferred financing costs relating to
the new facility entered into on November 26, 2003.

There were no tax provisions in the three-month and nine-month periods
ended June 30, 2004 and 2003, due to the losses incurred and the full valuation
allowance provided against net operating loss carryforwards.

LIQUIDITY AND CAPITAL RESOURCES

Our cash balance decreased $337,000 to $30,000 in the nine months ended
June 30, 2004, largely as a result of $13.0 million of net cash provided by
financing activities, offset by $12.9 million of net cash used in operating
activities and $535,000 of net cash used in investing activities.

The $12.9 million of net cash used in operating activities was largely a
result of the $11.5 million loss in the nine-month period ended June 30, 2004,
partially offset by $4.5 million in non-cash net expenses, and $5.9 million used
as a result of changes in operating assets and liabilities.

Additions to plant and equipment were $2.1 million in the nine months
ended June 30, 2004, as compared to $197,000 in the nine months ended June 30,
2003. Additions to plant and equipment for fiscal 2004 include $1.7 million for
evaluation units shipped to selected customers which are capitalized and
depreciated over their estimated useful lives. Capitalized software development
costs in the nine months ended June 30, 2004, were $568,000 as compared with
$993,000 in the nine months ended June 30, 2003. We did not capitalize software
development expenditures incurred at SEG during the nine months ended June 30,
2004 as the work performed during this period did not qualify for capitalization
under SFAS No. 86.

21

Funds from financing activities were $13.0 million in the nine months
ended June 30, 2004, as compared to $5.1 million in the nine months ended June
30, 2003. During the nine months ended June 30, 2004, we received net proceeds
from various financing activities of $4.7 million, our revolving line of credit
borrowings increased by $9.0 million and our net repayment of long-term
borrowings totaled $659,000.

Our consolidated financial statements have been prepared assuming that we
will continue as a going concern. However, because of continuing negative cash
flow from operations, limited credit facilities, and the uncertainty of the sale
of SEG, there is no certainty that we will have the financial resources to
continue in business. We have incurred operating losses in the nine months ended
June 30, 2004 and the years ended September 30, 2003, 2002, and 2001 amounting
to $8.0 million, $31.5 million, $40.5 million, and $83.2 million, respectively.
Net cash used in operating activities amounted to $12.9 million, $2.9 million,
$25.9 million and $12.6 million in the nine months ended June 30, 2004 and the
years ended September 30, 2003, 2002 and 2001, respectively. For the quarter
ended June 30, 2004, we incurred an operating loss of $1.4 million and used net
cash of $2.4 million in operating activities compared with $3.9 million and $4.1
million, respectively, for the quarter ended March 31, 2004.

We are exploring the sale of our Semiconductor Equipment Group ("SEG")
business and on June 18, 2004, we announced that we had selected William Blair &
Company LLC to research the level of interest, timing and valuation of a sale of
SEG. The sale of SEG, if completed, is expected to result in sufficient proceeds
to pay down all or a significant portion of our debt, reduce accounts payable,
and provide working capital for our remaining businesses. 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 and the first nine months of
fiscal 2004 to improve our long-term self-sufficiency of working capital.

On December 4, 2002, Pat V. Costa, our Chairman, President and CEO, loaned
us $500,000 and we issued a 9% Convertible Senior Note in the amount of
$500,000. 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 payments due on May 15, 2003, November 15, 2003,
and May 15, 2004. Mr. Costa agreed to forbear from exercising his rights with
respect to these interest payments 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 and we delivered 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%. We did not pay the amount due on April 11, 2004 and are in
default on the loan. The customer has not formally declared the loan to be in
default and we are in discussions with them regarding the indebtedness.

On September 26, 2003, we closed a private placement of our securities
raising $5.0 million in gross proceeds, $4.6 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 $6.0
million. 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 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 were required to file a registration statement by November 26,
2003, and to cause such registration statement to become effective by January
25, 2004, or, in each case, to pay 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 completed registration statement became effective on
April 6, 2004. As of March 31, 2004, we had incurred and accrued liquidated
damages of approximately $356,000 in connection with this obligation. In
complete satisfaction of this obligation, we entered into a settlement agreement
effective March 31, 2004, whereby we would issue 102,579 shares of RVSI common
stock and pay $42,000 in cash to the investors. The settlement agreement was
completed in the third quarter of fiscal 2004.

We had a $10.0 million revolving credit facility which was due to expire
on April 28, 2003. The termination date had been extended several times by the
lender. This credit facility allowed for borrowings of up to 90% of eligible
foreign receivables up to

22

$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 any bank reserves.

On November 26, 2003, we replaced the $10.0 million revolving credit line
with a $13.0 million facility. On June 25, 2004, we amended the facility to
increase the maximum borrowing availability from $13.0 million to $16.0 million.
To increase the availability to the full $16.0 million, the agreement with the
lender required us to separately add at least $2.0 million of additional working
capital. On July 23, 2004 we raised an additional $2.4 million ($2.2 million,
net of offering expenses) in equity in the form of a private placement for
1,175,605 shares at $2.05 per share. The buyers of the shares also acquired
warrants to purchase up to an additional 529,023 shares of common stock,
exercisable at $2.50 per share until January 31, 2005 and excercisable at $3.05
per share from February 1, 2005 until July 31, 2007.

The amended facility has two revolving credit lines and expires on
November 30, 2005. The first 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 is guaranteed by the
Export-Import Bank of the United States and has a 7% interest rate. The second
line is for a maximum of $6.0 million and is collateralized by certain domestic
and foreign receivables. Availability under this line is subject to a borrowing
base formula which, as defined in the credit agreement, includes a $1.5 million
over-advance feature. It has a 17% interest rate of which 5% can be capitalized
at our option (as defined in the agreement). The facility contains covenants
pertaining to our net worth and to fixed charge coverage (as defined). We can
prepay the facility at our discretion. Any sale of assets not in the ordinary
course of business would require the use of proceeds to pay down the principal
of both lines. The facility also includes an annual commitment fee of 0.5% based
on the unused portion of the facility. At June 30, 2004, the aggregate amount
available under the lines was approximately $14.0 million, against which we had
$13.6 million of borrowings. At March 31, 2004, we did not meet the fixed charge
covenant related to the facility and received a waiver from the lender for the
covenant violation. At June 30, 2004, we were in compliance with our financial
covenants, including the fixed charge covenant under the amended facility.

In connection with the facility, during the first quarter of fiscal 2004
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 of approximately $7.4 million using the Black-Scholes valuation
model which is being amortized and charged to interest expense over the life of
the facility. The lender exercised its warrant on December 18, 2003. In
addition, we incurred costs in connection with the financing of approximately
$465,000 which are being amortized and charged to interest expense over the life
of the facility. Upon the maturity or payoff of the facility we will also be
obligated to pay $400,000 reflecting deferred interest and closing costs and
which are being amortized and charged to interest expense over the life of the
facility.

In connection with the June 2004 amendment, we issued to the lender a
warrant to purchase up to 450,000 shares of common stock, at an exercise price
of $0.01 per share through November 30, 2008. As of June 25, 2004, the warrant
was exercisable for 200,000 shares of common stock. Additional shares will
become available for exercise if the maximum amount of borrowings outstanding
under our credit facility reaches certain thresholds specified in the warrant.
The lender exercised the warrant with respect to 200,000 shares on June 28, 2004
and the shares were issued on July 1, 2004. We recorded a deferred financing
cost asset for the fair value of the 200,000 exercisable warrants of
approximately $512,000 using the Black-Scholes valuation model which is being
amortized and charged to interest expense over the life of the facility. In
addition, we incurred costs in connection with the financing of approximately
$100,000 which are being amortized and charged to interest expense over the life
of the facility.

In February 2004, we completed private placements of our common stock and
warrants which raised $4.4 million in gross proceeds ($4.1 million, net of
offering expenses). A total of approximately 1.5 million shares of common stock
were sold to accredited investors at $3.00 per share. We also issued to these
accredited investors warrants to purchase up to approximately 1.4 million shares
at $3.10 per share.

During the nine months ended June 30, 2004, we issued 60,000 shares of our
common stock to suppliers in exchange for the cancellation of approximately
$50,000 of trade indebtedness owed to such suppliers and forgiveness of $703,000
of purchase order commitments.

As of June 30, 2004, we were in default on an aggregate of $2.7 million of
our borrowings.

23

On November 21, 2001, the $1.5 million note payable issued to the former
principals of Abante Automation Inc. ("Abante") came due, together with 8%
interest thereon from November 29, 2000. In connection with the acquisition of
Abante, we agreed to make post-closing installment payments to the selling
shareholders of Abante. These non-interest bearing payments were payable in
annual installments of not less than $500,000 through November 2005. On November
21, 2001, the first of five annual installments on the Abante payable also
became due, in the amount of $500,000. Pursuant to an oral agreement with the
former principals of Abante, we paid on November 21, 2001 the interest, $250,000
of note principal and approximately $112,000 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, $250,000 of note principal and approximately $150,000 of the first
annual installment on February 21, 2002, and paying approximately $238,000 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 $500,000. In addition, we did
not make a significant portion of the November 2003 annual installment payment
of $500,000. 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. Pursuant to this agreement, we paid $300,000 in
January 2004, agreed to make additional monthly payments of at least $35,000,
and agreed to pay the remaining balance due upon the sale of SEG, subject to
certain conditions. As of June 30, 2004, the remaining outstanding balances on
the note payable and post-closing installment payments were $204,000 and $1.8
million, respectively.

In connection with the acquisition of Auto Image ID, Inc. in January 2001,
we issued notes having an initial principal amount of approximately $5.6
million. We did not make all payments on the notes as scheduled. Beginning in
January 2002, we entered into a series of forbearance agreements with some of
the 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 approximately 59,000 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. In the third quarter
of fiscal 2004, noteholders representing approximately $4.1 million of the total
principal owed agreed to forbear on taking action to enforce their notes until
the earlier of December 1, 2005, or the occurrence of certain events. We agreed
to issue to these noteholders warrants to purchase a total of approximately
217,000 shares of our common stock at an exercise price of $0.01 per share,
valued at approximately $803,000 using the Black-Scholes valuation model with
the following assumptions: volatility of 152% and risk-free interest rate of
2.32%, pay interest on the outstanding balance at a 7% annual rate, make
periodic principal and interest payments and make an additional cash payment at
maturity of approximately $543,000. The notes payable have been recorded at
estimated fair market value reflecting a discount of approximately $1.3 million,
equal to the combined value of the warrants and the additional cash payment. The
discount is being accreted over the life of the notes in the form of additional
interest expense. There was no gain or loss recorded on this transaction.
Noteholders representing approximately $98,000 of the total principal did not
respond to the forbearance offer and therefore retain their rights under the
notes.

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):

TWELVE MONTH PERIOD ENDING JUNE 30: FACILITIES EQUIPMENT TOTAL
- ----------------------------------- ---------- --------- ---------

2005................................... $ 1,364 $ 30 $ 1,394
2006................................... 939 1 940
2007................................... 913 1 914
2008................................... 932 1 933
2009................................... 950 -- 950
Thereafter............................. 1,964 -- 1,964
-------- ----- ---------
Total.................................. $ 7,062 $ 33 $ 7,095
======== ===== =========

Purchase Commitments -- As of June 30, 2004, we had approximately $18.6
million of purchase commitments with vendors. Approximately $16.9 million were
for SEG, and included computers and manufactured components for the division's
lead and wafer scanning product lines. Approximately $1.7 million were 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.

EFFECT OF INFLATION

Management believes that during the three and nine months ended June 30,
2004 the effect of inflation was not material.

24

RECENT ACCOUNTING PRONOUNCEMENTS

In December 2003, the FASB issued SFAS No. 132 (Revised 2003): "Employers'
Disclosures about Pensions and Other Postretirement Benefits - An Amendment of
FASB Statements No. 87, 88, and 106." This Statement revises employers'
disclosures about pension plans and other postretirement benefit plans. It does
not change the measurement or recognition of those plans required by FASB
Statements No. 87, "Employers' Accounting for Pensions," No. 88, "Employers'
Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and
for Termination Benefits," and No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions." This Statement retains the
disclosure requirements contained in FASB Statement No. 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits," which it
replaces. It requires additional disclosures to those in the original Statement
132 about the assets, obligations, cash flows, and net periodic benefit cost of
defined benefit pension plans and other defined benefit postretirement plans. We
adopted this statement on January 1, 2004, as required. However, the adoption of
this pronouncement did not have a material effect on our financial position,
results of operations, or cash flows.

In December 2003, the SEC issued SAB No. 104, "Revenue Recognition," which
codifies, revises and rescinds certain sections of SAB No. 101, "Revenue
Recognition in Financial Statements", in order to make this interpretive
guidance consistent with current authoritative accounting and auditing guidance
and SEC rules and regulations. The changes noted in SAB No. 104 did not have a
material effect on our financial position, results of operations, or cash flows.

FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS

This report contains forward-looking statements including statements
regarding, among other items, financing activities and anticipated trends in our
business, which are made pursuant to the "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995. These 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, including
the following: we may not have sufficient resources to continue as a going
concern; any significant downturn in the highly cyclical semiconductor industry
or in general economic conditions would likely result in a reduction of demand
for our products and would be detrimental to our business; our Acuity CiMatrix
business faces significant competition; we will be unable to achieve profitable
operations unless we increase quarterly revenues or make further reductions in
our costs; a loss of or decrease in purchases by one of our significant
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 reduced collections of outstanding receivables;
development of our products requires significant lead time and we may fail to
correctly anticipate the technical needs of our markets; inadequate cash flows
and restrictions in our banking arrangements may impede production and prevent
us from investing sufficient funds in research and development; the loss of key
personnel could have a material adverse effect on our business; our common stock
is quoted on the OTC Bulletin Board; the large number of shares available for
future sale could adversely affect the price of our common stock; and the
volatility of our stock price could adversely affect the value of an investment
in our common stock.

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 above, describe factors,
among others, that could contribute to or cause such differences.

This Form 10-Q should be read in conjunction with detailed risk factors in
our annual report on Form 10-K, and other filings with the Securities and
Exchange Commission.

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ITEM 3. 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 minimum exposure to the impact of fluctuation on interest rates,
primarily because our indebtedness is 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 U.S.
dollar denominated. During fiscal 2003 and 2004, 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.

We estimate the fair value of our notes payable and long-term liabilities
based on quoted market prices for the same or similar issues or on current rates
offered to us for debt of the same remaining maturities. For all other balance
sheet financial instruments, the carrying amount approximates fair value.

ITEM 4. CONTROLS AND PROCEDURES

In the second quarter of 2004, Grant Thornton, LLP, our independent
auditors, and our management advised our Audit Committee that certain
significant deficiencies in internal controls had been noted. These deficiencies
related to the segregation of duties within the accounts payable function and
also the need to periodically test the computer back-up recovery systems.

Our Chief Executive Officer and our Chief Financial Officer noted that
they believed that procedures followed by us provided reasonable assurance that
the identified deficiencies did not lead to material misstatements in our
consolidated financial statements. However, we recognized the need to improve
segregation of duties in the accounts payable function and also the need to
periodically test the computer back-up recovery system and therefore implemented
additional controls to address these deficiencies.

Our management carried out an evaluation, with the participation of our
Chief Executive Officer and our Chief Financial Officer, of the effectiveness of
our disclosure controls and procedures as of June 30, 2004. Based on that
evaluation, our Chief Executive Officer and our Chief Financial Officer
concluded that our disclosure controls and procedures were effective to ensure
that information required to be disclosed by us in reports we file or submit
under the Securities Exchange Act of 1934 (the "Exchange Act") 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 required by Rules 13a-15(d) under
the Exchange Act that occurred during the three months ended June 30, 2004, that
has materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting.

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PART II. OTHER INFORMATION

ITEM 2. CHANGE IN SECURITIES AND USE OF PROCEEDS

During the three months ended June 30, 2004, we issued 1,979 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.

In connection with the June 2004 amendment to our credit facility, we
issued to the lender a warrant to purchase up to 450,000 shares of common stock,
at an exercise price of $0.01 per share through November 30, 2008. As of June
25, 2004, the warrant was exercisable for 200,000 shares of common stock.
Additional shares will become available for exercise if the maximum amount of
borrowings outstanding under the Company's credit facility reaches certain
thresholds specified in the warrant. The lender exercised the warrant with
respect to 200,000 shares on June 28, 2004 and the shares were issued on July 1,
2004.

In conjunction with a forbearance agreement with certain of the former
shareholders of Auto Image ID, Inc. we agreed to issue during the third quarter
ended June 30, 2004 warrants to purchase a total of approximately 217,000 shares
at an exercise price of $0.01 per share through March 31, 2007.

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

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits.

EXHIBIT
NO DESCRIPTION
- ------- -----------

10.1 First Amendment to Amended and Restated Revolving Credit and
Security Agreement dated as of June 26, 2004, among the
Registrant, RVSI Investors, L.L.C. and other lenders party
thereto, and PNC Bank National Association as Agent (1)

10.2 Warrant issued to RVSI Investors, L.L.C. on June 25, 2004 (1)

10.3 Registration Rights Agreement dated as of June 25, 2004 between
the Registrant and RVSI Investors, L.L.C. (1)

31.1 Rule 13a-14(a) Certification of Chief Executive Officer

31.2 Rule 13a-14(a) Certification of Chief Financial Officer

32.1 Section 1350 Certifications

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

(1) Filed as an exhibit to the Registrant's Current Report on Form 8-K dated
June 25, 2004.

(b) Reports on Form 8-K for the quarter ended June 30, 2004.

During the quarter ended June 30, 2004, we filed or submitted the
following current report on Form 8-K

Current report on Form 8-K, dated April 29, 2004, was submitted to the
SEC on April 29, 2004. The item reported was:

Item 12 - Results of Operations and Financial Condition, which
reported the issuance of a press release announcing our
financial results for the quarter ended March 31, 2004.

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SIGNATURES

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

Robotic Vision Systems, Inc. Registrant

Dated: August 13, 2004 /s/ Pat V. Costa
--------------------------------------
Pat V. Costa
President and Chief Executive Officer
(Principal Executive Officer)

/s/ Jeffrey P. Lucas
---------------------------------------
Jeffrey P. Lucas
Chief Financial Officer and Treasurer
(Principal Financial Officer)

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