DT INDUSTRIES INC - 10-K Annual Report

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

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

FOR THE FISCAL YEAR ENDED JUNE 29, 2003

OR

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

FOR THE TRANSITION PERIOD FROM TO

COMMISSION FILE NUMBER 0-23400
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DT INDUSTRIES, INC.
[Exact name of registrant as specified in its charter]

DELAWARE 44-0537828
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
907 WEST FIFTH STREET 45407
DAYTON, OH (Zip Code)
(Address of principal executive offices)

REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:
(937) 586-5600
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

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

Common Stock, par value $.01 per share
Series A Cumulative Preferred Stock, par value $.01 per share
Preferred Stock Purchase Rights
(Title of each class)
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Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes. [X] No. [ ]

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

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

As of December 27, 2002, (the last business day of the Registrant's most
recently completed second fiscal quarter) the aggregate market value of the
voting and non-voting common stock held by non-affiliates of the registrant was
$46,756,483 (based on the closing sales price on December 27, 2002 of $2.01 per
share).

As of October 3, 2003, there were 23,667,932 shares of common stock, $.01 par
value, outstanding.
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DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant's Definitive Proxy Statement for its Annual Meeting
of Stockholders scheduled to be held on November 11, 2003 are incorporated by
reference into Part II (Item 5) and Part III of this Annual Report.
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DT INDUSTRIES, INC.

INDEX TO FORM 10-K

ii

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

Certain information contained in this Annual Report, including, without
limitation, the information appearing under the captions "Business," "Legal
Proceedings" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations," includes forward-looking statements made pursuant to
the safe harbor provisions of Section 21E of the Securities Exchange Act of
1934, as amended. These statements comprising all statements herein which are
not historical reflect our current expectations and projections about our future
results, performance, liquidity, financial condition, prospects and
opportunities and are based upon information currently available to us and our
interpretation of what we believe to be significant factors affecting our
businesses, including many assumptions regarding future events. References to
the words "opportunities," "growth potential," "objectives," "goals," "will,"
"anticipate," "believe," "intend," "estimate," "expect," "should," and similar
expressions used herein indicate such forward-looking statements. Our actual
results, performance, liquidity, financial condition, prospects and
opportunities could differ materially from those expressed in, or implied by,
these forward-looking statements as a result of various risks, uncertainties and
other factors, including the amount and availability of, and our ability to
comply with restrictions and covenants relating to, our indebtedness under our
senior credit facility, our ability to obtain a waiver of our current credit
facility covenant defaults and therefore borrow additional funds, our ability to
refinance or further extend our senior credit facility in order to meet our
liquidity needs and continue as a going concern after July 2, 2004, our ability
to achieve anticipated cost savings from our corporate restructuring and cost
reduction initiatives, our ability to continue upgrading and modifying our
financial, information and management systems and controls to manage our
operations on an integrated basis and report our results, continued economic
downturns in industries or markets served, delays or cancellations of customer
orders, delays in shipping dates of products, significant cost overruns on
projects, customer demand for new products and applications, the loss of a key
customer, significant pre-tax charges, including for goodwill impairment, the
write-down of assets, warranty-related expenses and restructuring charges,
foreign currency exchange rate fluctuations, changes in interest rates,
increased inflation and collectibility of past due customer receivables. See
"Business -- Risks Related to Our Business" for a description of these and other
risks, uncertainties and factors.

You should not place undue reliance on any forward-looking statements.
Except as expressly required by the federal securities laws, we undertake no
obligation to publicly update or revise any forward-looking statements, whether
as a result of new information, future events, changed circumstances or any
other reason.

iii

PART 1

ITEM 1. BUSINESS

GENERAL

DT Industries, Inc. is an engineering-driven designer, manufacturer and
integrator of automated production equipment and systems used to manufacture,
test or package a variety of industrial and consumer products. Our business
strategy is to develop, market and provide complementary technologies and
capabilities to supply customers with integrated processing, assembly, testing
and packaging systems for their products.

We are a Delaware corporation organized in January 1993 and the successor
to Peer Corporation, Detroit Tool Group, Inc. ("DTG") and Detroit Tool and
Engineering Company ("DTE"). Peer Corporation was organized in June 1992 to
acquire the Peer Division of Teledyne, Inc. and the stock of DTG, the sole
stockholder of DTE and Detroit Tool Metal Products Co. As used in this Annual
Report, unless the context indicates otherwise, the terms "we," "us," "our" and
"DTI" refer to DT Industries, Inc. and its consolidated subsidiaries.

Our principal executive offices are located at 907 West Fifth Street,
Dayton, Ohio 45407, and our telephone number is (937) 586-5600. Our website is
located at http://www.dtindustries.com. Information contained on our website is
not a part of this Annual Report.

BUSINESS SEGMENTS, FOREIGN AND DOMESTIC OPERATIONS AND INTERNATIONAL SALES

In fiscal 2002, we reorganized our operations into four business segments
(which also represent our reportable segments during fiscal 2002): Material
Processing, Precision Assembly, Assembly and Test and Packaging Systems. This
new structure was designed to allow us to streamline product offerings,
capitalize on the combined strength of operating units, reduce overlap in the
marketplace and improve capacity utilization, internal controls, financial
reporting and disclosure controls. The four business segments are described
below under "-- Markets and Products." In July 2003, we announced the closure of
our Precision Assembly segment manufacturing facility in Buffalo Grove, Illinois
and the transfer of its manufacturing operations to our Material Processing
segment's Lebanon, Missouri facility. An engineering, sales and service office
will remain in Illinois to serve Precision Assembly's customers. As a result of
this consolidation, we are consolidating the Precision Assembly segment into the
Material Processing segment for financial reporting purposes and expect to begin
reporting financial results for the three remaining business segments in our
Form 10-Q for the fiscal quarter ended September 28, 2003.

Our principal foreign operations consist of manufacturing, sales and
service operations in the United Kingdom and Germany. Our Canadian subsidiary
was closed in fiscal 2002. Sales from our foreign operations were approximately
18% of our consolidated net sales for fiscal 2003 and 2002 and 14% of our
consolidated net sales for fiscal 2001. Sales to customers outside of the United
States were approximately 40% of our consolidated net sales for fiscal 2003, 45%
of our consolidated net sales in fiscal 2002 and 37% of our consolidated net
sales in fiscal 2001. For financial information concerning our business
segments, foreign and domestic operations and international sales, see Note 16
to the audited consolidated financial statements included herein.

BUSINESS STRATEGY

Our long-term business strategy is to develop, market and provide
complementary technologies and capabilities to supply customers with integrated
assembly, testing and packaging systems for their products. Our goal is to
become the premier provider of engineered solutions for the markets we serve. We
expect to achieve this goal by designing and delivering on-time, innovative
solutions that meet or exceed our customers' expectations while continuously
improving quality, service and cost. Key elements of our strategy include the
following:

Operational Improvements. We are focused on improving operational
performance through greater use of risk assessment techniques, higher quality
and more detailed project proposals, a strengthening of the skill

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set in applications, engineering and project management, and an increased focus
on working capital management. Management is also developing a more positive
work environment that emphasizes continuous operational improvement throughout
the organization. For example, management and employees are being evaluated on
the basis of the improvement of identified financial and operational benchmarks,
such as return on assets managed and operating cash flow.

Cost Reductions. We have continued to pursue cost reduction measures
throughout our businesses with a goal of lowering or maintaining our current
level of selling, general and administrative expenses, lowering indirect
manufacturing expenses and increasing profitability.

Leverage Engineering and Manufacturing Capabilities. We intend to utilize
our versatile engineering expertise to satisfy the growing demand for small,
medium and large complex, integrated automation solutions. We also intend to
utilize our manufacturing capacity and engineering capabilities fully by
directing work to facilities with specific capabilities and manufacturing
strengths to best meet our customers' needs.

Product Line and Customer Base Expansion. We are focused on providing
customers with integrated solutions and systems rather than single use
equipment. We are also using our engineering expertise and manufacturing
capability to develop new products and technologies for markets we currently
serve and to enter into new markets. As we continue to integrate operations and
develop existing product lines, we expect to expand our product offerings and
customer base. We believe the expansion of our product offerings and customer
base represents an opportunity for net sales growth.

MARKETS AND PRODUCTS

The following disclosure describes the markets and products of the four
business segments within which we operated in fiscal 2003.

DT MATERIAL PROCESSING SEGMENT. The DT Material Processing segment
manufactures special machines, automated systems, tooling and fixturing, the
Peer(TM) brand of automated welding equipment, high-speed rotary presses and
plastic processing machines and equipment for a wide variety of products, such
as appliances, electronics, building construction, hardware, cosmetics, food and
beverage, toys and automotive accessories. The DT Material Processing segment is
comprised of the DTE and DT Converting Technologies divisions.

DTE manufactures special automation assembly and processing equipment for a
wide variety of applications, precision tooling and dies, and welding systems.
DTE's special automation equipment incorporates engineering capabilities ranging
from refining and replicating existing equipment to designing and building new
equipment. DTE's special automation equipment typically handles part envelopes
cubes of three inches and larger, with cycle times of three to 30 parts per
minute. DTE provides systems integration and implements a wide range of
applications, including dials, power and free, synchronous, indexing processes,
metal forming, welding and robotics.

DTE possesses considerable expertise in the design, engineering and
production of precision tools and dies, including cam dies, progressive dies,
large single-hit dies and contoured form dies. In addition, personnel trained as
tool and die makers often apply their skill to the manufacture of production
machines.

DTE also manufactures and sells a line of standard resistance welding
equipment, as well as special automated welding systems, designed and built for
specific applications. Marketed under the brand name Peer(TM), these products
are used in the automotive, appliance and electrical industries to fabricate and
assemble components and subassemblies. Our resistance welding equipment is also
used in the manufacture of file cabinets, school and athletic lockers, store
display shelves, metal furniture and material storage products.

DT Converting Technologies manufactures high-speed rotary presses and
plastic processing machines and equipment. We design and manufacture rotary
presses used by customers in the airbag, candy, food supplement, ceramic,
ordnance, specialty chemical, and pharmaceutical industries to produce tablets.
Marketed under the brand name Stokes(TM), our line of rotary presses includes
machines capable of producing

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17,000 tablets per minute and other machines capable of applying up to 40 tons
of pressure. Products produced on our rotary presses include candy, breath
mints, vitamins and inflation pellets for automotive airbags.

The plastic processing equipment we manufacture includes thermoformers,
blister packaging systems and laboratory machines. A thermoformer heats plastic
material and uses pressure and/or a vacuum to mold it into a product. Marketed
under the brand names Sencorp(R) and Armac(TM), our thermoformers are used by
customers in North America, Europe and Asia to form a variety of products,
including specialized cups, plates and food containers, trays for food and
medical products and other plastics applications. Our thermoformers are sold
primarily to custom formers who use the machines to create thermoformed items
which are sold to a variety of end users. We also sell thermoformers directly to
end users, including large producers of electrical and healthcare products,
cosmetics, hardware, and other consumer products.

Blister packaging is a common method of displaying consumer products for
sale in hardware stores, convenience stores, warehouse stores, drug stores and
similar retail outlets. Batteries, cosmetics, hardware items, electrical
components, razor blades and toys are among the large variety of products sold
in a clear plastic blister or two-sided package. We design and manufacture
machinery, marketed under the brand names Sencorp(R) and Armac(TM), that
performs blister packaging by heat-sealing a clear plastic bubble, or blister,
onto coated paperboard, or by sealing two-sided packages using heat or microwave
technology. Our blister packaging systems are primarily sold to manufacturers of
the end products. We also produce a line of small scale blister sealers and a
line of tablet pressing equipment used to test new materials and techniques, for
quality control, laboratory or other small run uses. In addition, we sell parts
and accessories for our proprietary machines and design and build special tools
and dies used in custom applications of our thermoforming systems and rotary
presses.

DT PRECISION ASSEMBLY SEGMENT. The DT Precision Assembly segment designs,
manufactures and integrates custom precision assembly systems, primarily for
customers in the medical, electronics, consumer, bioscience and automotive
markets. Integrated systems combine a wide variety of manufacturing technologies
into a complete automated manufacturing system. Utilizing advanced computers,
robotics, vision systems and other technologies, we provide a variety of
capabilities, including systems integration, medium/high speed indexing,
synchronous assembly, flexible/reconfigurable assembly, high speed precision
assembly and cell control/data collection. We offer this variety of integrated
systems for small or large and custom or standard applications. The standardized
automation applications utilize various machine platforms and proprietary
modular building blocks in carousel, in-line, rotary and robotic assembly
systems, all of which facilitate time-sensitive, concurrent engineering projects
where changes in tooling and processes can occur in an advanced stage of system
design.

In July 2003, we announced the closure of our Precision Assembly segment
manufacturing facility in Buffalo Grove, Illinois and the transfer of its
manufacturing operations to our Material Processing segment's Lebanon, Missouri
facility. An engineering, sales and service office will remain in Illinois to
serve Precision Assembly's customers. As a result of this consolidation, we are
consolidating the Precision Assembly segment into the Material Processing
segment for financial reporting purposes and expect to begin reporting financial
results for the three remaining business segments in our Form 10-Q for the
fiscal quarter ended September 28, 2003.

DT ASSEMBLY AND TEST SEGMENT. The DT Assembly and Test segment designs and
builds custom non-synchronous assembly systems, rotary dial assembly systems,
electrified monorail material handling systems, fuel injection, engine and
transmission test systems, and lean assembly systems primarily for customers in
automotive-related and heavy equipment markets.

Our custom machine building capabilities include engineering, project
management, machining and fabrication of components, installation of electrical
controls, final assembly and testing. A customer will usually approach us with a
manufacturing objective, and we will work with the customer to design, engineer,
assemble, test and install a machine to meet the objective. The customer often
retains rights to the design after delivery of the machine because the purchase
contract typically includes the design of the machine; however, we often reapply
the engineering and manufacturing expertise gained in designing and building the
machine in projects for other customers.
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We build an automated electrified monorail product offered in various
capacity ranges from lightweight systems to systems transporting products
weighing up to 8,800 pounds. This product can be applied to a variety of
material handling applications ranging from delivery systems for the food
industry to manufacturing processes involving manual and automation interfaces
for engine assembly and testing. The benefits of this product include providing
a clean, quiet, controlled transport with the flexibility to operate in a
variety of processes and production rates.

DT PACKAGING SYSTEMS SEGMENT. The DT Packaging Systems segment designs and
builds proprietary machines and integrated systems utilized for packaging,
liquid filling or tube filling applications that are marketed under individual
brand names and manufactured for specific industrial applications using designs
we own or license. Although these machines are generally cataloged as specific
models, they are usually modified for specific customer requirements and often
combined with other machines into integrated systems. Many customers also
request additional accessories and features that typically generate higher
revenues and enhanced profit opportunities. The equipment we manufacture
includes bottle unscramblers, electronic and slat tablet counters, liquid
fillers, cottoners, cappers and labelers, collators and cartoners, all of which
can be sold as an integrated system or individual units. These machines are
marketed under the brand names of Kalish(TM), Lakso(R), Merrill(R), and
Swiftpack(TM) and are primarily provided to customers in the pharmaceutical,
nutritional, food, cosmetic, toy and chemical industries. We believe this
equipment maintains a strong reputation among our customers for quality,
reliability and ease of operation and maintenance. We also sell replacement
parts and accessories for our substantial installed base of machines.

We benefit from a substantial installed base of Lakso(R) and Merrill(R)
slat counters in the aftermarket sale of slats. Slat counting machines use a set
of slats to meter the number of tablets or capsules to be inserted into bottles.
Each size or shape of tablet or capsule requires a different set of slats. In
addition, the practice in the pharmaceutical industry is to use a different set
of slats for each product, even if the tablets are the same size.

NON-CORE BUSINESSES. During fiscal 2002, we sold the assets used to
produce precision-stamped steel and aluminum components through stamping and
fabrication operations for the heavy trucking, agricultural equipment,
appliance, and electrical industries. These assets comprised our non-core
businesses in fiscal 2002 and fiscal 2001.

MARKETING AND DISTRIBUTION

Our machines and systems are sold primarily through our direct sales force.
We have sales and service offices in the United States, Canada, England and
Germany. Sales of machines and integrated systems require our sales personnel to
have a high degree of technical expertise and extensive knowledge of the
industry served. Our sales force consists of specialists in each primary market
in which our machines and systems are sold. Each division has a sales force
experienced in the marketing of the equipment and systems historically produced
by its business. We believe that integration of proprietary technology and
custom equipment into total production automation systems for selected
industries provides us with expanded sales opportunities. Our machines and
systems are also sold throughout the world to a lesser extent by manufacturers'
representatives and sales agents.

RAW MATERIALS

The principal raw materials and components used in the manufacturing of our
machines and systems include carbon steel, stainless steel, aluminum, electronic
components, pumps and compressors, programmable logic controls, hydraulic
components, conveyor systems, visual and mechanical sensors, precision bearings
and lasers. We are not dependent upon any one supplier for raw materials or
components used in the manufacture of machines and systems. Certain customers
specify sole source suppliers for components of custom machines or systems. We
believe there are adequate alternative sources of raw materials and components
of sufficient quantity and quality.

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CUSTOMERS

The majority of our sales are attributable to repeat customers, some of
which have been our customers (including our acquired businesses) for over
twenty years. We believe this repeat business is indicative of our engineering
capabilities, the quality of our products and overall customer satisfaction. We
have historically generated a substantial portion of our net sales from a
relatively small number of customers. For example, Hewlett-Packard Company
accounted for approximately 23%, 31% and 28% of our consolidated net sales
during fiscal 2003, fiscal 2002 and fiscal 2001, respectively, and approximately
29% and 83% of the Material Processing segment's and Precision Assembly
segment's net sales in fiscal 2003, respectively. Other customers whose sales
were 10% or more of an individual segment's net sales in fiscal 2003 were:
Maytag (20% of Material Processing), Visteon and DaimlerChrysler (19% and 13%,
respectively, of Assembly & Test). No other customer accounted for 10% or more
of our consolidated net sales or any of our four segment's net sales during
fiscal 2003.

BACKLOG

Our backlog is based upon customer purchase orders that we believe are
firm. As of June 29, 2003, we had $88.9 million of orders in backlog, which
compares to a backlog of approximately $142.8 million as of June 30, 2002.
Backlog and orders by segment for the current and prior year period were as
follows:

Our backlog continues to decrease as a result of the softness in orders
across all segments. The decreases in backlog and orders for the Material
Processing and Precision Assembly segments primarily reflect the decrease in new
projects with Hewlett-Packard. The reduced backlog of the Material Processing
segment also reflects the cancellation in fiscal 2003 of $12.0 million of orders
from Green Packaging for biodegradable foam laminate packaging equipment. The
decrease in backlog and orders for the Packaging Systems segment primarily
reflects the decrease in projects with our larger pharmaceutical customers. The
Assembly & Test segment recorded the only increase in orders for fiscal 2003 as
compared to fiscal 2002. The increase was from automotive projects that resulted
from international customers and new technology projects. Regarding our order
outlook across business segments, we remain cautious about any increase in order
levels.

The level of backlog at any particular time is not necessarily indicative
of our future operating performance for any particular report period because we
may not be able to recognize as sales the orders in our backlog when expected or
at all due to various contingencies, many of which are beyond our control. For
example, many purchase orders are subject to cancellation by the customer upon
notification (e.g., Green Packaging's cancelled orders described above). Certain
orders are also subject to delays in completion and shipment at the request of
the customer. However, our contracts normally provide for cancellation and/or
delay charges that require the customer to reimburse us for costs actually
incurred and a portion of quoted profit margin on the project. We believe most
of the orders in our backlog as of June 29, 2003 will be recognized as sales
during fiscal 2004.

COMPETITION

The market for our machines and systems is highly competitive, with a large
number of companies advertising the sale of production machines. However, the
market for machinery and systems is fragmented and characterized by a number of
industry niches in which few manufacturers compete. Our competitors vary

5

in size and resources; most are smaller privately-held companies or subsidiaries
of larger companies, some of which are larger than us, and none of which compete
with us in all product lines. In addition, we may encounter competition from new
market entrants. We believe that the principal competitive factors in the sale
of our equipment and systems are quality, technology, on-time delivery, price
and service. We believe that we compete favorably with respect to each of these
factors.

ENGINEERING; RESEARCH AND DEVELOPMENT

We maintain engineering departments at all of our manufacturing locations.
In addition to design work relating to specific customer projects, our engineers
develop new products and product improvements designed to address the needs of
our target market niches and to enhance the reliability, efficiency, ease of
operation and safety of our proprietary machines. We incurred research and
development costs of approximately $1.9 million, $3.4 million and $2.8 million
in fiscal 2003, 2002 and 2001, respectively.

INTELLECTUAL PROPERTY RIGHTS

We use a combination of trade secrets, trademarks, patents, employee and
third party nondisclosure agreements, copyright laws and contractual rights to
establish and protect proprietary rights in our technology, manufacturing
process and products. In the United States, we own and maintain the registered
trademarks ATT(R), AMI 1(R), AMI 2(R), AssemblyFlex(R), Cord-Lock(R),
Fabspec(R), Fillit(R), Force-Flo Feeder(R), Lakso(R), Merrill(R), Micro-Scan(R),
Mid-West(R), Mid-West Automation(R), MWA(R) and design, Oscar(R) and design,
Pacer(R), Pharmaveyor(R), Reformer(R), Sencorp(R), Slat-Scan(R), TMC(R),
Vali-Tab(R) and Versa-Press(R). We also own and maintain registrations for our
trademarks in countries where the applicable products are sold and such
registrations are considered necessary to preserve our proprietary rights
therein. We also have the rights to use the unregistered trademarks AMI(TM),
Armac(TM), F.A.S.T.(TM), Hartridge(TM), Kalish(TM), Peer(TM), Stokes(TM) and
Swiftpack(TM). All of the trademarks listed above are used in connection with
the marketing of our machines and systems.

We apply for and maintain United States and foreign patents when we believe
they are necessary to maintain our interest in inventions, designs and
improvements. We do not believe that any single patent or group of patents is
material to our business, nor do we believe that the expiration of any one or a
group of our patents would have a material adverse effect upon our business or
ability to compete in our business. We believe that our existing patent and
trademark protection, however, provides us with a modest competitive advantage
in the marketing and sale of our proprietary products.

ENVIRONMENTAL AND SAFETY REGULATION

We are subject to environmental laws and regulations that impose
limitations on the discharge of pollutants into the environment and establish
standards for the treatment, storage and disposal of toxic and hazardous wastes.
We are also subject to the federal Occupational Safety and Health Act and state
safety and health statutes. Costs of compliance with environmental, health and
safety requirements have not been material to date, and we believe we are in
material compliance with all such applicable laws and regulations.

EMPLOYEES

As of September 30, 2003, we had approximately 1,200 employees. None of our
employees are covered under collective bargaining agreements. We consider our
relations with employees to be good.

RISKS RELATED TO OUR BUSINESS

The following risks, uncertainties and other factors could have a material
adverse affect on our business, financial condition, operating results and
growth prospects.

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OUR INDEBTEDNESS AND OBLIGATIONS UNDER THE PREFERRED SECURITIES OF OUR
WHOLLY-OWNED SUBSIDIARY TRUST COULD ADVERSELY AFFECT OUR FINANCIAL HEALTH.

As of October 3, 2003, our total indebtedness, plus our obligations under
the preferred securities of our wholly-owned subsidiary trust (the sole asset of
which is our junior subordinated debentures), was approximately $81.7 million.
We expect to incur additional indebtedness in the future to fund our operations
and capital expenditures. Our indebtedness and obligations under the trust
preferred securities could adversely affect our financial health by:

- limiting our ability to obtain additional financing that we may need to
operate and develop our business;

- requiring us to dedicate or reserve a substantial portion of our cash
flow from operations to service our debt and other obligations, which
reduces the funds available for operations and future business
opportunities;

- increasing our vulnerability to a downturn in general economic conditions
or other adverse events in our business;

- increasing our vulnerability to increases in interest rates because our
borrowings under our senior credit facility are at variable interest
rates; and

- making us more leveraged than certain competitors in our industry, which
could place us at a competitive disadvantage.

Our senior credit facility matures on July 2, 2004 and we have periodic
commitment reductions of $1.5 million per quarter while the senior credit
facility is outstanding. In addition, the preferred securities of our
wholly-owned subsidiary trust and our related junior subordinated debentures are
scheduled to mature on May 31, 2008. Furthermore, we are obligated to make
quarterly cash distributions on these securities beginning on July 2, 2004;
provided, however, that if we make a cash distribution on these securities for
at least the first quarter, we can defer subsequent distributions after the
quarter ending September 30, 2004. If the cash flow from our operating
activities is not sufficient to meet our obligations under the senior credit
facility and the trust preferred securities (which it will not be with respect
to the lump sum payment due July 2, 2004), we will need to delay or reduce
capital expenditures, restructure or refinance our debt, sell assets and/or seek
additional equity capital. For example, we are actively engaged in negotiations
to refinance our senior credit facility and sell certain assets in order to
satisfy our obligations under the senior credit facility at or prior to its
maturity on July 2, 2004. Delaying or reducing capital expenditures,
restructuring or refinancing our debt, selling assets and/or raising additional
equity capital, however, may not be sufficient to allow us to service our debt
obligations in the future. Further, we may be unable to take any of these
actions on satisfactory terms, in a timely manner, or at all. The report of our
independent auditors on our audited consolidated financial statements that are
included in this Annual Report states that our current defaults under the senior
credit facility, recurring losses and significant accumulated deficit raise
substantial doubt about our ability to continue as a going concern. If we do not
have sufficient funds to satisfy our obligations under our senior credit
facility and the trust preferred securities, we will not be able to continue our
operations as currently anticipated and may need to initiate bankruptcy
proceedings in order to continue our operations with minimal disruption and
preserve the value of our assets.

THE COVENANTS AND RESTRICTIONS UNDER OUR SENIOR CREDIT FACILITY COULD LIMIT OUR
OPERATING AND FINANCIAL FLEXIBILITY.

Under the terms of our senior credit facility, we must maintain minimum
levels of EBITDA (earnings before interest, taxes, depreciation and
amortization) and quarterly net worth, not exceed annual capital expenditure
limitations and comply with various financial performance ratios. We may not be
able to comply with these covenants, especially if we do not experience
improvement in capital spending in the markets we serve and in demand for our
product. For example, as a result of our financial performance in fiscal 2003
and the first quarter of fiscal 2004, we failed on several occasions to satisfy
the minimum trailing twelve-month

7

EBITDA and maximum funded debt to EBITDA financial covenants under the facility.
We obtained waivers from our lenders for the failures to comply with those
covenants for the first nine months of fiscal 2003 and are negotiating with our
lenders for a waiver for the failures to comply with these covenants in the
fourth quarter of fiscal 2003 and first quarter of fiscal 2004. If these
covenant defaults or any other failure to comply with the covenants in our
credit facility trigger an event of default that is not waived or cured, our
lenders will be entitled to, among other things, accelerate the maturity of the
debt outstanding under our senior credit facility so that it is immediately due
and payable. In addition, no further borrowings are available under the
revolving portion of our senior credit facility if there is an event of default,
which is currently the case due to the current financial covenant defaults.
Limitations on our ability to access further borrowings under the credit
facility could materially adversely affect our ability to satisfy our liquidity
needs if we are not able to effectively manage our cash. The report of our
independent auditors on our audited consolidated financial statements that are
included in this Annual Report states that our current defaults under the senior
credit facility, recurring losses and significant accumulated deficit raise
substantial doubt about our ability to continue as a going concern. If our
indebtedness is accelerated, we will not have sufficient funds to satisfy our
obligations, will not be able to continue our operations as currently
anticipated and may need to initiate bankruptcy proceedings in order to continue
our operations with minimal disruption and preserve the value of our assets.

In addition, our senior credit facility contains restrictive covenants that
could limit our ability to engage in transactions that we believe are in our
long-term best interest, including the following:

- certain types of mergers or consolidations;

- paying dividends or other distributions to our securityholders;

- making investments;

- selling or encumbering assets;

- changing lines of business;

- borrowing additional money; and

- engaging in transactions with affiliates.

These restrictions could limit our ability to react to changes in our
operating environment or take advantage of business opportunities.

WE REPORTED AN OPERATING LOSS FOR OUR 2001, 2002 AND 2003 FISCAL YEARS, HAVE
RECEIVED A GOING CONCERN OPINION AND MAY NOT ACHIEVE OR SUSTAIN PROFITABILITY IN
THE NEAR FUTURE.

We reported operating losses of approximately $66.8 million, $4.0 million
and $64.8 million for the fiscal years ended June 24, 2001, June 30, 2002 and
June 29, 2003, respectively. The operating losses included non-cash
goodwill/asset impairment charges of $51.9 million in fiscal 2003 and $38.2
million in fiscal 2001. We have restructured our business by consolidating
manufacturing and fabrication operations, establishing three business segments
as of the first quarter of fiscal 2004 and reducing our workforce. We are
focused on improving operational performance through greater use of risk
assessment techniques, higher quality and more detailed project proposals, a
strengthening of the skill set in applications, engineering and project
management, and an increased focus on working capital management. To the extent
that our corporate restructuring and focus on operational improvements do not
generate the cost savings or net sales that we anticipate, we may continue to
incur losses and may not achieve profitability in the near future. Furthermore,
the report of our independent auditors on our audited consolidated financial
statements that are included in this Annual Report states that our current
defaults under the senior credit facility, recurring losses and significant
accumulated deficit raise substantial doubt about our ability to continue as a
going concern. Even if we are able to continue our operations as currently
anticipated and achieve profitability in the near future, we may not be able to
sustain such operating performance.

8

WE HAVE A NUMBER OF DIFFERENT OPERATING DIVISIONS AND MANUFACTURING FACILITIES
AND MAY HAVE DIFFICULTY ESTABLISHING EFFECTIVE SYSTEMS AND PROCEDURES AND
CONDUCTING OUR OPERATIONS ON AN INTEGRATED BASIS.

We have five operating divisions with 10 manufacturing facilities within
three business segments, after giving effect to the consolidation of the
Material Processing and Precision Assembly segments in the first quarter of
fiscal 2004 following the announcement in July 2003 of the closure of the
remaining manufacturing facility of the Precision Assembly segment. Some of our
operating facilities have different systems and procedures in various
operational and financial areas that we are in the process of rationalizing and
integrating. We continue to upgrade and modify our financial, information and
management systems and procedures to ensure uniform compliance with corporate
procedures and policies and accurate and timely reporting of financial data and
required company disclosure. This may be difficult because we have manufacturing
and/or sales facilities in the United Kingdom, Germany and five different states
in the United States. If we are unable to fully integrate our operations and
continue improving our systems and procedures smoothly, quickly, successfully,
or at all, we will not achieve the efficiency, results and capabilities that the
rationalization and consolidation of our operations were designed to accomplish.

A DOWNTURN IN GENERAL ECONOMIC CONDITIONS OR THE ECONOMIC CONDITION OF THE
MARKETS THAT WE SERVE HAS MATERIALLY ADVERSELY AFFECTED, AND MAY FURTHER
MATERIALLY ADVERSELY AFFECT, OUR REVENUES.

Our revenues and results of operations are susceptible to negative trends
in the general economy and the markets that we serve that affect capital
spending. For example, the slowing of the U.S. economy and the economic
uncertainty throughout the world have resulted in restrained customer capital
spending for the past several years, which has adversely affected sales of our
equipment to the pharmaceutical and nutritional, electronics, plastics
packaging, automotive, heavy trucks and other industries. Continued economic
sluggishness or economic uncertainty could cause our customers to further reduce
or delay orders for our products or delay payment for our delivered products. If
this occurs, our revenues and cash flows could be further materially adversely
affected.

WE MAY NOT RECOGNIZE AS SALES A MATERIAL AMOUNT OF THE ORDERS IN OUR BACKLOG,
WHICH WOULD MATERIALLY HARM OUR BUSINESS.

Our backlog was $88.9 million as of June 29, 2003. Our backlog is based
upon customer purchase orders that we believe are firm. The level of our backlog
at any current time, however, is not necessarily indicative of our future
operating performance for any particular reporting period because we may not be
able to recognize as sales the orders in our backlog when expected or at all due
to various contingencies, many of which are beyond our control. Many of our
purchase orders are subject to cancellation by the customer upon notification
and certain purchase orders are subject to delays in completion and shipment at
the request of the customer. For example, Green Packaging, a customer of our
Material Processing segment, cancelled approximately $12.0 million of orders
during fiscal 2003. See "Legal Proceedings" for a description of the dispute we
have with Green Packaging with respect to these cancelled orders. Although we
have historically recognized as sales almost all of the orders in our backlog,
our ability to recognize as sales in fiscal 2004 the orders in our backlog as of
June 29, 2003 could be adversely affected if a continued downturn or continued
uncertainty in the economic condition of the markets we serve causes our
customers in those markets to cancel purchase orders to poor demand for their
products and their need to restrain capital spending. If we fail to recognize a
material amount of our backlog, our net sales would be materially harmed.

OUR OVERALL PERFORMANCE AND QUARTERLY OPERATING RESULTS MAY FLUCTUATE
SIGNIFICANTLY AND COULD ADVERSELY AFFECT THE MARKET PRICE OF OUR COMMON STOCK.

Our net sales and results of operations have varied significantly from
quarter to quarter. We expect large fluctuations in our future quarterly
operating results due to a number of factors, including:

- the level of product and price competition;

- the length of our sales cycle and manufacturing processes;

9

- the size and timing of individual projects;

- the timing of satisfying milestones in order to recognize revenue for
percentage of completion projects;

- the mix of customized projects, which tend to have lower gross margins
due to the difficulty in estimating the cost and pricing of less proven
concepts, and repeat and standard projects, which tend to have higher
margins, due to expenses in estimating the cost and price of proven
concepts;

- the size and timing of significant pre-tax charges, including for
goodwill impairment, the write-down of assets, such as for excess and
obsolete inventories and doubtful account receivables, warranty-related
costs and restructuring charges, such as costs for severance, idle
facilities and personnel relocation;

- defects and other product quality problems;

- the timing of new product introductions and enhancements by us and our
competitors;

- customers' fiscal constraints and related demand for our equipment and
systems;

- changes in foreign currency exchange rates, including for the Euro and
the British Pound; and

- general economic conditions.

As a result of these and other factors, many of which are beyond our control,
our results of operations for any particular quarter are not necessarily
indicative of results that may be expected for any subsequent quarter or related
fiscal year. These fluctuations in our quarterly results could cause our
quarterly earnings to fall below market expectations, which in turn could
adversely affect the market price of our common stock.

OUR BUSINESS COULD BE ADVERSELY AFFECTED IF WE FAIL TO ACCURATELY ESTIMATE THE
MATERIAL AND LABOR COSTS OR DURATION OF A PROJECT OR FAIL TO COMMUNICATE CHANGES
TO THESE SPECIFICATIONS TO OUR CUSTOMERS.

We derive almost all of our net sales from the sale and installation of
equipment and systems pursuant to fixed-price contracts. Because of the
complexity of many of our projects, accurately estimating the material and labor
costs of a particular project can be a difficult task. If we fail to accurately
estimate the costs of one or more projects during the bidding process, we could
be forced to devote additional materials and labor hours to these projects for
which we will not receive additional compensation. To the extent that an
expenditure of additional resources is required on a project, this could reduce
the profitability of, or result in a loss on, the project. In the past, we have,
on occasion, engaged in significant negotiations with customers regarding
changes to the costs or duration of specific projects. To the extent we do not
sufficiently communicate to our customers, or our customers fail to adequately
appreciate, the nature and extent of any of these changes to a project, our
reputation may be harmed and we may suffer losses on the project. In addition,
many contracts are subject to certain completion schedule requirements with
liquidated damages in the event schedules are not met as the result of
circumstances that are within our control. Our business could be materially
adversely affected if we incur significant liquidated damages due to not
satisfying projects' schedules.

THE LOSS OF, OR REDUCED PURCHASE ORDERS FROM, A KEY CUSTOMER COULD MATERIALLY
ADVERSELY AFFECT OUR OPERATING RESULTS BECAUSE WE DEPEND ON A RELATIVELY LIMITED
NUMBER OF CUSTOMERS FOR A LARGE PORTION OF OUR NET SALES.

We have historically generated a substantial portion of our net sales from
a relatively small number of customers. For example, Hewlett-Packard Company
accounted for approximately 23%, 31% and 28% of our consolidated net sales
during fiscal 2003, 2002 and 2001, respectively. We expect that purchase orders
from Hewlett-Packard will decline in fiscal 2004. The loss of, or reduced orders
for products from, one or more of our significant customers, including
Hewlett-Packard, could have a material adverse impact on our future operating
results. In addition, a delay in purchase orders from, or completion of projects
for, one or more of our significant customers, including Hewlett-Packard, could
have a material adverse impact on our operating results in a particular fiscal
period. Our reliance on a limited number of customers also magnifies the risk of
not being able to collect accounts receivable from any one customer.

10

OUR BUSINESS COULD BE ADVERSELY AFFECTED IF WE EXPERIENCE EXCESS PRODUCT
WARRANTY OR LIABILITY CLAIMS.

We are subject to warranty claims in the ordinary course of our business.
Although we maintain reserves for such claims, the warranty expense levels may
not remain at current levels or our reserves may not be adequate. A large number
of warranty claims exceeding our current warranty expense levels could
materially harm our business. In addition, we are subject to product liability
claims from time to time for various injuries alleged to have resulted from
defects in the manufacture and/or design of our products. Any resolution of
these claims in a manner adverse to us could have an adverse effect on our
business, financial condition and results of operations. These claims may also
be costly to defend against and may divert the attention of our management and
resources in general.

INTENSE COMPETITION IN OUR INDUSTRY COULD IMPAIR OUR ABILITY TO GROW AND ACHIEVE
PROFITABILITY.

The market for our automation and packaging machines and systems is highly
competitive. Our competitors vary in size and resources, some of which are
larger than we are and have access to greater resources than we do. As a result,
our competitors may be in a stronger position to respond more quickly to changes
in customer needs and may be able to devote more resources to the development,
marketing and sale of their products than we can. We may also encounter
competition from new market entrants. We may not be able to compete effectively
with current or future competitors, which could impair our ability to grow and
achieve profitability.

OUR FAILURE TO RETAIN KEY PERSONNEL MAY NEGATIVELY AFFECT OUR BUSINESS.

Our success depends on our ability to retain senior executives and other
key employees who are critical to our continued development and support of our
products, the management of our diverse operations and our ongoing sales and
marketing efforts. The loss of key personnel could cause disruptions in our
operations, the loss of existing customers, the loss of key information,
expertise and know-how, and unanticipated additional recruitment and training
costs. Furthermore, our amended senior credit facility provides that an event of
default will exist under the facility if any two of Stephen J. Perkins, our
President and Chief Executive Officer, John M. Casper, our Senior Vice
President -- Finance and Chief Financial Officer, and John F. Schott, our former
Chief Operating Officer and current President of our combined Detroit Tool and
Engineering and Precision Assembly operations, are no longer employed by, and
fulfilling their then current positions with, us, other than as a result of
their death, disability or our board of directors exercising its fiduciary duty.
Thus, under these circumstances, if we lose any two of these senior executives,
our lenders could accelerate the maturity of the debt outstanding under our
senior credit facility unless we obtain satisfactory replacement executives.

IF WE DECIDE TO SELL ANY OF OUR BUSINESSES OR DISCONTINUE ANY OF OUR OPERATIONS
AND DO NOT SUCCESSFULLY ADDRESS THE ASSOCIATED RISKS, OUR ABILITY TO COMPETE,
OPERATE EFFICIENTLY AND OTHERWISE REALIZE THE EXPECTED BENEFITS OF SUCH A
TRANSACTION MAY BE IMPAIRED.

In connection with our corporate integration plan and to generate cash to
help us meet our debt obligations, in fiscal 2002 we disposed of our Detroit
Tool Metal Products, Scheu & Kniss and Hansford Parts and Products businesses,
closed facilities in Montreal, Quebec, Rochester New York and Bristol,
Pennsylvania and consolidated our Swiftpack and C.E. King operations. In fiscal
2003, we closed our facility in Erie, Pennsylvania and in July 2003 we announced
the closure of our manufacturing facility in Buffalo Grove, Illinois. We are
exploring opportunities to sell other businesses to generate cash to help us
meet our debt obligations and might further consolidate our operations if we
believe such actions would further improve our operational efficiency or if we
decide to change the focus of our business strategy. In the case of the
disposition of a business, we may not be able to identify buyers who are willing
to pay acceptable prices or agree to acceptable terms. For example, we pursued
the sale of our Stokes business in 2001, but were unable to consummate the
disposition due to adverse market conditions and instead closed the facility in
Bristol, Pennsylvania and combined Stokes' manufacturing operations with our DT
Converting Technologies facility

11

in Hyannis, Massachusetts in 2002. The sale of a business and discontinuing or
consolidating operations involves a number of special risks and challenges,
including:

- diversion of management's attention;

- expenses incurred to effect the transactions;

- difficulties in implementing a new business strategy with which we may
have little experience;

- employees' uncertainty about their role with the continuing operations of
the business and a lack of employee focus due to distractions of a
transaction;

- a reduction of recurring costs that may not exceed the reduction of
recurring revenues; and

- incurring substantial restructuring charges, such for severance, asset
write-offs and future facility lease costs, or a net loss on the disposal
of assets.

If we sell any of our businesses or discontinue or consolidate any of our
operations and do not successfully address the associated risks, our ability to
compete, operate efficiently and otherwise realize the expected benefits of such
a transaction may be impaired.

WE ARE SUBJECT TO VARIOUS ENVIRONMENTAL AND EMPLOYEE SAFETY AND HEALTH
REGULATIONS, WHICH COULD SUBJECT US TO SIGNIFICANT LIABILITIES AND COMPLIANCE
EXPENDITURES.

We are subject to various federal, state and local environmental laws and
regulations concerning air emissions, wastewater discharges, storage tanks and
solid and hazardous waste disposal at our facilities. Our operations are also
subject to various employee safety and health laws and regulations, including
those concerning occupational injury and illness, employee exposure to hazardous
materials and employee complaints. Environmental and employee safety and health
regulations are comprehensive, complex and frequently changing. We may be
subject from time to time to administrative and/or judicial proceedings or
investigations brought by private parties or governmental agencies with respect
to environmental matters and employee safety and health issues. These
proceedings and investigations could result in substantial costs to us, divert
our management's attention and, if it is determined we are not in compliance
with applicable laws and regulations, result in significant liabilities, fines
or the suspension or interruption of our manufacturing activities. Future
events, such as changes in existing laws and regulations, new laws and
regulation or the discovery of conditions not currently known to us, could
create substantial compliance or remedial liabilities and costs.

WE INCURRED SIGNIFICANT PRE-TAX CHARGES RELATED TO GOODWILL IMPAIRMENT AND THE
WRITE-DOWN OF ASSETS DURING FISCAL 2003, AND IF WE INCUR SIMILAR SIGNIFICANT
CHARGES IN THE FUTURE, OUR OPERATING RESULTS MAY BE MATERIALLY ADVERSELY
AFFECTED.

During fiscal 2003, we recorded an impairment charge of approximately $51.9
million after determining that the goodwill associated with two of our segments
had been impaired. As of June 29, 2003, our goodwill balance of approximately
$75.3 million represented approximately 36% of our total assets. In July 2001,
the Financial Accounting Standards Board issued Statement No. 142, "Goodwill and
Other Intangible Assets" (SFAS 142), which we early adopted in the first quarter
of fiscal 2002. SFAS 142 requires, among other things, the discontinuance of the
amortization of goodwill and the introduction of, at a minimum, annual
impairment testing in its place. In connection with such impairment testing in
the future, we may determine that the carrying value of our goodwill is further
impaired. If we are required to further significantly write-down the carrying
value of goodwill in accordance with SFAS 142 in the future, or write-down
significant assets in the future due to unsalable inventory or difficulties in
collecting accounts receivable, our operating results may be materially
adversely affected.

12

ANY FURTHER RESTATEMENTS OF FINANCIAL RESULTS COULD HAVE A MATERIAL ADVERSE
EFFECT ON OUR LIQUIDITY, ABILITY TO OPERATE AND COMMON STOCK PRICE AND RESULT IN
MATERIAL LIABILITIES.

Recent historical restatements have diverted management's attention from
our ongoing operations, generated significant accounting and legal expenses and
harmed our reputation with investors and possibly customers. Although we have
improved our internal controls and accounting staff at our divisions, we could
still experience accounting and financial reporting problems at our subsidiaries
in the future, which could have a material adverse impact on our consolidated
financial statements. If we are not able to retain competent, trustworthy
accounting staff at our divisions and continue to upgrade and modify our
internal controls when necessary so as to avoid these accounting issues and
similar restatements in the future, our access to, and ability to refinance or
restructure, our senior credit facility, as well the price of our common stock
and our ability to maintain the listing of our common stock on The Nasdaq Stock
Market, may be materially adversely affected. We may also face securities class
action lawsuits and the Securities and Exchange Commission may impose
significant penalties against us if further accounting issues should occur in
the future.

HOLDERS OF OUR COMMON STOCK ARE SUBORDINATED TO THE HOLDERS OF PREFERRED
SECURITIES OF OUR WHOLLY-OWNED SUBSIDIARY TRUST AND WOULD BE DILUTED UPON
CONVERSION OF THE TRUST PREFERRED SECURITIES INTO COMMON STOCK.

Our wholly-owned subsidiary trust currently has issued and outstanding
$35.0 million of preferred securities. These trust preferred securities
represent undivided beneficial ownership interests in the trust, the sole assets
of which are a related aggregate principal amount of our junior subordinated
debentures. We have guaranteed the payment of distributions and payments on
liquidation of the trust or the redemption of the trust preferred securities.
Through this guarantee, our junior subordinated debentures, the debentures'
indenture and the trust's declaration of trust, taken together, we have fully,
irrevocably and unconditionally guaranteed all of the trust's obligations under
the trust preferred securities. Thus, while the trust-preferred securities are
not included in liabilities for financial reporting purposes and instead appear
on our consolidated balance sheet between liabilities and stockholders' equity,
they represent obligations that rank senior in right of payment to our common
stock. Therefore, upon the bankruptcy, liquidation or winding up of our
operations, holders of the trust preferred securities would be paid before
holders of our common stock. In addition to having a preference senior to our
common stock, the trust preferred securities are convertible into an aggregate
of 2,500,000 shares of common stock. The issuance of these shares of common
stock would dilute the ownership and voting interests of our existing
stockholders.

13

ITEM 2. PROPERTIES

Our administrative headquarters are located in Dayton, Ohio, where we lease
approximately 27,000 square feet of space. This lease expires on August 1, 2016.
Set forth below is information with respect to our manufacturing facilities as
of the date of this Annual Report.

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

(1) This property secures our senior credit facility.

(2) We have an option to renew this lease for two additional five-year terms.

(3) We announced the closure of this manufacturing facility in July 2003.
Manufacturing of Precision Assembly segment orders are being transferred to
the Lebanon, Missouri facility of the Material Processing segment.

We do not anticipate any significant difficulty in leasing alternate space
at reasonable rates in the event of the expiration, cancellation or termination
of a lease relating to any of our leased properties. We believe that our
principal owned and leased manufacturing facilities have sufficient capacity to
accommodate future internal growth without major capital improvements.

ITEM 3. LEGAL PROCEEDINGS

The staff of the Securities and Exchange Commission (the "Commission") is
conducting an investigation of the accounting practices at our Kalish and
Sencorp subsidiaries that led to the restatements of our consolidated financial
statements for fiscal years 1997, 1998 and 1999 and the first three quarters of
fiscal 2000, as well as the issues at our AMI subsidiary that led to the
accounting adjustments to our previously reported audited consolidated financial
results for the fiscal years ended June 24, 2001, June 25, 2000 and June 27,
1999, and to our previously reported unaudited consolidated financial results
for the first three fiscal quarters of 2002. We are cooperating fully with the
Commission in connection with its investigation and cannot currently predict the
duration or outcome of the investigation.

In November 1998, pursuant to the agreement by which we acquired Kalish,
Mr. Graham L. Lewis, a former executive officer and director of DTI, received an
additional payment based on Kalish's earnings for each of the three years after
the closing. As a result of the prior restatement due to accounting practices at
Kalish, we believe that the additional payment should not have been made. During
fiscal 2001, we commenced legal action against Mr. Lewis in Superior Court,
Civil Division in Montreal, Quebec to recover this payment

14

and certain bonuses paid to Mr. Lewis. Mr. Lewis has counter-sued for wrongful
termination and is seeking to recover monetary damages, including severance,
loss of future income, emotional distress and harm to reputation, equal to $2.8
million Canadian dollars. There has been little discovery in these actions to
date. Management believes that our suit against Mr. Lewis has merit. Management
further believes that Mr. Lewis' counter-suit is without merit. We intend to
pursue vigorously our claims against Mr. Lewis and defend against his
counter-suit.

In July 2003, Green Packaging SDN BHD and Green Earth Packaging Corp.
(collectively, "Green Packaging") filed a complaint against Detroit Tool &
Engineering Company ("DTE"), a wholly-owned subsidiary of DTI, in the Superior
Court of the State of California, County of Santa Barbara. As causes of action,
the complaint alleges breach of contract, misappropriation of trade secrets,
breach of confidence, unfair business practices, conversion and similar claims
arising out of a purchase order pursuant to which DTE was to manufacture for
Green Packaging four lines of equipment for the purpose of producing
biodegradable food packaging using technology and processes licensed by Green
Packaging from EarthShell Corporation. In its complaint, Green Packaging seeks
damages "believed to be in excess of $3.3 million," punitive damages and
injunctive relief. Prior to the filing of the complaint, Green Packaging had
notified DTE that it was canceling its purchase order for the equipment, and DTE
had invoiced Green Packaging for cancellation charges in excess of $6.4 million,
which amount has not been paid. DTE filed a motion to quash service of the
summons and complaint for lack of personal jurisdiction. Rather than responding
to the motion, on September 29, 2003 Green Earth amended its complaint and added
DTI as a defendant in that action. The causes of action in the amended complaint
are the same as those asserted in the original complaint, with the addition of a
breach of guarantee and breach of an additional agreement claims. We intend to
file a motion to quash service of the summons and complaint for lack of personal
jurisdiction. In addition, we intend to vigorously defend Green Packaging's
action and to vigorously pursue our claim against Green Packaging for the
above-referenced cancellation charges.

Product liability claims are asserted against us from time to time for
various injuries alleged to have resulted from defects in the manufacture and/or
design of our products. There are currently seven such claims either pending or,
to our knowledge, that may be asserted against us. We do not believe that the
resolution of these claims, either individually or in the aggregate, will have a
material adverse effect on our financial condition, results of operations or
cash flow. Product liability claims are covered by our comprehensive general
liability insurance policies, subject to certain deductible amounts. We have
established reserves for these deductible amounts, which we believe to be
adequate based on our previous claims experience. However, there can be no
assurance that resolution of product liability claims in the future will not
have a material adverse effect on our financial condition, results of operations
or cash flow.

In addition to product liability claims, from time to time we are the
subject of legal proceedings, including involving employee, commercial, general
liability and similar claims, that are incidental to the ordinary course of our
business. Except as described above, there are no such material claims currently
pending. We maintain comprehensive general liability insurance that we believe
to be adequate for the continued operation of our business.

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

None.

15

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

MARKET INFORMATION AND HOLDERS

Our common stock is quoted on The Nasdaq National Market under the symbol
"DTII." As of September 19, 2003, the number of record holders of common stock
was 90. Such record holders include several holders who are nominees for an
undetermined number of beneficial owners. We believe that the number of
beneficial owners of the shares of common stock issued and outstanding at such
date was approximately 1,300.

The following table sets forth, for the quarters indicated, the high and
low sales prices for our common stock as reported by The Nasdaq Stock Market.

DIVIDENDS

We did not pay or declare any cash dividends on our common stock in fiscal
2001, 2002 or 2003. Our senior credit facility and the indenture governing our
convertible junior subordinated debentures currently prohibit us from declaring
or paying a cash dividend on our common stock.

EQUITY COMPENSATION TABLE

The Equity Compensation Table required by this item will be set forth under
the caption "Securities Authorized for Issuance Under Equity Compensation Plans"
in the definitive proxy statement, which information is incorporated by
reference herein.

16

ITEM 6. SELECTED FINANCIAL DATA

You should read the following selected consolidated financial data along
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and our consolidated financial statements and related notes thereto
included in this Annual Report.

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

(1) The previously reported statement of operations for the year ended June 30,
2002 has been adjusted to record curtailment and settlement losses of $2,221
on the U.K. pension plan of Assembly Technology & Test, Ltd. The curtailment
and settlement losses, though disclosed in the notes to our fiscal 2002
financial

17

statements, were not previously recorded as part of the restructuring and
related items charge on the statement of operations for the fiscal year
ended June 30, 2002. The losses have been reflected as an increase in the
restructuring and related items charge for the year ended June 30, 2002. The
previously reported balance sheets since the acquisition of Assembly
Technology & Test, Ltd. in fiscal 1998 have also been adjusted to properly
reflect the status of the U.K. pension plan, including the recording of a
prepaid pension asset at the acquisition date of $3,518, the reduction in
goodwill due to the additional prepaid pension asset and a related reduction
in goodwill amortization and adjustments to stockholders' equity -- other
comprehensive income to reflect the minimum pension liability in subsequent
years to the acquisition. We also made an adjustment to beginning retained
earnings for the reversal of certain opening balance sheet reserves of
$2,160 related to the acquisitions of Hansford and Assembly Technology and
Test (in fiscal 1997 and 1998, respectively), which were established to
cover certain contingencies at the date of acquisition and were included in
costs and earnings in excess of amounts billed on uncompleted projects. In
subsequent years, we did not charge the contingent losses against the
reserve nor reverse the reserves when the contingencies were resolved.

(2) Our senior credit facility and the indenture governing our convertible
junior subordinated debentures currently prohibit us from declaring or
paying a cash dividend on our common stock.

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

For a better understanding of the significant factors that influenced our
performance during the past three fiscal years, the following discussion should
be read in conjunction with our audited consolidated financial statements and
notes thereto appearing elsewhere in this Annual Report. The following
discussion contains forward-looking statements that are subject to risks,
uncertainties and other factors, including those discussed under
"Business -- Risk Factors," that could cause our actual results, performance,
financial condition, liquidity, prospects and opportunities in fiscal 2004 and
beyond to differ materially from those expressed in, or implied by, these
forward-looking statements. See "Cautionary Note Regarding Forward-Looking
Statements."

OVERVIEW

We were formed through a series of acquisitions beginning with the initial
acquisitions of Detroit Tool Group, Inc. and the Peer Division of Teledyne, Inc.
in 1992. Subsequent to those transactions, we acquired a number of companies
with proprietary products and manufacturing capabilities that had strong market
and technological positions in the niche markets they served and furthered our
goal of providing customers with a full range of integrated automated systems.
These acquisitions expanded our base of customers and markets, creating greater
opportunities for cross-selling among our various divisions.

Our current executive management team, appointed in fiscal 2001, has been
aggressively reviewing our business practices and procedures and implementing
needed changes to position us for stability and profitability. We made progress
in fiscal 2002 and fiscal 2003 with respect to improving our financial health by
engaging in asset sales to generate cash for debt reduction, modifying our
operations in an effort to improve productivity and margins and, as part of a
major financial recapitalization transaction described under "Liquidity and
Capital Resources -- Recapitalization," negotiating an extension of our senior
credit facility from July 2, 2002 to July 2, 2004. Furthermore, in fiscal 2003,
we implemented the final steps of our corporate restructuring plan to contain
costs and improve profitability by reducing our operations from 17 autonomous
divisions with 22 manufacturing facilities as of January 1, 2001 to six
operating divisions with 11 manufacturing facilities as of the end of fiscal
2003. This restructuring included management changes at under-performing units,
reductions in work force throughout our organization, the closing of facilities
in Camberly, England, Montreal, Canada, Rochester, New York, Bristol,
Pennsylvania and Erie, Pennsylvania. Also as part of this restructuring plan, we
reorganized our operations into four business segments: Material Processing,
Precision Assembly, Assembly and Test and Packaging Systems. This new structure
was designed to allow us to streamline product offerings, capitalize on the
combined strength of operating units, reduce overlap in the marketplace and
improve capacity utilization, internal controls, financial reporting and
disclosure controls.

18

In July 2003, we announced the closure of our Precision Assembly segment
manufacturing facility in Buffalo Grove, Illinois and the transfer of its
manufacturing operation to our Material Processing segment's Lebanon, Missouri
facility. We will maintain an engineering sales and service office in Illinois
to serve Precision Assembly's customers. As a result of this consolidation, we
are consolidating the Precision Assembly segment into the Material Processing
segment for financial reporting purposes and expect to begin reporting financial
results for the three remaining business segments in our Form 10-Q for the
fiscal quarter ended September 28, 2003.

In the first and second quarters of fiscal 2002, we sold the assets
comprising our non-core businesses that produced precision-stamped steel and
aluminum components through our stamping and fabrication operations.

Almost all of our net sales are derived from the sale and installation of
equipment and systems primarily under fixed-price contracts. We also derive net
sales from the sale of spare and replacement parts and servicing installed
equipment and systems. We recognize revenue under the percentage of completion
method or upon delivery and acceptance in accordance with SEC Staff Accounting
Bulletin No. 101.

We principally utilize the percentage of completion method of accounting to
recognize revenues and related costs for the sale and installation of equipment
and systems pursuant to customer contracts. These contracts are typically
engineering-driven design and build contracts of automated production equipment
and systems used to manufacture, test or package a variety of industrial and
consumer products. These contracts are generally for large dollar amounts and
require a significant amount of labor hours with durations ranging from three
months to over a year. Under the percentage of completion method, revenues and
related costs are measured based on the ratio of engineering and manufacturing
hours incurred to date compared to total estimated engineering and manufacturing
labor hours. Any revisions in the estimated total costs of the contracts during
the course of the work are reflected when the facts that require the revisions
become known. The percentage of completion method of accounting is described
below under "Critical Accounting Policies and Estimates -- Revenue
Recognition -- Percentage of Completion Method."

For those contracts accounted for in accordance with SAB 101, we recognize
revenue upon shipment (FOB shipping point). We utilize this method of revenue
recognition for products produced in a standard manufacturing operation whereby
the product is built according to pre-existing bills of materials, with some
customization occurring. These contracts are typically of shorter duration (one
to three months) and have smaller contract values. The revenue recognition for
these products follows the terms of the contracts, which call for transfer of
title at time of shipment after factory acceptance tests with the customer. If
installation of the product is included in the contracts, revenue for the
installation portion of the contract is recognized when installation is
complete.

Costs and related expenses to manufacture products, primarily labor,
materials and overhead, are recorded as cost of sales when the related revenue
is recognized. Provisions for estimated losses on uncompleted contracts are made
in the period in which such losses are determined.

Selling, general and administrative expenses primarily consist of salary
and wages for employees, research and development costs, sales commissions and
marketing and professional expenses. In fiscal 2001, selling, general and
administrative expenses also included goodwill amortization of $4.7 million.

The report of our independent auditors on our audited consolidated
financial statements that are included in this Annual Report states that the
current defaults under our senior credit facility, recurring losses and
significant accumulated deficit raise substantial doubt about our ability to
continue as a going concern. See "Liquidity and Capital Resources -- Cash Flow
Activity" for additional information.

ADJUSTMENT TO HISTORICAL FINANCIAL RESULTS

In connection with the acquisition of Assembly Technology and Test in
fiscal 1998, we assumed defined benefit plans for the United Kingdom and Germany
divisions. On the opening balance sheet, we did not record a prepaid pension
asset nor did we subsequently adjust the prepaid pension asset in following
years. The U.K. pension plan was overfunded by $3,518 at the acquisition date.
Due to stock market declines and additional
19

changes, the U.K. plan became underfunded in fiscal 2002 and required a charge
to stockholders' equity to establish a minimum pension liability. Also, it was
determined that a curtailment and a settlement loss occurred in fiscal 2002 due
to enhanced pension benefits provided to 18 individuals terminated between April
and June of fiscal 2002. The curtailment and settlement losses, though disclosed
in the notes to our fiscal 2002 financial statements, were not previously
recorded as part of the restructuring and related items charge on the statement
of operations for the fiscal year ended June 30, 2002. The statement of
operations impact in fiscal 2002 was an increase in the restructuring and
related items charge of $2.2 million. The previously reported balance sheets
since the acquisition of Assembly Technology & Test, Ltd. in fiscal 1998 have
also been adjusted to properly reflect the status of the U.K. pension plan,
including the recording of a prepaid pension asset at the acquisition date of
$3.5 million, the reduction in goodwill due to the additional prepaid pension
asset and a related reduction in goodwill amortization, and adjustments to
stockholders' equity -- other comprehensive income to reflect the minimum
pension liability in fiscal 2002.

We also made an adjustment to beginning retained earnings for the reversal
of certain opening balance sheet reserves of $2.2 million related to the
acquisitions of Hansford and Assembly Technology and Test (in fiscal 1997 and
1998 , respectively), which were established to cover certain contingencies at
the date of acquisition and were included in costs and earnings in excess of
amounts billed on uncompleted projects. In subsequent years, we did not charge
the actual losses against the reserve nor reverse the reserves when the
contingencies were resolved.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Management has prepared the consolidated financial statements included
herein in conformity with U.S. generally accepted accounting principles.
Accordingly, management is required to make certain estimates, judgments and
assumptions that it believes to be reasonable based upon the information
available. These estimates, judgments and assumptions affect the reported
amounts of assets and liabilities at the date of the financial statements and
the reported amounts of net sales and expenses during the periods presented. The
following accounting policies comprise those that management believes involve
estimates, judgments and assumptions that are the most critical to aid in fully
understanding and evaluating our reported financial results. Because of the
uncertainty inherent in these matters, actual results could differ from
estimates, judgments and assumptions we use in applying the critical accounting
policies.

Revenue Recognition -- Percentage of Completion Method

We recognize a significant portion of our revenues and profits as contracts
progress using the percentage of completion method of accounting, which relies
on estimates of total expected contract revenues and costs. Under this method,
estimated contract revenues and resulting gross profit are recognized based on
labor hours incurred to date as a percentage of total estimated labor hours to
complete the contract. We follow this method because we believe reasonably
dependable estimates of the revenues and costs applicable to various elements of
a contract can be made. Because the financial reporting of these contracts
depends on estimates, which are assessed continually during the term of these
contracts, recognized revenues and profit are subject to revisions as the
contract progresses to completion. Total estimated costs, and thus contract
profitability, are impacted by changes in productivity, scheduling, and the unit
cost of labor, subcontracts, materials and purchased equipment. Additionally,
external factors, such as customer needs and customer delays in providing
approvals, may also affect the progress and estimated cost of a project's
completion and thus the timing of profit and revenue recognition. Revisions in
profit estimates are reflected in the period in which the facts that give rise
to the revision become known. Accordingly, favorable changes in estimates result
in additional revenues and profit recognition, and unfavorable changes in
estimates result in a reduction of recognized revenues and profits. When current
estimates of total contract costs indicate that the contract will result in a
loss, the projected loss is recognized in full in the period in which the loss
becomes evident.

Many of our contracts provide for termination of the contract at the
convenience of the customer. In the event a contract is terminated at the
convenience of the customer prior to completion, we will typically be
compensated for progress up to the time of termination and any termination
costs. In addition, many contracts

20

are subject to certain completion schedule requirements with liquidated damages
in the event schedules are not met as the result of circumstances that are
within our control.

Inventory Valuation

We value our inventories at the lower of cost, which approximates the
first-in, first-out (FIFO) method, or market. With regard to stock inventories,
we regularly count quantities on hand and record a provision for excess and
obsolete inventory based primarily on historical usage rates. With regard to
finished goods inventories, we record market value reserves based on estimated
forecasts of future product demand.

Accounts Receivable

We perform ongoing credit evaluations of new and existing customers and
constantly monitor customer payments via accounts receivable aging reports. We
maintain an estimated allowance for doubtful accounts resulting from the
inability of our customers to make required payments based upon historical
experience and known customer collection issues. The allowance for doubtful
accounts is reevaluated at each balance sheet date and adjusted based on
information that impacts the estimates of uncollectible amounts. Because we
cannot predict future changes in the financial stability of our customers,
actual future losses from uncollectible accounts may differ from our estimates.

Goodwill Impairment

Under Statement of Financial Accounting Standards No. 142, "Goodwill and
Other Intangible Assets" (SFAS 142), we assess recoverability of goodwill on an
annual basis or when events or changes in circumstances indicate that the
carrying amount of goodwill may not be recoverable. Factors that we consider
important that could trigger an impairment review include, among others, the
following:

- significant underperformance of a segment or division relative to
expected historical or projected future operating results;

- significant negative industry or economic trends; and

- significant changes in the strategy for a segment or division.

In accordance with the provisions of SFAS 142, we derive fair values for
our reporting units that represent the various components of our operating
segments and compare such fair values to the carrying values of each of our
reporting units to determine if there is any indication of goodwill impairment.
For purposes of deriving the fair values of our reporting units, we utilize a
discounted cash flow analysis based upon, among other things, certain
assumptions about expected future operating performance. Our estimates of
discounted cash flows may differ from actual cash flow due to, among other
things, changes in economic conditions, changes to our business models, changes
in our weighted average cost of capital, or changes in our operating
performance. We will recognize an impairment charge to the extent that the
implied fair values of the goodwill balances for the reporting units are less
than the carrying value of such goodwill balances.

Given that this impairment analysis is performed at the reporting unit
level for which discrete financial information is available, it is possible for
a segment of our business, which represents an aggregation of reporting units,
to show increased levels of sales and operating results but at the same time
have impairment within such segment.

Deferred Income Tax Assets

We provide for estimated income taxes payable or refundable on current year
income tax returns as well as the estimated future tax effects attributable to
temporary differences and carryforwards, in accordance with the Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS
109"). SFAS 109 also requires that a valuation allowance be recorded against any
deferred tax assets that are not likely to be realized in the future. This
requires considerable judgment to determine such realizability. The
determination is based on our ability to generate future taxable income and, at
times, is dependent on our

21

ability to implement strategic tax initiatives to ensure full utilization of
recorded deferred tax assets. We have experienced tax losses for the past four
fiscal years and, therefore, have provided a full valuation allowance against
our deferred tax assets, including net operating losses. To the extent that we
are able to generate taxable income in the future, these valuation allowances
may be reversed.

Long-Lived Assets

We review long-lived assets, including property, plant and equipment, and
intangible assets other than goodwill, for impairment whenever events or changes
in circumstances indicate that the carrying amount of any asset may not be
recoverable. Factors that we consider important that could trigger an impairment
review include, among others, the following:

- significant underperformance of a segment or division relative to
expected historical or projected future operating results;

- significant changes in the use of the assets of a segment or division or
the strategy for the segment or division; and

- significant negative industry or economic trends.

Our impairment test is based on a comparison of undiscounted cash flows to
the recorded value of the asset. The estimate of cash flow is based upon, among
other things, certain assumptions about expected future operating performance.
Our estimates of undiscounted cash flow may differ from actual cash flow due to,
among other things, technological changes, economic conditions, changes to our
business model or changes in our operating performance. If the sum of the
undiscounted cash flows (excluding interest) is less than the carrying value, we
recognize an impairment loss, measured as the amount by which the carrying value
exceeds the fair value of the asset.

Warranty Accruals

We routinely incur costs after projects are installed and closed. We record
these costs as warranty charges within cost of sales. Warranty costs are
estimated at the time a project is closed based on our historical warranty
experience and consideration of any known warranty issues. The fluctuation in
our warranty costs depends on the nature and timing of our projects. Increases
in warranty costs coincide with our incurring increased costs associated with
projects that have performance issues. Our estimate of warranty expense may
differ from actual warranty expense incurred due to, among other things, our
inability to satisfactorily debug all customer projects or our inability to meet
all specifications of customer projects.

22

SEGMENT FINANCIAL DATA

Set forth below is certain financial data relating to each business
segment.

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

(1) Fiscal 2003 and fiscal 2001 operating loss includes $51,880 and $38,219,
respectively, of goodwill/asset impairment charges.

(2) Operating income was adjusted from that previously reported due to the
recording of an additional restructuring and related items charge of $2,221
related to the curtailment/settlement loss on the U.K. pension plan at
Assembly Technology & Test, Ltd.

(3) Assets have been adjusted from previously reported to properly reflect the
status of the U.K. pension plan, including the reduction in goodwill due to
the recording of an additional prepaid pension asset of $3,518 at the
acquisition date of Assembly Technology & Test, Ltd. We also made an
adjustment to beginning retained earnings for the reversal of certain
opening balance sheet reserves of $2,160 related to the acquisitions of
Hansford and Assembly Technology and Test, which were included in costs and
earnings in excess of amounts billed on uncompleted projects.

RESULTS OF OPERATIONS

The following table sets forth, for the periods indicated, the percentage
of net sales represented by certain items reflected in our consolidated
statement of operations. The data presented below was derived from our audited
consolidated financial statements included in this Annual Report.

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

(1) Percentages were adjusted from previously reported percentages due to the
recording of an additional restructuring and related items charge of $2.2
million related to the curtailment/settlement loss on the U.K. pension plan
at Assembly Technology & Test, Ltd.

Fiscal 2003 Compared to Fiscal 2002 (As Adjusted)

Our consolidated net sales for the fiscal year ended June 29, 2003 were
$241.1 million, a decrease of $85.2 million, or 26.1%, from $326.3 million for
the fiscal year ended June 30, 2002. Sales to Hewlett-Packard

24

were $54.4 million in fiscal 2003, down $45.2 million, or 45.4%, from fiscal
year 2002. We expect to see continued softness in our core electronics market in
fiscal 2004.

Material Processing segment net sales decreased $12.8 million, or 13.5%, to
$82.5 million for the fiscal year ended June 29, 2003 from fiscal 2002. The
decrease in net sales was across multiple industries, including automotive
tires, electronics and consumer products. These decreases were partially offset
by increased sales to the appliance industry. Sales to Hewlett-Packard were
$23.9 million in fiscal 2003, down $4.3 million, or 15.1%, from fiscal 2002.

Precision Assembly segment net sales decreased $32.8 million, or 47.0%, to
$36.9 million for the fiscal year ended June 29, 2003 from fiscal 2002. Sales to
Hewlett-Packard has accounted for over 75% of the Precision Assembly segment's
sales in each of fiscal years 2003 and 2002. In fiscal 2003, sales to Hewlett-
Packard were $30.5 million, down $24.4 million, or 44.5%. The decrease in sales
can be attributed to the completion of several capital spending programs with
this customer being recognized in fiscal 2002 and not being replaced by other
orders from this customer or other customers in fiscal 2003. In July 2003, we
announced the decision to shut down the remaining manufacturing operations in
Buffalo Grove, Illinois of the Precision Assembly segment. Future projects will
be manufactured in Lebanon, Missouri as part of the Material Processing segment.
As a result of this consolidation, we are consolidating the Precision Assembly
segment into the Material Processing segment for financial reporting purposes
and expect to begin reporting financial results for the three remaining business
segments in our Form 10-Q for the fiscal quarter ended September 28, 2003. The
decision to shut down operations in Buffalo Grove was based on the outlook for
future electronics projects and excess capacity issues. We expect to see
continued softness in our core electronics market, including sales from
Hewlett-Packard, in fiscal 2004.

Packaging Systems segment net sales decreased $6.6 million, or 16.1%, to
$34.4 million for the fiscal year ended June 29, 2003 from fiscal 2002. This
business segment primarily serves the pharmaceutical and nutritional markets.
The lower sales can be attributed to the softness in capital spending by large
pharmaceutical companies.

Assembly & Test segment net sales decreased $32.2 million, or 27.0%, to
$87.2 million for the fiscal year ended June 29, 2003 from fiscal 2002. Our
Assembly & Test segment primarily serves the automotive market. This segment's
automotive-related sales decreased due to the general softness in the economy
that has restrained customer capital spending in the automotive market. Sales
were also down due to the decrease in revenues from a diesel engine assembly and
test project. This project contributed $6.8 million in revenues in fiscal 2003
versus $12.1 million in fiscal 2002. Our Assembly & Test segment has not been
able to replace the reductions in this project with new orders.

Gross profit decreased $23.7 million, or 36.3%, to $41.6 million for the
fiscal year ended June 29, 2003 from $65.3 million for the fiscal year ended
June 30, 2002. The decrease in our gross profits reflects the effect of the
$85.2 million, or 26.1%, decrease in net sales. Our gross margin decreased to
17.2% in fiscal 2003 from 20.0% in fiscal 2002. The decrease in our gross margin
primarily reflects the process and equipment development costs of $1.9 million
for Earthshell's biodegradable foam laminate packaging equipment in the Material
Processing segment and the manufacturing inefficiencies within the Precision
Assembly segment resulting from the decrease in manufacturing activity.

Selling, general and administrative (SG&A) expenses were $51.3 million for
the fiscal year ended June 29, 2003, a decrease of $4.3 million, or 7.7%, from
the $55.6 million for the year ended June 30, 2002. The decrease is primarily
attributed to the cost reduction program that we implemented in fiscal 2003,
which achieved savings of $1.0 million a month beginning in April 2003. The
program included the discontinuance of 401-K matching and discretionary
contributions and salary and wage reductions of 5% to 10% across several
divisions and our corporate office.

In the fourth quarter of fiscal 2003, we recorded a $51.9 million
goodwill/asset impairment charge related to several businesses in both the
Precision Assembly and Packaging Systems segments. We recorded an additional
$12.0 million goodwill/asset impairment charge from the $39.9 million
goodwill/asset impairment charge previously disclosed in our earnings press
release issued September 5, 2003. The additional charge

25

related to a revised assessment of the fair value of the assets and liabilities
of the Packaging Systems segment. The write-down of goodwill was primarily the
result of the continued decline in the operating results of certain reporting
units and management's assumptions regarding future performance based on the
overall economic recession and reduction in capital spending levels. We
calculated the present value of expected cash flows using a discount rate of
11%, which represented the weighted average cost of capital adjusted for risk
factors relative to our reporting units.

On December 13, 2002, we announced the closure of our Erie, Pennsylvania
facility (also known as Assembly Machines, Inc.), transferring manufacturing
operations and the customer base to our Buffalo Grove, Illinois facility as part
of our Precision Assembly segment. We completed the shutdown and the sale of the
facility in March 2003. We recorded a restructuring charge in December 2002 of
$1.7 million, including severance costs of $0.6 million for the termination of
62 employees. The remaining restructuring charge of $1.1 million included a $1.0
million charge to write-down the land and building to the estimated fair market
value and $0.1 million for other asset write-offs and non-cancellable office and
plant equipment leases. We recorded an additional $0.5 million restructuring
charge in June 2003 for idle facility lease commitment costs related primarily
to our Rochester, New York leased facility.

Operating loss increased $60.8 million to $64.8 million for the twelve
months ended June 29, 2003 from $4.0 million for the twelve months ended June
30, 2002.

Material Processing segment operating income decreased $3.5 million to $5.2
million for the twelve months ended June 29, 2003 from $8.7 million for the
twelve months ended June 30, 2002. Operating margin for the Material Processing
segment was 6.3% in fiscal 2003 versus 9.1% in fiscal 2002. The decrease in
operating margin was due to the finalization of several large projects with
increased profitability in fiscal 2002, including electronics and automotive
tire systems and the recording of a $1.7 million loss reserve on the Green
Packaging project. We have incurred a total of $8.0 million of process and
equipment development costs for Green Packaging's biodegradable foam laminate
packaging equipment and received $3.3 million from the customer. The orders were
cancelled by Green Packaging during fiscal 2003 and we have since contracted to
sell a majority of the Green Packaging inventory to another customer and expect
to recover the $3.0 million of net value on our balance sheet at June 29, 2003.

Precision Assembly segment operating income (loss) decreased $42.7 million
to a loss of $38.9 million for the twelve months ended June 29, 2003 from income
of $3.8 million for the twelve months ended June 30, 2002. Operating margin for
the Precision Assembly segment was a loss of 105.2% in fiscal 2003 versus income
of 5.4% in fiscal 2002. The Precision Assembly segment recorded a $30.9 million
goodwill/asset impairment charge and a $1.7 million restructuring charge related
to the closure of the Erie, Pennsylvania facility in fiscal 2003. Due to the
decrease in sales of $32.8 million, or 47.0%, the segment also recorded $3.5
million of increased unfavorable manufacturing variances in fiscal 2003. The
shutdown of our Buffalo Grove, Illinois facility is expected to reduce costs by
approximately $6.0 million annually and result in a restructuring charge in the
first quarter of fiscal 2004.

Packaging Systems segment operating loss increased $15.3 million to $19.0
million for the twelve months ended June 29, 2003 from $3.7 million for the
twelve months ended June 30, 2002. Operating margin for the Packaging Systems
segment was a loss of 55.3% in fiscal 2003 versus a loss of 9.0% in fiscal 2002.
The segment recorded a $21.0 million goodwill/asset impairment charge in fiscal
2003. Operating losses in fiscal 2002 included various charges, including a $2.8
million restructuring charge, a $1.1 million charge for inventory obsolescence
and a $0.5 million charge for bad debt reserves.

Assembly & Test segment operating loss decreased $3.6 million to $3.0
million for the twelve months ended June 29, 2003 from $6.6 million for the
twelve months ended June 30, 2002. Operating loss in fiscal 2002 was higher due
to various charges, including an $8.2 million restructuring charge, which
included the previously unrecorded $2.2 million curtailment/settlement loss on
the U.K. pension plan, and a $1.0 million charge for warranty reserves. The
restructuring charge previously reported in fiscal 2002 was adjusted to include
the $2.2 million curtailment/settlement loss on the U.K. pension plan, as
discussed above. Operating margin for the Assembly & Test segment was a loss of
3.5% in fiscal 2003 versus a loss of 5.5% in fiscal 2002.

26

Corporate head office operating costs were $9.1 million for the twelve
months ended June 29, 2003 versus $6.7 million for the twelve months ended June
30, 2002. Fiscal 2002 operating costs were lower due to several favorable
adjustments, including other post retirement accruals, workers compensation
accruals and 401-K plan forfeiture recoveries.

Interest expense decreased $5.9 million, or 48.0%, to $6.3 million for the
fiscal year ended June 29, 2003 from $12.2 million for the fiscal year ended
June 30, 2002. The decrease resulted from lower outstanding borrowings primarily
in fiscal 2002 resulting from the reduction in working capital, the proceeds
from the disposal of assets and the proceeds from the recapitalization
transaction discussed in "Liquidity and Capital Resources -- Recapitalization."
We generated additional free cash flow in fiscal 2003 and paid down debt from
tax refunds received. Dividends on our trust preferred securities were $1.6
million in fiscal 2003 compared to $4.8 million in fiscal 2002 due to the
financial recapitalization that effectively eliminated the accrued dividend in
the fourth quarter of fiscal 2002.

We recorded an income tax provision of $4.9 million in fiscal 2003, despite
tax losses. Based on uncertainty of future taxable income, we did not record any
benefit for fiscal year 2003 losses and established valuation allowances against
all of our United States and United Kingdom deferred tax assets. In fiscal 2002,
we recorded a tax benefit for current year domestic losses that we were able to
carry-back against previous years' earnings and established a valuation
allowance for our Canadian losses.

Fiscal 2002 (As Adjusted) Compared to Fiscal 2001

Our consolidated net sales for the fiscal year ended June 30, 2002 were
$326.3 million, a decrease of $184.8 million, or 36.2%, from $511.1 million for
the fiscal year ended June 24, 2001. Our fiscal year 2001 net sales included
$46.1 million in net sales attributable to our Vanguard Technical Solutions,
Detroit Tool Metal Products, Scheu & Kniss and Hansford Parts and Products
divisions, the assets of which were sold in March 2001, June 2001, July 2001 and
October 2001, respectively.

Material Processing segment net sales decreased $32.4 million, or 25.3%, to
$95.4 million for the fiscal year ended June 30, 2002 from fiscal 2001. The
decrease in net sales was primarily a result of lower sales to the automotive
market. In particular, net sales recognized in fiscal 2001 that related to a
large capital spending program of a customer in the automotive tire market
resulted in $28.8 million in lower sales in fiscal 2002 versus fiscal 2001
because softness in order activity did not replace these sales. In addition,
welding systems sales primarily to the automotive market were down approximately
$9.7 million due to the general softness in the economy that restrained customer
capital spending in the automotive market. The decreases in sales to the
automotive market were partially offset by the increase in sales to the
electronics market by our Material Processing segment as we sourced more
electronics projects to this segment's facilities. On a consolidated basis,
however, our sales to the electronics market decreased $36.5 million, or 25.8%,
from fiscal 2001.

Precision Assembly segment net sales decreased $50.9 million, or 42.2%, to
$69.7 million for the fiscal year ended June 30, 2002 from fiscal 2001. Sales to
Hewlett-Packard accounted for over 75% of the Precision Assembly segment's sales
in each of fiscal years 2002 and 2001. The decrease in sales from fiscal year
2001 to fiscal year 2002 can be attributed to several capital spending programs
of Hewlett-Packard being recognized in fiscal 2001 and not being replaced by
other orders from this customer or other customers in fiscal 2002.

Packaging Systems segment net sales decreased $11.4 million, or 21.7%, to
$41.1 million for the fiscal year ended June 30, 2002 from fiscal 2001. The
lower sales of our Packaging Systems segment in fiscal 2002 can be attributed to
our Montreal, Quebec "Kalish" business unit. We shut down our Montreal, Quebec
facility in the third quarter of fiscal 2002 following 18 months of attempting
to rebuild and restructure its operations. The business from this facility was
transferred to another facility.

Assembly & Test segment net sales decreased $44.9 million, or 27.3%, to
$119.3 million for the fiscal year ended June 30, 2002 from fiscal 2001.
Automotive-related sales decreased due to the general softness in the economy
that restrained customer capital spending in the automotive market.

Gross profit decreased $8.8 million, or 11.9%, to $65.3 million for the
twelve months ended June 30, 2002 from $74.1 million for the twelve months ended
June 24, 2001. Gross profit in fiscal 2001 reflected
27

$13.5 million of charges taken in the fourth quarter of fiscal 2001 primarily
related to provisions for excess and obsolete inventory, other inventory market
value write-downs and certain fixed asset write-downs. See Note 13 to the
audited consolidated financial statements included herein for a discussion of
these charges. Gross profit in fiscal 2002 reflected decreased warranty expense
of $1.0 million from fiscal 2001 due to greater amounts of warranty activity
during fiscal 2001 related to specific problematic projects. The decrease in our
gross profits reflects the effect of the $184.8 million decrease in net sales.
Our gross margin increased to 20.0% in fiscal 2002 from 14.5% in fiscal 2001.
The increase in our gross margin reflects improved project performance in the
electronics market gained from manufacturing efficiencies in the production of
duplicate systems and restructuring in fiscal 2001, which reduced headcount and
overhead costs.

Selling, general and administrative (SG&A) expenses were $55.6 million for
the fiscal year ended June 30, 2002, a decrease of $34.9 million from the $90.5
million for year ended June 24, 2001. The $34.9 million decrease in SG&A
expenses was primarily a result of the following items:

- $10.8 million decrease resulting from the $8.3 million charge in fiscal
2001 for asset write-downs primarily related to doubtful accounts of
which we recovered $2.5 million in fiscal 2002;

- $5.4 million decrease in amortization as a result of the discontinuance
of goodwill amortization in fiscal 2002 due to our implementation of SFAS
No. 142 as of June 25, 2001, which replaces the requirement to amortize
intangible assets with indefinite lives with a requirement for an annual
impairment test;

- $4.3 million decrease in SG&A expenses resulting from the sale of
Vanguard Technical Solutions in the third quarter of fiscal 2001, Scheu &
Kniss and Detroit Tool Metal Products in the first quarter of fiscal 2002
and Hansford Parts and Products in the second quarter of fiscal 2002;

- $3.8 million decrease in SG&A expenses in fiscal 2002 resulting from
savings in salary and compensation expenses as a result of a decrease in
headcount from our 2001 restructuring;

- $3.5 million in legal, consulting and other professional expenses and
severance-related expenses incurred in fiscal 2001 in connection with the
investigations into our accounting restatements in fiscal 2000;

- $3.4 million decrease in SG&A expenses in fiscal 2002 relating to the
closure of our Rochester, New York and Montreal, Quebec manufacturing
facilities; and

- $1.3 million reversal of post-retirement benefit accruals due to
cancellation of post-retirement plans in fiscal 2002.

During fiscal 2002, we announced several actions in connection with our
corporate restructuring plan as outlined below. These actions resulted in an
aggregate of $12.5 million of restructuring and related items charges in fiscal
2002. The $12.5 million restructuring and related items charge includes an
adjustment of $2.2 million to the previously reported restructuring and related
items charge in the fiscal 2002 financial statements. See the Assembly and
Test-Europe restructuring discussion below for additional information concerning
this adjustment.

- Closure of our Rochester, New York facility, including termination of
employees, in the fourth quarter of 2002 and the transfer of the customer
base of this facility primarily to our Dayton, Ohio and Buffalo Grove,
Illinois facilities. The closure was announced January 24, 2002. The
restructuring costs, which totaled $3.6 million, were recorded in the
third quarter of fiscal 2002 and included severance costs of $1.3 million
for the termination of 114 employees. As of June 30, 2002, four employees
remained for final administrative duties, all of whom were discharged by
the end of the first quarter of fiscal 2003. The remaining restructuring
costs included $1.1 million for facility lease and related costs, $1.1
million for asset write-offs and $0.1 million for office equipment lease
terminations and miscellaneous other charges. The asset write-offs
included the remaining value of leasehold improvements, the computer
system and show machines. In fiscal 2003, we recorded an additional
restructuring charge of $0.5 million for additional facility lease and
related costs.

28

- Closure of our Montreal, Quebec facility, including termination of
employees in August 2002, and the transfer of its customer base and
assets to our operations in Leominster, Massachusetts. The closure of
this facility was announced March 22, 2002. The restructuring costs of
$2.3 million were recorded in the third quarter of fiscal 2002 and
included estimated severance costs of $1.0 million for the termination of
83 employees, partially offset by a reversal of $0.5 million associated
with severance accrual recorded in fiscal 2001. The terminations included
8 employees in fiscal 2002 and 75 employees in fiscal 2003. The remaining
restructuring costs included $0.6 million for future facility lease and
related costs, $1.1 million for asset write-offs and $0.1 million of
other costs. The asset write-offs primarily included the remaining value
of leasehold improvements and the computer system.

- Transfer of our manufacturing operations in Bristol, Pennsylvania to
Hyannis, Massachusetts as part of our Converting Technologies division.
The closure of this operation was announced March 22, 2002 and completed
in September 2002. The restructuring costs of $0.9 million were recorded
in the third quarter of fiscal 2002 and included severance costs of $0.3
million for the termination of 15 employees (all terminations occurred in
fiscal 2003). Approximately 10 employees remain in Bristol for sales and
engineering support. The remaining restructuring costs included $0.4
million of asset write-offs, $0.2 million for facility lease and related
costs and $0.3 million of other costs. The asset write-offs included the
remaining value of leasehold improvements.

- Transfer of our Assembly and Test-Europe fabrication operations from
Gawcott, United Kingdom to our Buckingham, England plant in the fourth
quarter of fiscal 2002. We recorded an initial restructuring charge of
$1.2 million in the third quarter of fiscal 2002 and included severance
costs of $0.9 million for the termination of 43 employees, all of whom
were terminated by June 30, 2002. The restructuring charge also included
$0.3 million for future lease payments. Upon the approval of the trustees
to the pension plan, certain of the terminated employees were granted
enhanced pension benefits resulting in a curtailment/settlement loss to
the defined benefit pension plan of approximately $2.2 million. The
previously reported operating results have been adjusted to reflect this
curtailment/ settlement loss as this amount was not previously reflected
in our consolidated financial statements for fiscal 2002.

- We recognized additional restructuring charges of $2.3 million in fiscal
2002 primarily related to severance costs associated with management
changes and workforce reductions at several divisions, as well as future
lease payments resulting from the consolidation of two Packaging Systems
segment divisions. The restructuring charge included estimated severance
costs of $1.7 million for the termination of 125 employees, $0.3 million
for future lease payments and $0.2 million of asset write-offs. All of
these employees were terminated by June 30, 2002.

In the fourth quarter of fiscal 2002, we entered into a sale/leaseback
agreement for our Hyannis, Massachusetts facility and recorded a net loss on
disposal of assets of $1.1 million in connection with that transaction. We
entered into the sale/leaseback transaction in order to retire the $5.0 million
of variable rate Industrial Revenue Bonds, which were backed by a letter of
credit drawn on Fleet National Bank ("Fleet"), that we issued in 1998 to fund
the expansion of this facility. Fleet, under the terms of the letter of credit
reimbursement agreement, required us to post 110% cash collateral to support the
letter of credit no later than August 1, 2002. The proceeds of the
sale/leaseback transaction were used to repay the Industrial Revenue Bonds on
August 1, 2002, thereby eliminating the need to post the cash collateral. We
also avoided a 7% fee charged by Fleet for the letter of credit and maintained
the liquidity under our senior credit revolving line. See "Liquidity and Capital
Resources -- Industrial Revenue Bonds." The effect of the sale/leaseback was the
removal of the facility, which had a carrying value of $6.5 million at June 30,
2002 from our accounting records and the recording of cash proceeds of
approximately $5.4 million. We have lease expense of approximately $0.8 million
annually.

Operating loss decreased $62.8 million to a loss of $4.0 million for the
twelve months ended June 30, 2002 from a loss of $66.8 million for the twelve
months ended June 24, 2001. Operating loss in fiscal 2001 reflects various
charges taken primarily in the fourth quarter of fiscal 2001 related to goodwill
impairment ($38.2 million), losses on the disposal of assets ($8.5 million),
restructuring charges ($3.7 million), provisions

29

for bad debts ($8.2 million), provisions for excess and obsolete and fair market
value inventory reserves ($11.4 million), provisions for warranty reserves ($2.8
million) and other asset write-downs. See Note 6 -- Dispositions, Note
11 -- Goodwill and Intangible Assets, Note 14 -- Write-Down of Assets, and Note
15 -- Restructuring to the audited consolidated financial statements included
herein for a discussion of these charges.

The information in the following table is being provided to aid in the
understanding of the comparability of our operating results by segment:

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

(1) The restructuring charge was adjusted from that previously reported due to
the recording of an additional restructuring and related items charge of
$2,221 related to the curtailment/settlement loss on the U.K. pension plan
at Assembly Technology & Test, Ltd.

Material Processing segment operating income increased $30.3 million to
income of $8.7 million for the twelve months ended June 30, 2002 from a loss of
$21.6 million for the twelve months ended June 24, 2001. As shown in the table
above, certain charges and expenses decreased by $27.2 million in fiscal 2002
from fiscal 2001, which led to a corresponding increase in operating income.
Operating margin for the Material Processing segment was 9.1% in fiscal 2002
versus (16.9)% in fiscal 2001. The increase in operating margin was due to the
reduction in these charges and expenses and finalization of several large
projects with improved profitability, including electronics and automotive tire
systems.

Precision Assembly segment operating income increased $15.2 million to
income of $3.8 million for the twelve months ended June 30, 2002 from a loss of
$11.4 million for the twelve months ended June 24, 2001. As shown in the table
above, certain charges and expenses decreased by $14.0 million in fiscal 2002
from fiscal 2001, which led to a corresponding increase in operating income.
Operating margin for the Precision Assembly segment was 5.4% in fiscal 2002
versus (9.5)% in fiscal 2001. The increase in operating margin was due to the
reduction in these charges and expenses and the improvement in project
performance in the electronics market gained from the manufacturing efficiencies
in the production of duplicate systems.

Packaging Systems segment operating loss decreased $10.2 million to a loss
of $3.7 million for the twelve months ended June 30, 2002 from a loss of $13.9
million for the twelve months ended June 24, 2001. As shown in the table above,
certain charges and expenses decreased by $8.8 million in fiscal 2002 from
fiscal 2001, which led to a corresponding decrease in operating loss. Operating
margin for the Packaging Systems segment was (9.0)% in fiscal 2002 versus
(26.5)% in fiscal 2001. The increase in operating margin was due

30

primarily to the reduction in these charges and expenses and fiscal 2001
restructuring, which reduced headcount and overhead costs.

Assembly & Test segment operating income, as adjusted, decreased $8.7
million to a loss of $6.6 million for the twelve months ended June 30, 2002 from
income of $2.1 million for the twelve months ended June 24, 2001. The charges
and expenses shown in the table above increased by $1.7 million in total for
fiscal 2002 versus 2001, which led to a corresponding decrease in operating
income. Operating margin for the Assembly & Test segment was (5.5)% in fiscal
2002 versus 1.3% in fiscal 2001. The decrease in operating margin was due to
project performance on a few automotive related projects, partially offset by
the reduction in the above-described charges and expenses.

Interest expense decreased $2.7 million, or 18.1%, to $12.2 million for the
fiscal year ended June 30, 2002 from the fiscal year ended June 24, 2001. The
decrease resulted from lower outstanding borrowings as a result of the
application of asset sale proceeds and additional debt paydowns. Dividends on
our trust preferred securities were $4.8 million in fiscal 2002 compared to $5.5
million in fiscal 2001 due to the financial recapitalization discussed in
"Liquidity and Capital Resources -- Recapitalization," which effectively
eliminated the accrued dividend in the fourth quarter of fiscal 2002.

The income tax benefit was $3.9 million, or an effective tax benefit rate
of 20.7%, for the fiscal year ended June 30, 2002, compared to an income tax
benefit of $14.1 million, or an effective tax benefit rate of 16.2%, for the
fiscal year ended June 24, 2001. The effective income tax benefit rate primarily
reflects valuation allowances and the utilization of net operating loss
carry-forwards.

We recorded a gain on conversion of trust preferred securities of $16.6
million, net of tax of $8.8 million, in June 2002. The gain resulted from the
financial recapitalization pursuant to which the holders of our trust preferred
securities exchanged $35.0 million of outstanding trust preferred securities and
$15.1 million in accrued and unpaid distributions for 6,260,658 shares of our
common stock. The shares were valued for book and tax purposes based on the
market price of our common stock on the closing date of the financial
recapitalization.

LIQUIDITY AND CAPITAL RESOURCES

Cash Flow Activity

Net cash flow generated by operations was $6.3 million in fiscal 2003,
compared with $55.4 million in fiscal 2002 and net cash used by operating
activities of $8.6 million in fiscal 2001. In fiscal 2003, the reduction in
working capital provided $5.3 million of operating cash flow as compared to
$52.2 million in fiscal 2002.

The decrease in working capital of $5.3 million in fiscal 2003 can be
primarily attributed to the reduction in net sales of $85.2 million, or 26.1%,
from fiscal 2002. Working capital, exclusive of cash, remains at a very low
percentage to sales for both fiscal 2003 and fiscal 2002 (13.3% and 10.4%,
respectively). Note 13 to the audited consolidated financial statements included
herein provides a breakdown of the components of costs and estimated earnings in
excess of amounts billed on uncompleted contracts (CIE) and billings in excess
of costs and estimated earnings (BIE) that contributed to the decrease in
working capital. As shown in Note 13, costs incurred on uncompleted contracts
decreased $57.6 million from June 30, 2002 to June 29, 2003 reflecting our much
lower level of project activity at June 29, 2003, although net CIE/BIE has
actually increased. The lower project activity is reflected primarily on the
statement of cash flows as a reduction in accounts receivable. Projects are
being shipped and not being replaced with new projects. Also contributing to the
decrease in working capital are working capital management programs that we put
into place during fiscal 2002 to ensure that project cash flow could be financed
with our capital resources. The reductions in the various components in working
capital were a result of better management of payment terms with customers and
suppliers, a shift of project mix towards projects with better payment terms and
a focus on reduction of inventories carried.

The decrease in working capital of $52.2 million in fiscal 2002 can be
primarily attributed to the reduction in net sales of $184.8 million, or 36.2%,
from fiscal 2001. Costs incurred on uncompleted contracts decreased $108.3
million from June 24, 2001 to June 30, 2002 reflecting our much lower level of
project activity at
31

June 30, 2002. Also contributing to the decrease in working capital were the
working capital management programs discussed above.

Our working capital balances can fluctuate significantly between periods as
a result of the significant costs incurred on individual contracts, the
relatively large amounts invoiced and collected for a number of large contracts,
and the amounts and timing of customer advances or progress payments associated
with certain contracts.

Proceeds from the disposal of assets of $2.9 million offset capital
expenditures in fiscal 2003 of $2.9 million, resulting in $10,000 of net cash
provided from investing activities. The disposal of assets in fiscal 2003
included the sale/leaseback of the Alcester, England facility in October 2002
for $0.7 million, the sale of the Leominster, Massachusetts facility in January
2003 for $1.3 million and the sale of the Erie, Pennsylvania facility in March
2003 for $0.9 million. Capital expenditures in fiscal 2003 included the purchase
and installation of a press for the tool and die business of the Material
Processing segment, leasehold improvements for the new facility in Leominster,
Massachusetts and normal recurring replacements or refurbishments of machinery
and equipment. Net cash provided by investing activities of $21.5 million in
fiscal 2002 resulted from the proceeds of $18.8 million from the disposal of
Detroit Tool Metal Products, Scheu & Kniss and Hansford Parts and Products, the
sale/leaseback of our Hyannis, Massachusetts manufacturing facility for $5.5
million and the sale of miscellaneous pieces of property, plant and equipment.
Net cash used by investing activities of $1.1 million in fiscal 2001 were for
capital expenditures of $3.2 million offset partially by $2.0 million from the
sale of our corporate airplane and the sale of substantially all of the assets
of Vanguard Technical Solutions. We anticipate capital expenditures in fiscal
2004 to be approximately $2.0 million.

During fiscal 2003, we repaid $19.8 million in borrowings from the cash
balance at June 30, 2002 and the cash generated from operations and assets
sales. Due to financial covenant defaults in the fourth quarter of fiscal 2003
and the first quarter of fiscal 2004, no further borrowings are currently
available under the revolving portion of our senior credit facility. We are
negotiating with our lenders for a waiver of these defaults. We believe that
cash flows from operations, together with available borrowings under our credit
facility, assuming we obtain such waivers in the near future and there are
otherwise no significant reductions in availability or acceleration of
indebtedness due to defaults under our credit facility, will be sufficient to
meet our working capital, capital expenditures and debt service needs up to July
2, 2004, the maturity date of our senior credit facility. If we do not obtain
waivers for our current financial covenant defaults in the near future, our
ability to meet our liquidity needs prior to July 2, 2004 could be materially
adversely affected if we are not able to effectively manage our cash. The report
of our independent auditors on our audited consolidated financial statements
that are included in this Annual Report states that our current defaults under
the senior credit facility, recurring losses and significant accumulated deficit
raise substantial doubt about our ability to continue as a going concern. We
will need to delay or reduce capital expenditures, restructure or refinance our
debt, sell assets and/or seek additional equity capital in order to satisfy our
liquidity needs after July 2, 2004. If we are unable to do so, we will not be
able to continue our operations as currently anticipated and may need to
initiate bankruptcy proceedings in order to continue our operations with minimal
disruption and preserve the value of our assets.

Senior Credit Facility and Trust Preferred Securities

We use our borrowings under our senior credit facility to fund working
capital requirements, capital expenditures and finance charges. Borrowings under
our senior credit facility are secured by substantially all of our domestic
assets. As of June 29, 2003, our senior credit facility consisted of a $54.3
million revolving credit facility and a $6.0 million term credit facility. Of
this amount, $40.8 million was outstanding (including $0.9 million in
outstanding letters of credit) and total borrowing availability was $19.4
million.

As a result of our financial performance in fiscal 2003 and in July and
August of fiscal 2004, we were in default of the minimum EBITDA, minimum EBITDA
to interest expense and minimum net worth covenants of our senior credit
facility. In July 2003, we received permanent waivers of the covenant defaults
in the first nine months of fiscal 2003. In conjunction with the waiver of these
covenant defaults, the revolving credit facility was temporarily reduced to
$45.0 million, with revolver advances in excess of $42.0 million requiring
32

majority lender approval. We are negotiating with our lending group to waive
covenant defaults in the fourth quarter of fiscal 2003 and the first quarter of
fiscal 2004. Until we receive these waivers, no further borrowings are available
under the revolving portion of our senior credit facility, which could
materially adversely affect our ability to satisfy our liquidity needs if we are
not able to effectively manage our cash.

See "Business -- Risk Related to Our Business -- The covenants and
restrictions under our senior credit facility could limit our operating and
financial flexibility" for a discussion of restrictive covenants contained in
the credit facility.

Our senior credit facility will expire on July 2, 2004. We are actively
engaged in negotiations to refinance our senior credit facility and sell certain
assets in order to satisfy our obligations under the senior credit facility at
or prior to its maturity on July 2, 2004. While we believe we will be able to
replace the facility, we may not be able to obtain new financing on terms
acceptable to us or our current bank group. If that is the case, the current
bank group may not be willing to further extend the credit facility. If the
current bank group is not willing to extend the credit facility, new financing
on acceptable terms is not available and we are not able to generate cash by
selling assets, we will not be able to make the lump sum payment that will
otherwise be due on July 2, 2004. If we do not have sufficient funds to satisfy
our obligations under the senior credit facility, we will not be able to
continue our operations as currently anticipated and may need to initiate
bankruptcy proceedings in order to continue our operations with minimal
disruption and preserve the value of our assets. See "Cash Flow Activity" for
disclosure regarding the going concern opinion issued by our independent
auditors.

At June 29, 2003, interest rates were 8.0% on outstanding domestic
indebtedness and 8.17% on outstanding Sterling Pound indebtedness. Interest
rates at June 29, 2003 were based on the prime rate plus 4.0% or the Eurodollar
rate plus 4.5%. The facility requires commitment fees of 0.50% per annum payable
quarterly on any unused portion of the revolving credit facility, an annual
agency fee of $150,000 and a 1% annual facility fee. The annual facility fee
will be forgiven if the debt is paid in full and the credit facility is
cancelled before the annual due dates.

On June 12, 1997, we completed a private placement to several institutional
investors of $70.0 million of 7.16% convertible preferred securities ("TIDES").
The TIDES offering was made by our wholly-owned subsidiary trust, DT Capital
Trust (the "Trust"). The TIDES represent undivided beneficial ownership
interests in the Trust, the sole assets of which are the related aggregate
principal amount of junior subordinated debentures issued by us that the Trust
acquired with the proceeds of the TIDES offering. As originally structured, the
TIDES were convertible at the option of the holders at any time into shares of
our common stock at a conversion price of $38.75 per share. Furthermore, the
TIDES holders were entitled to receive cash distributions at an annual rate of
7.16%, payable quarterly in arrears on the last day of each calendar quarter. In
connection with the September 1999 amendment to our senior credit facility, we
elected to defer distributions on the TIDES for up to five years.

In connection with our financial recapitalization transaction that we
completed on June 20, 2002, we restructured our agreement with the TIDES holders
and, among other things, exchanged half of the outstanding TIDES, plus the
deferred quarterly distributions of $15.1 million on the TIDES, for 6,260,658
shares of our common stock. See "Recapitalization -- TIDES Exchange" below. We
have guaranteed the payment of distributions and payments on liquidation of the
Trust or the redemption of the TIDES. Through this guarantee, our junior
subordinated debentures, the debentures' indenture and the Trust's declaration
of trust, taken together, we have fully, irrevocably and unconditionally
guaranteed all of the Trust's obligations under the TIDES. Thus, while the TIDES
are not included in our liabilities for financial reporting purposes and instead
appear on our consolidated balance sheet between liabilities and stockholders'
equity, they represent obligations of DTI. See "New Accounting Pronouncements"
for the impact of new accounting standards on the TIDES balance sheet
classification.

Recapitalization

On June 20, 2002, we consummated a major financial recapitalization
transaction comprised of an amendment to our senior credit facility (the "Bank
Amendment"), a restructuring of our TIDES securities

33

(the "TIDES Exchange") and the sale of 7.0 million shares of our common stock
for $3.20 per share in a private placement (the "Private Placement"). Each
component of our financial recapitalization is described below.

Bank Amendment

Pursuant to the Bank Amendment:

- our lenders permanently waived financial covenant defaults resulting from
our financial performance in fiscal 2002;

- the maturity date of our senior credit facility was extended from July 2,
2002 to July 2, 2004;

- the total commitment under the facility was reduced to $76.4 million,
comprised of a $70.0 million revolver and a $6.4 million term loan (with
subsequent reductions as described above);

- a monthly asset coverage test (65% of eligible accounts and 25% of
eligible inventory) was established for all revolver advances in excess
of $53.0 million (subsequently removed with the July 2003 decreases to
the revolving credit commitment to $45.0 million); and

- the interest rate was reset at the Eurodollar Rate plus 4% or the Prime
Rate plus 3.5% for all revolver advances up to $53.0 million and the
Prime Rate plus 4% for all revolver advances in excess of $53.0 million
(subsequently changed in the March 2003 amendment increasing the
Eurodollar Rate increment to 4.5% and Prime Rate increment to 4.0%).

The Bank Amendment requires us to make pro rata reductions of the revolving
loan commitment and term loan (1) of $1.5 million per quarter, (2) as a result
of excess cash flow (as defined in the credit facility agreement) for the fiscal
year ended June 29, 2003, and (3) as a result of proceeds from equity issuances
other than in connection with employee stock option exercises. The Bank
Amendment also reset the financial covenants under the senior credit facility,
including maintenance of minimum levels of EBITDA and quarterly net worth and
maximum annual capital expenditures. We made all required debt payments during
fiscal 2003.

TIDES Exchange

As part of our financial recapitalization, we consummated the TIDES
Exchange, whereby:

- the TIDES holders exchanged $35.0 million of outstanding TIDES and $15.1
million of accrued and unpaid distributions thereon into 6,260,658 shares
of common stock at a price of $8.00 per share;

- the maturity date of the remaining $35.0 million of TIDES was shortened
from May 31, 2012 to May 31, 2008;

- the conversion price of the remaining TIDES was reduced from $38.75 per
share to $14.00 per share;

- the TIDES holders agreed to a "distribution holiday" pursuant to which
distributions on the remaining TIDES will not accrue from April 1, 2002
through July 2, 2004; and

- provided that we make the first distribution payment following the
"distribution holiday," we will have the right from time to time to defer
distributions on the TIDES through their maturity in 2008.

We filed a registration statement on Form S-3 with the Commission and
registered the resale of the shares of common stock issued upon the exchange,
and issuable upon our future conversion, of the TIDES. We also granted the
holders of the TIDES as a group the right to appoint one representative to
attend and observe meetings of our board of directors. This right will expire
upon the conversion of all of the remaining trust preferred securities into
shares of common stock.

Private Placement

As part of the financial recapitalization, we consummated a private
placement to several stockholders of 7.0 million shares of our common stock at
$3.20 per share. We used the proceeds of the offering to repay

34

indebtedness of approximately $18.5 million under the senior credit facility and
to pay transaction expenses of approximately $3.9 million. The registration
statement on Form S-3 was filed with the Commission and registered the resale of
these shares of common stock.

Pursuant to the share purchase agreement for the Private Placement, we
amended our Amended and Restated By-laws and our stock incentive plans to
provide that, unless approved by the holders of a majority of the shares of our
outstanding common stock, we will not:

- grant stock options that have an exercise price less than the underlying
stock's fair market value on the grant date;

- reprice any outstanding stock options, including through the cancellation
of options and grant of replacement options with a lower exercise price
or accelerated vesting schedule or restricted stock;

- sell or issue any security convertible into, or exercisable or
exchangeable for, shares of common stock having a conversion, exercise or
exchange price per share that is subject to downward adjustment based on
the market price of the common stock at the time of conversion, exercise
or exchange; or

- in general, enter into any equity line or agreement to sell common stock
or any security convertible into, or exercisable or exchangeable for,
shares of common stock at a purchase, conversion, exercise or exchange
price per share that is fixed after the execution date of the agreement.

These restrictions may make it more difficult for us to raise capital in
the equity or debt markets in the future should we need to do so.

Industrial Revenue Bonds

On July 27, 1998, our wholly-owned subsidiary, Sencorp Systems, Inc.
participated in the issuance of $7.0 million of Massachusetts Industrial Finance
Agency Multi-Mode Industrial Development Revenue Bonds 1998 Series A (Bonds) to
fund the expansion of our facility in Hyannis, Massachusetts. The Bonds were
scheduled to mature July 1, 2023 and bore interest at a floating rate (4.7% as
of June 30, 2002) determined weekly by Quick and Reilly, the bond remarketing
agent. On June 25, 2002, we consummated a sale/leaseback transaction of the
Hyannis facility, and informed the bond trustee of our intention to use the net
proceeds thereof to prepay the $5 million outstanding balance of the Bonds on
August 1, 2002. Accordingly, the Bonds were classified as a current liability as
of June 30, 2002. The Bonds were prepaid in full and retired on August 1, 2002.

Repayment of Borrowings

During fiscal 2003, we repaid $19.8 million in borrowings from the cash
generated from operations and asset sales. During fiscal 2002, we repaid $79.7
million in borrowings from the cash generated from operations, assets sales and
the Private Placement.

35

SUMMARY DISCLOSURE ABOUT CONTRACTUAL OBLIGATIONS

The following table reflects a summary of our contractual cash obligations
as of June 29, 2003:

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

(1) Amount pertains to commitment to increase funding to improve the funding
status of the pension plan.

(2) Amount pertains to contractual cash obligations for which there is no
predetermined date of payment.

BACKLOG

Our backlog is based upon customer purchase orders that we believe are
firm. As of June 29, 2003, we had $88.9 million of orders in backlog, which
compares to a backlog of approximately $142.8 million as of June 30, 2002.
Backlog and orders by segment for the current and prior year period were as
follows:

(b) Reports on Form 8-K

On May 7, 2003, a Current Report on Form 8-K was filed to report,
pursuant to Items 7 and 9 thereof, a release of the Company's earnings for
the third quarter of fiscal 2003, among other things.

40

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

DT INDUSTRIES, INC.

By: /s/ JOHN M. CASPER
------------------------------------
John M. Casper
Senior Vice President -- Finance and
Chief Financial Officer

Dated: October 14, 2003

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on October 14, 2003.

41

DT INDUSTRIES, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

F-1

REPORT OF INDEPENDENT AUDITORS

To the Board of Directors and Stockholders of DT Industries, Inc.

In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, changes in stockholders' equity
and cash flows, present fairly, in all material respects, the financial position
of DT Industries, Inc. and its subsidiaries at June 29, 2003 and June 30, 2002,
and the results of their operations and their cash flows for each of the three
fiscal years in the period ended June 29, 2003 in conformity with accounting
principles generally accepted in the United States of America. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America which
require that we plan and perform the audits to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

The accompanying financial statements have been prepared assuming the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company is currently in default of certain debt
covenants and has not obtained as of the date hereof a waiver for such defaults.
The Company has also suffered recurring losses and has a significant accumulated
deficit. These factors raise substantial doubt about the Company's ability to
continue as a going concern. Management's plans in regard to these matters are
also described in Note 1. The accompanying financial statements do not include
any adjustments that might result from the outcome of this uncertainty.

As described in Notes 2 and 17, the Company restated its consolidated
financial statements for the year ended June 30, 2002.

As described in Note 3 to the consolidated financial statements, the
Company adopted Statement of Financial Accounting Standards No. 142, Goodwill
and Other Intangible Assets, effective June 25, 2001.

/s/ PricewaterhouseCoopers LLP

PricewaterhouseCoopers LLP

St. Louis, Missouri
October 14, 2003

F-2

DT INDUSTRIES, INC.

CONSOLIDATED BALANCE SHEETS

See accompanying Notes to Consolidated Financial Statements.

F-3

DT INDUSTRIES, INC.

CONSOLIDATED STATEMENT OF OPERATIONS

See accompanying Notes to Consolidated Financial Statements.

F-4

DT INDUSTRIES, INC.

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY

See accompanying Notes to Consolidated Financial Statements.

F-5

DT INDUSTRIES, INC.

CONSOLIDATED STATEMENT OF CASH FLOWS

See accompanying Notes to Consolidated Financial Statements.

F-6

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

NOTE 1 -- LIQUIDITY AND CAPITAL RESOURCES

In recent years, the Company has experienced operating losses, has an
accumulated deficit of $103.4 million, is in default of certain covenants on its
senior credit facility and its operating performance continues to be impacted by
depressed levels of capital spending in the markets it serves. These
circumstances raise substantial doubt about the Company's ability to continue as
a going concern. The Company has initiated discussions with several lenders and
is actively engaged in negotiations to sell certain assets for purposes of
refinancing borrowings under its credit facility, and expects to complete such
refinancing prior to July 2, 2004. While the Company believes it will be able to
replace the facility, the Company may not be able to find new financing on terms
acceptable to the Company or the current bank group. If that is the case, the
current bank group may not be willing to further extend the credit facility. If
the current bank group is not willing to extend the credit facility, new
financing at acceptable terms is not available and the Company is not able to
generate cash by selling assets, the Company would not be able to make the lump
sum payment that will otherwise be due on July 2, 2004. If sufficient funds to
satisfy obligations under the senior credit facility are not available, the
Company would not be able to continue its operations as currently anticipated
and may need to initiate bankruptcy proceedings in order to continue its
operations with minimal disruption and preserve the value of its assets.

The Company's senior credit facility, described in Note 4, matures on July
2, 2004 and borrowings thereunder of approximately $39,492 are presented as
current debt in the accompanying June 29, 2003 consolidated balance sheet.

NOTE 2 -- BUSINESS

DT Industries, Inc. (DTI or the Company) is a designer, manufacturer and
integrator of automated production equipment and systems used to manufacture,
test or package a variety of industrial and consumer products. The Company's
operations are located in North America and Europe, but its products are sold
throughout the world.

Current Adjustment to Historical Financial Results

In connection with the acquisition of Assembly Technology and Test (ATT) in
fiscal 1998, the Company assumed defined benefit plans for the United Kingdom
and Germany divisions. On the opening balance sheet, the Company did not record
a prepaid pension asset related to the U.K. plan nor subsequently adjusted the
prepaid pension asset in following years. The U.K. pension plan was overfunded
by $3,518 at the acquisition date. Due to stock market declines and actuarial
changes, the U.K. plan became underfunded in fiscal 2002 and required a charge
to stockholders' equity of $6,469 to establish a minimum pension liability.
Also, it was determined that a curtailment and a settlement loss occurred in
fiscal 2002 due to enhanced pension benefits provided to 18 individuals
terminated between April and June of fiscal 2002. The curtailment and settlement
losses, though previously disclosed in the notes to the Company's 2002 financial
statements, were not previously recorded as part of the restructuring and
related items charge on the statement of operations for the fiscal year ended
June 30, 2002. The statement of operations impact in fiscal 2002 was an increase
in the restructuring and related items charge of $2,221. The previously reported
balance sheets since the acquisition of Assembly Technology and Test, in fiscal
1998 have also been adjusted to properly reflect the status of the U.K. pension
plan, including the recording of a prepaid pension asset at the acquisition date
of $3,518, the reduction in goodwill due to the additional prepaid pension asset
and a related reduction in goodwill amortization, and adjustments to
stockholders' equity -- other comprehensive income to reflect the minimum
pension liability in fiscal 2002.

The Company also made an adjustment to beginning retained earnings for the
reversal of certain opening balance sheet reserves of $2,160 related to the
acquisitions of Hansford and ATT (in fiscal 1997 and 1998, respectively), which
were established to cover certain contingencies at the date of acquisition and
were

F-7

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

included in costs and earnings in excess of amounts billed on uncompleted
projects. In subsequent years, the Company did not charge the actual losses
against the reserve nor reverse the reserves when the contingencies were
resolved.

The Company has also adjusted net income during each of the first three
quarters of 2003, by reversing the tax benefits recorded during each of those
periods.

A comparison of previously reported to adjusted consolidated statement of
operations line items for the fiscal year ended June 30, 2002 and consolidated
balance sheet line items as of June 30, 2002 is provided in Note 17 to the
audited consolidated financial statements included herein. Adjusted unaudited
consolidated quarterly financial data for the fiscal years ended June 29, 2003
and June 30, 2002 is included in Note 18 to the audited consolidated financial
statements included herein.

June 2002 Recapitalization

On June 20, 2002, the Company consummated a major financial
recapitalization transaction comprised of an amendment to its senior credit
facility (the "Bank Amendment"), a restructuring of its TIDES securities (the
"TIDES Exchange") and the sale of 7.0 million shares of its common stock for
$3.20 per share in a private placement (the "Private Placement"). Each component
of the financial recapitalization is described below.

Bank Amendment

Pursuant to the Bank Amendment:

- the Company's lenders permanently waived previous financial covenant
defaults resulting from its financial performance in fiscal 2002;

- the maturity date of the Company's senior credit facility was extended
from July 2, 2002 to July 2, 2004;

- the total commitment under the facility was reduced to $76,441, comprised
of a $70,000 revolver and a $6,441 term loan (with subsequent reductions
as described in Note 4);

- a monthly asset coverage test (65% of eligible accounts and 25% of
eligible inventory) was established for all revolver advances in excess
of $53,000 (subsequently removed with the July 2003 decreases to the
revolving credit commitment to $45.0 million);

- the interest rate was reset at the Eurodollar Rate plus 4% or the Prime
Rate plus 3.5% for all revolver advances up to $53,000 and the Prime Rate
plus 4% for all revolver advances in excess of $53,000 million
(subsequently changed in the March 2003 amendment increasing the
Eurodollar Rate increment to 4.5% and Prime Rate increment to 4.0%); and

- $1,500 quarterly pro rata reductions of the revolving loan commitment and
term loan were required.

See Note 4 for additional information on the Bank Amendment and further
amendments to the Company's senior credit facility.

TIDES Exchange

As part of the financial recapitalization, the Company consummated the
TIDES Exchange, whereby:

- the TIDES holders exchanged $35,000 of outstanding TIDES and $15,085 of
accrued and unpaid distribution thereon into 6,260,658 shares of common
stock of the Company at a price of $8.00 per share;

F-8

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

- the maturity date of the remaining $35,000 of TIDES was shortened from
May 31, 2012 to May 31, 2008;

- the conversion price of the remaining TIDES was reduced from $38.75 per
share to $14.00 per share;

- the TIDES holders agreed to a "distribution holiday" pursuant to which
distributions on the remaining TIDES will not accrue from April 1, 2002
through July 2, 2004; and

- provided that the Company make the first distribution payment following
the "distribution holiday," it will have the right from time to time to
defer distributions on the TIDES through their maturity in 2008.

See Note 5 for additional information on the TIDES Exchange.

Private Placement

On June 20, 2002, the Company consummated the Private Placement to several
stockholders of 7.0 million shares of its common stock at $3.20 per share. The
Company used the proceeds of this offering to repay indebtedness of
approximately $18,500 under the Company's senior credit facility and to pay
transaction expenses of approximately $3,900.

NOTE 3 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The accounting policies utilized by the Company in the preparation of the
financial statements conform to accounting principles generally accepted in the
United States, and require that management make estimates, judgments and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual amounts could differ from these
estimates.

Certain reclassifications have been made to prior year financial statements
for comparative purposes. These reclassifications had no effect on net losses.

The significant accounting policies followed by the Company are described
below.

Revenue Recognition

Almost all of the Company's net sales are derived from the sale and
installation of equipment and systems primarily under fixed-price contracts. The
Company also derives net sales from the sale of spare and replacement parts and
servicing installed equipment and systems. The Company recognizes revenue under
the percentage of completion method or upon delivery and acceptance in
accordance with SEC Staff Accounting Bulletin No. 101, "Revenue Recognition in
Financial Statements" (SAB 101).

The Company principally utilizes the percentage of completion method of
accounting to recognize revenues and related costs for the sale and installation
of equipment and systems pursuant to customer contracts. These contracts are
typically engineering-driven design and build contracts of automated production
equipment and systems used to manufacture, test or package a variety of
industrial and consumer products. These contracts are generally for large dollar
amounts and require a significant amount of labor hours with durations ranging
from three months to over a year. Under the percentage of completion method,
revenues and related costs are measured based on the ratio of engineering and
manufacturing hours incurred to date compared to total estimated engineering and
manufacturing labor hours. Any revisions in the estimated total costs of the
contracts during the course of the work are reflected when the facts that
require the revisions become known.

For those contracts accounted for in accordance with SAB 101, revenue is
recognized upon shipment (FOB shipping point). The Company utilizes this method
of revenue recognition for products produced in a

F-9

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

standard manufacturing operation whereby the product is built according to
pre-existing bills of materials, with some customization occurring. These
contracts are typically of shorter duration (one to three months) and have
smaller contract values. The revenue recognition for these products follows the
terms of the contracts, which calls for transfer of title at time of shipment
after factory acceptance tests with the customer. If installation of the
products is included in the contracts, revenue for the installation portion of
the contract is recognized when installation is complete.

Costs and related expenses to manufacture products, primarily labor,
materials and overhead, are recorded as cost of sales when the related revenue
is recognized. Provisions for estimated losses on uncompleted contracts are made
in the period in which such losses are determined.

A summary of revenues by fiscal year recognized under the two methods of
accounting is as follows:

Progress billings and cash deposits received from customers on contracts in
process recognized under the percentage of completion accounting method are
reflected as costs and estimated earnings in excess of amounts billed on
uncompleted contracts or billings in excess of costs and estimated earnings on
uncompleted contracts in the consolidated balance sheet. Progress billings and
cash deposits received from customers on contracts in process recognized upon
delivery and acceptance are reflected as customer advances in the consolidated
balance sheet. Costs and estimated earnings in excess of amounts billed on
uncompleted contracts represent costs and earnings recognized in excess of
customer advances billed or collected. Billings in excess of costs and estimated
earnings on uncompleted contracts represent customer advances billed or
collected in excess of costs incurred and earnings recognized. See Note 13 for
additional information.

Capitalization of Certain Engineering Costs

The Company capitalizes the initial engineering costs on multiple systems
orders and amortizes these costs to systems in backlog concurrent with
recognition of revenue on such systems. During fiscal 2003, the Company
capitalized $505 of initial engineering costs in the third quarter related to
the process and equipment development for Earthshell's biodegradable foam
laminate packaging equipment. These costs were reversed in the fourth quarter in
conjunction with the cancellation of the customer orders. The Company did not
capitalize any engineering costs in fiscal 2002. During fiscal 2001, the Company
capitalized approximately $2,400 of initial engineering costs of which
approximately $1,300 was amortized during fiscal 2002 and $1,100 was amortized
in fiscal 2001.

Warranty Accrual

The Company routinely incurs warranty cost after projects are installed and
closed. The Company records these costs as warranty charges and they are
included in cost of sales. Warranty costs are estimated at the time a project is
closed based on the Company's historical warranty experience and consideration
of any known warranty issues.

Principles of Consolidation

The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All significant intercompany transactions and
balances have been eliminated.

F-10

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

Foreign Currency Translation

The accounts of the Company's foreign subsidiaries are maintained in their
respective local currencies. The accompanying consolidated financial statements
have been translated and adjusted to reflect U.S. dollars on the basis presented
below.

Assets and liabilities are translated into U.S. dollars at year-end
exchange rates. Income and expense items are translated at average rates of
exchange prevailing during the year. Adjustments resulting from the process of
translating the consolidated amounts into U.S. dollars are accumulated in a
separate translation adjustment account, included in stockholders' equity.
Common stock and additional paid-in capital are translated at historical U.S.
dollar equivalents in effect at the date of acquisition. Foreign currency
transaction gains and losses are included in earnings currently. Foreign
currency transaction gains and losses were not material for all periods
presented.

Cash and Cash Equivalents

All highly liquid debt instruments purchased with original maturities of
three months or less are classified as cash equivalents. As of June 30, 2002,
the Company had $5,493 of cash received upon the sale of the Hyannis,
Massachusetts facility that was restricted for the prepayment of the Sencorp
Industrial Revenue Bonds that were paid in full in August 2002. See Note 4 for
additional information.

Concentrations of Credit Risk and Allowance for Doubtful Accounts

The Company sells its production equipment and systems to a range of
manufacturing companies. However, historically the Company's five top customers
have accounted for at least 25% of the Company's consolidated net sales. The
Company performs ongoing credit evaluations of its customers and generally does
not require collateral, although many customers pay deposits to the Company
prior to shipment of its products. The Company monitors its exposure at each
balance sheet date and adjusts the allowance account for amounts estimated to be
uncollectible. The Company maintains a specific policy for its allowance for
doubtful accounts as it relates to significantly past due receivables and
requires amounts to be reserved for unless certain indicators from the customer
exist that indicate future payments will be made.

Inventories

Inventories are stated at the lower of cost, which approximates the
first-in, first-out (FIFO) method, or market. Inventories include the cost of
materials, direct labor and manufacturing overhead.

Obsolete or unsalable inventories are reflected at their estimated
realizable values. Obsolescence is determined by analyzing historical and
forecasted future usage and/or inventory aging. Inventory that has not had
activity during the past year is fully reserved. The portion of the reserve
related to excess inventory is determined by analyzing historical and forecasted
usage against the amount of inventory on hand.

Property, Plant and Equipment

Property, plant and equipment are recorded at cost and are depreciated
using the straight-line method over the estimated useful lives of the assets,
which range from 3 to 39.5 years. These assets are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. Such impairment tests are based on a comparison
of undiscounted cash flows to the recorded value of the asset. If impairment is
indicated, the asset is written down to its fair value. During fiscal 2003, the
Company recorded a fixed asset impairment charge of $2,500 which, along with the
goodwill impairment charge in fiscal 2003, is separately reflected in operating
expenses on the statement of operations. There were no such fixed asset charges
during fiscal 2002 or 2001.

F-11

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

Expenditures for repairs, maintenance and renewals are expensed as
incurred. Expenditures that improve an asset or extend its estimated useful life
are capitalized. When properties are retired or otherwise disposed of, the
related cost and accumulated depreciation are removed from the accounts and any
gain or loss is included in income.

Goodwill and Intangible Assets

The Company elected to early adopt Statement of Financial Accounting
Standards No. 142, "Goodwill and Other Intangible Assets" (SFAS 142) in the
first quarter of fiscal 2002. SFAS 142 addresses the financial accounting and
reporting for goodwill and other intangible assets subsequent to their initial
recognition. Among the requirements of SFAS 142 are:

- Goodwill and indefinite-lived intangible assets are not amortized.
Discontinuance of goodwill amortization reduced pre-tax amortization
expense by $5,287 in fiscal 2002;

- Goodwill and indefinite-lived intangible assets are tested for impairment
at the reporting unit level annually or more frequently if circumstances
indicate potential impairment;

- The amortization period of intangible assets that have finite lives are
not limited to 40 years; and

- Additional financial statement disclosures about goodwill and intangible
assets are required.

See Note 11 for discussion of goodwill impairment and the additional
financial statement disclosures.

Research and Development

Research and development costs are expensed as incurred. These costs
approximated $1,914, $3,445 and $2,785 in fiscal 2003, 2002 and 2001,
respectively, and are included as selling, general, and administrative expenses
in the accompanying consolidated statement of operations.

Fair Value of Financial Instruments

The Company has financial instruments consisting of floating rate long-term
debt and derivative instruments, consisting of foreign exchange forward
contracts. The Company has determined that the fair value of its long-term debt
approximates its book value at June 29, 2003. Our international divisions
utilize foreign exchange forward contracts to manage foreign currency risks on
customer orders denominated in a foreign currency other than their functional
currency. The Company accounts for these contracts as cash flow hedges under
SFAS 133, "Accounting for Derivative Instruments and Hedging Activity" which
requires all derivatives to be reported on the balance sheet at fair value, with
changes in fair value recognized either in earnings or equity, depending on the
nature of the underlying transaction and how effective the derivative is at
offsetting price movements in the underlying exposure. The Company has two
contracts outstanding at June 29, 2003 with a notional amount of approximately
$5,100. The carrying amount and fair value of the contracts at June 29, 2003
were $297. Both contracts expire within 120 days. The estimated fair values of
the foreign exchange forward contracts were calculated based on market rates.
These values represent the estimated amounts the Company would receive to
terminate the contracts. The contracts maintain high correlation with changes in
the underlying currency and therefore qualify for hedge accounting.

Income Taxes

The Company files a consolidated federal income tax return which includes
its domestic subsidiaries. The Company has adopted Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS 09). Under
SFAS 109, the current or deferred tax consequences of a transaction are measured
by applying the provisions of enacted laws to determine the amount of taxes
payable currently or in future years. Deferred income taxes are provided for
temporary differences between the income tax bases of

F-12

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

assets and liabilities, and their carrying amounts for financial reporting
purposes. SFAS 109 also requires that a valuation allowance be recorded against
any deferred tax assets that are not likely to be realized in the future. See
Note 7 for additional information.

Earnings Per Share

Statement of Financial Accounting Standards No. 128, "Earnings Per Share"
(SFAS 128) requires the computation of basic (Basic EPS) and diluted (Diluted
EPS) earnings per share. Basic EPS is based on the weighted average number of
outstanding common shares during the period but does not consider dilution for
potentially dilutive securities.

Employee Stock-Based Compensation

The Company accounts for employee stock options in accordance with
Accounting Principles Board No. 25, "Accounting for Stock Issued to Employees"
(APB 25). Under APB 25, the Company applies the intrinsic value method of
accounting. For employee stock options accounted for using the intrinsic value
method, no compensation expense is recognized because the options are granted
with an exercise price equal to the market value of the stock on the date of
grant. Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" (SFAS 123) prescribes the recognition of compensation
expense based on the fair value of options or stock awards determined on the
date of grant. However, SFAS 123 allows companies to continue to apply the
valuation methods set forth in APB 25. For companies that continue to apply the
valuation methods set forth in APB 25, SFAS 123 mandates certain pro forma
disclosures as if the fair value method had been utilized.

Had compensation costs for the Company's stock incentive plans been
determined based on the fair value of the options on the grant dates consistent
with the methodology prescribed by SFAS 123, the Company's loss to common
stockholders and loss to common stockholders per basic and diluted share would
have been increased to the pro forma amounts indicated below. Because future
stock option awards may be granted, the pro forma impacts shown below are not
necessarily indicative of the impact in future years.

Comprehensive Income

Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" requires the disclosure of the components of comprehensive
income or loss in the financial statements. The components of comprehensive loss
included in the Company's financial statements are net loss, minimum pension
liability, foreign currency translation and the valuation adjustment on
derivative financial instruments, which are disclosed in the consolidated
statement of changes in stockholders' equity.

F-13

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

Fiscal Year

The Company uses a 52-53 week fiscal year that ends on the last Sunday in
June.

Accounting Pronouncements

In January 2003, the FASB issued FASB Interpretation No. 46 (FIN 46),
"Consolidation of Variable Interest Entities," which addresses the reporting and
consolidation of variable interest entities as they relate to a business
enterprise. This interpretation incorporates and supersedes the guidance set
forth in ARB No. 51, "Consolidated Financial Statements." It requires the
consolidation of variable interests into the financial statements of a business
enterprise if that enterprise holds a controlling financial interest via other
means than the traditional voting majority. The disclosure requirements of FIN
46 are effective immediately for variable interest entities created after
January 31, 2003 and thereafter. In October 2003, the FASB decided to defer the
implementation date of FIN 46. The new effective date for FIN 46 is the end of
the first interim or annual period subsequent to December 15, 2003, which is the
second quarter of fiscal 2004 for the Company. The Company has not created any
new variable interest entities since January 31, 2003 and is currently assessing
the impact of adopting FIN 46.

In May 2003, the FASB issued FASB Statement No. 150, "Accounting for
Certain Financial Instruments with Characteristics of both Liabilities and
Equity." This Statement establishes standards for how an issuer classifies and
measures certain financial instruments with characteristics of both liabilities
and equity and requires that an issuer classify a financial instrument that is
within its scope as a liability. This Statement is effective for financial
instruments entered into or modified after May 31, 2003, and otherwise is
effective at the beginning of the first interim period beginning after June 15,
2003 which is the first quarter of fiscal 2004 for the Company. The Company is
currently considering the impact this standard will have, in conjunction with
FIN 46, with respect to its TIDES securities.

NOTE 4 -- FINANCING

Long-term debt consisted of the following at the end of the last two fiscal
years:

Due to financial covenant defaults in the fourth quarter of fiscal 2003 and
the first quarter of fiscal 2004, no further borrowings are currently available
under the revolving portion of the Company's senior credit facility. The Company
is currently negotiating with its lenders for a waiver of these defaults. If the
Company does not obtain waivers for its current financial covenant defaults in
the near future, its ability to meet its liquidity needs prior to July 2, 2004,
the maturity date of the credit facility, could be materially adversely
affected.

On June 20, 2002, the Company extended the senior credit facility, which
was scheduled to mature on July 2, 2002, through an amendment to the term and
revolving loan agreement. As a result of covenant

F-14

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

defaults, the agreement was further amended in March and July 2003 resulting in
certain revisions to the terms of the agreement. Significant terms of the
agreement as amended through July 2003 were:

- A maturity of July 2, 2004;

- $1,500 quarterly scheduled commitment reductions prorated between the
term and revolving loan commitments through June 2004;

- Interest rates for amounts borrowed under the credit facility are based
on Prime Rate plus 4.0% or Eurodollar Rate plus 4.5%. At June 29, 2003,
interest rates on outstanding indebtedness were 8.0% on domestic
borrowings and 8.17% on Sterling Pound borrowings.

The amended facility requires commitment fees of 0.50% per annum payable
quarterly on any unused portion of the revolving credit facility, an annual
agency fee of $150 and a 1% annual facility fee. The annual facility fee will be
forgiven if the debt is paid in full and the credit facility is cancelled before
the annual due dates. Total borrowing availability under the credit facility, as
of June 29, 2003, was $19,415. Borrowings under the credit facility are secured
by substantially all of the assets of DTI and its domestic subsidiaries.

On June 26, 2002, the Company completed a sale/leaseback on the facility in
Hyannis, Massachusetts and repaid the outstanding balance of $5,000 on
Massachusetts Industrial Finance Agency Multi-Mode Industrial Development
Revenue Bonds 1998 Series A on August 1, 2002.

NOTE 5 -- COMPANY-OBLIGATED, MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED
SECURITIES OF SUBSIDIARY DT CAPITAL TRUST HOLDING SOLELY CONVERTIBLE
JUNIOR SUBORDINATED DEBENTURES OF THE COMPANY (CONVERTIBLE PREFERRED
SECURITIES OR TIDES)

On June 12, 1997, the Company completed a private placement to several
institutional investors of 1,400,000 7.16% Convertible Preferred Securities
(liquidation preference of $50 per Convertible Preferred Security). The
placement was made through the Company's wholly-owned subsidiary, DT Capital
Trust (Trust), a Delaware business trust. The Convertible Preferred Securities
represent undivided beneficial ownership interests in the Trust. The sole assets
of the Trust are the 7.16% Convertible Junior Subordinated Deferrable Interest
Debentures Due 2012 (Junior Debentures) issued by the Company that were acquired
with the proceeds from the offering as well as the sale of common securities of
the Trust to the Company. The Company's obligations under the Convertible Junior
Subordinated Debentures, the Indenture pursuant to which they were issued, the
Amended and Restated Declaration of Trust of the Trust and the Guarantee of DTI,
taken together, constitute a full, irrevocable and unconditional guarantee by
DTI of amounts due on the Convertible Preferred Securities. As originally
structured, the Convertible Preferred Securities were convertible at the option
of the holders at any time into the common stock of DTI at an effective
conversion price of $38.75 per share and were mandatorily redeemable in 2012.
The Convertible Preferred Securities are redeemable at the Company's option
after June 1, 2000.

On June 20, 2002, the Company completed a financial recapitalization
transaction pursuant to which, among other things, in the TIDES Exchange the
holders of the Convertible Preferred Securities agreed to restructure the
Convertible Preferred Securities (and the Junior Debentures of the Company held
by the Trust) such that, among other things, $35,000 of the outstanding
Convertible Preferred Securities plus approximately $15,085 in accrued and
unpaid distributions on the Convertible Preferred Securities were exchanged for
6,260,658 shares of common stock. The conversion price of the remaining $35,000
outstanding Convertible Preferred Securities (and the Junior Debentures of the
Company held by the Trust) was lowered to $14.00 per share, the distributions on
the Convertible Preferred Securities do not accrue from April 1, 2002 until July
2, 2004, and the maturity date of the Convertible Preferred Securities was
accelerated to May 31, 2008. Dividend expense of $1,604 annually on the
remaining Convertible Preferred Securities is recorded reflecting an approximate
effective yield of 4.6% over the life of the remaining Convertible Preferred
Securities.

F-15

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

As a result of the TIDES Exchange, the Company recorded a gain on
conversion of the trust preferred securities of $16,587, net of tax of $8,787,
in June 2002. The shares were valued for book and tax purposes based on the
market price of the Company's common stock on the closing date of the TIDES
Exchange. The gain on conversion of the trust preferred securities was recorded
directly to equity and has been reflected on the consolidated statement of
operations below net loss to arrive at loss to common stockholders in fiscal
2002.

NOTE 6 -- DISPOSITIONS

The following table summarizes certain information regarding the Company's
disposal of assets during the past three fiscal years:

The losses on the sale of DTMP and S&K are reflected in the net loss on
disposal of assets line on the consolidated statement of operations for the
fiscal year ended June 24, 2001. The net sales and operating loss of HPP in
fiscal 2002 were $792 and $129, respectively. The combined net sales and
operating profit of Vanguard, DTMP, S&K and HPP in fiscal 2001 were $46,335 and
$1,124, respectively.

NOTE 7 -- INCOME TAXES

Loss before provision (benefit) for income taxes was taxed under the
following jurisdictions:

F-16

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

The provision (benefit) for income taxes charged to operations was as
follows:

Deferred tax assets (liabilities) are comprised of the following:

The deferred tax assets valuation allowance has been recorded to reflect
the potential non-realization of NOL carryforwards and deferred tax assets in
the United States. At June 29, 2003 the Company had available

F-17

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

domestic NOL carryforwards for income tax reporting purposes of approximately
$33,703, which will begin to expire in 2019.

Included in the deferred tax liabilities (other line item) is $8,285 of
U.S. Federal refunds received related to a bad debt deduction taken on the
fiscal 2002 tax return, a portion of which relates to the Competent Authority
request discussed below.

Kalish, Inc., a wholly-owned Canadian subsidiary of the Company, agreed to
an assessment by the Canadian Customs and Revenue Agency for its tax years 1996
through 2001. The additional taxable income agreed to in the assessment was
offset by NOL carryforwards and credits that would have otherwise been included
in the deferred tax asset valuation allowance. As the majority of the assessment
relates to transfer pricing adjustments, the Company has submitted a Competent
Authority request pursuant to the United States-Canada Income Tax Treaty to
reflect the results of the Canadian audit in the Company's United States income
tax returns for the same periods. While the final outcome of these proceedings
cannot be predicted, the Company has fully reserved for this matter pending
final resolution.

The effective tax rates differ from the U.S. Federal income tax rate for
the following reasons:

The above income tax disclosures exclude the effect of the gain on
conversion of preferred securities in fiscal 2002 as described in Note 5.

NOTE 8 -- RETIREMENT PLANS

The Company offers substantially all of its employees a retirement savings
plan under Section 401(k) of the Internal Revenue Code. Each employee may elect
to enter a written salary deferral agreement under which a maximum of 100% of
their salary, subject to aggregate limits required under the Internal Revenue
Code, may be contributed to the plan. In fiscal 2003, the Company suspended any
matching, mandatory or discretionary contributions to the plan. During the
fiscal years ended June 29, 2003, June 30, 2002 and June 24, 2001, the Company
made contributions of approximately $1,867, $3,549 and $4,557, respectively.

During fiscal 1999, the Company created a non-qualified deferred
compensation plan for certain executive employees. Each employee may elect to
enter a written salary deferral agreement under which a maximum of 100% of their
salary, less any amounts contributed under the 401(k) plan, may be contributed
to the plan. In fiscal 2003, the Company discontinued any matching, mandatory or
discretionary contributions to the plan.

F-18

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

In connection with the acquisition of Assembly Technology and Test, Ltd. in
fiscal 1998, the Company assumed defined benefit plans for the international
divisions. The following sets forth reconciliations of the projected benefit
obligations (PBO) of the defined benefit plans:

The following sets forth the reconciliations of the fair value of plan
assets of the defined benefit plans:

The following sets forth the funded status of the defined benefit plans as
of the end of the last two fiscal years:

F-19

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

The following sets forth the defined benefit pension plans' net periodic
pension cost:

Included in the Other line in fiscal 2002 was $2,221 of
curtailment/settlement costs recorded as a restructuring charge on the adjusted
consolidated statement of operations for the fiscal year ended June 30, 2002.

The weighted-average assumptions used to determine the PBO are as follows:

Recognition of a minimum pension liability is necessary whenever the
actuarial present value of accumulated pension benefits exceeds available plan
assets. Recording a minimum pension liability adjustment has no impact on the
results of operations or cash flows. At June 29, 2003 and June 30, 2002, the
Company recognized minimum pension obligations of $15,421 and $4,422,
respectively, for its pension plans. The adjustments include charges to equity
in those years of $10,294 and $6,469, respectively. Consistent with the overall
tax situation of the Company as of June 29, 2003, a full valuation allowance has
been provided through a charge to equity for the deferred tax assets.

Effective December 31, 2001, the Company cancelled all of its domestic post
retirement medical and life insurance benefit plans. As a result of the
cancellation, the Company reversed its post retirement benefit obligation
resulting in income of $1,325 in fiscal year 2002.

NOTE 9 -- STOCK COMPENSATION PLANS

The Company has three stock incentive plans: the 1994 Employee Stock Option
Plan (Employee Plan), the 1994 Directors Non-Qualified Stock Option Plan
(Directors Plan) and the 1996 Long-Term Incentive Plan (LTIP Plan).

The Employee Plan provides for the granting of options to the Company's
executive officers and key employees to purchase shares of common stock at
prices equal to the fair market value of the stock on the date of grant. Options
to purchase up to 900,000 shares of common stock may be granted under the
Employee Plan. Options outstanding at June 29, 2003 entitle the holders to
purchase common stock at prices ranging between $1.69 and $31.25 per share.
Options outstanding become exercisable over five years from the date of grant.
The right to exercise the options expires ten years from the date of grant or
earlier if an option holder ceases to be employed by the Company.

The Directors Plan provides for the granting of options to the Company's
directors, who are not employees of the Company, to purchase shares of common
stock at prices equal to the fair market value of the stock on the date of
grant. Options to purchase up to 100,000 shares of common stock may be granted
under

F-20

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

the Directors Plan. Options outstanding at June 29, 2003 entitle the holders to
purchase common stock at prices ranging between $4.19 and $30.25 per share.
Options outstanding become exercisable with respect to one-fourth of the shares
covered thereby on each anniversary of the date of grant, commencing on the
second anniversary of such date. All options granted under the Directors Plan
expire ten years from the date of grant or earlier if a director leaves the
board of directors of the Company.

The LTIP Plan provides for the granting of the following four types of
awards on a stand alone, combination, or a tandem basis: nonqualified stock
options, incentive stock options, restricted shares and performance stock
awards. The LTIP Plan provides for the granting of up to 600,000 shares of
common stock. Grants to date consist of restricted shares and non-qualified
stock options entitling the holders to purchase common stock at prices ranging
between $4.19 and $37.50 per share. The exercise price of such non-qualified
stock options is equal to the fair market value of the stock on the date of the
grant. Options outstanding become exercisable over five years from the date of
grant. The right to exercise the options expires ten years from the date of
grant or earlier if an option holder ceases to be employed by the Company.

The Company issued 20,000 shares, 50,000 shares and 230,000 shares or
restricted common stock of the Company in fiscal 2003, 2002 and 2001,
respectively, with four-year vesting periods under the LTIP Plan. Upon issuance
of the restricted shares, unearned compensation expense equivalent to the market
value at the date of grant was charged to Stockholders' Equity and will be
amortized to expense over the vesting period. The lapsing of restrictions on
these shares will be accelerated in certain circumstances, one of which is a
change in control of the Company.

A summary of the status of the Company's stock incentive plans as of June
29, 2003, June 30, 2002 and June 24, 2001, and changes during the years then
ended are presented below:

The following table summarizes certain information for options currently
outstanding and exercisable at June 29, 2003:

F-21

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

The fair value of the options granted (which is amortized over the option
vesting period in determining the pro forma impact) is estimated on the date of
grant using the Black-Scholes multiple option-pricing model with the following
weighted average assumptions:

The weighted average fair value of options granted during the years ended
June 29, 2003, June 30, 2002 and June 24, 2001 was $1.85, $3.91 and $2.63 per
share, respectively.

NOTE 10 -- COMMITMENTS AND CONTINGENCIES

The Company leases land, buildings, machinery, equipment and furniture
under various noncancelable capital and operating lease agreements. Future
minimum lease payments under noncancelable capital and operating leases are as
follows:

Total lease expense under noncancelable operating leases was approximately
$7,048, $6,227 and $7,133 for the years ended June 29, 2003, June 30, 2002 and
June 24, 2001, respectively.

The staff of the Securities and Exchange Commission (the "Commission") is
conducting an investigation of the accounting practices at our Kalish and
Sencorp subsidiaries that led to the restatements of our consolidated financial
statements for fiscal years 1997, 1998 and 1999 and the first three quarters of
fiscal 2000, as well as the issues at AMI that led to the accounting adjustments
to our previously reported audited consolidated financial results for the fiscal
years ended June 24, 2001, June 25, 2000 and June 27, 1999, and to our
previously reported unaudited consolidated financial results for the first three
fiscal quarters of 2002. We are cooperating fully with the Commission in
connection with its investigation and cannot currently predict the duration or
outcome of the investigation.

In November 1998, pursuant to the agreement by which we acquired Kalish,
Mr. Graham L. Lewis, a former executive officer and director of DTI, received an
additional payment based on Kalish's earnings for each of the three years after
the closing. As a result of the prior restatement due to accounting practices at
Kalish, we believe that the additional payment should not have been made. During
fiscal 2001, we commenced legal action against Mr. Lewis in Superior Court,
Civil Division in Montreal, Quebec to recover this payment and certain bonuses
paid to Mr. Lewis. Mr. Lewis has counter-sued for wrongful termination and is
seeking to recover monetary damages, including severance, loss of future income,
emotional distress and harm to

F-22

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

reputation, equal to $2.8 million Canadian dollars. There has been little
discovery in these actions to date. Management believes that our suit against
Mr. Lewis has merit. Management further believes that Mr. Lewis' counter-suit is
without merit. We intend to pursue vigorously our claims against Mr. Lewis and
defend against his counter-suit.

In July 2003, Green Packaging SDN BHD and Green Earth Packaging Corp.
(collectively, "Green Packaging") filed a complaint against Detroit Tool &
Engineering Company ("DTE"), a wholly-owned subsidiary of DTI, in the Superior
Court of the State of California, County of Santa Barbara. As causes of action,
the complaint alleges breach of contract, misappropriation of trade secrets,
breach of confidence, unfair business practices, conversion and similar claims
arising out of a purchase order pursuant to which DTE was to manufacture for
Green Packaging four lines of equipment for the purpose of producing
biodegradable food packaging using technology and processes licensed by Green
Packaging from EarthShell Corporation. In its complaint, Green Packaging seeks
damages "believed to be in excess of $3.3 million," punitive damages and
injunctive relief. Prior to the filing of the complaint, Green Packaging had
notified DTE that it was canceling its purchase order for the equipment, and DTE
had invoiced Green Packaging for cancellation charges in excess of $6.4 million,
which has not been paid. DTE filed a motion to quash service of the summons and
complaint for lack of personal jurisdiction. Rather than responding to the
motion, on September 29, 2003 Green Earth amended its complaint and added DTI as
a defendant in that action. The causes of action in the amended complaint are
the same as those asserted in the original complaint, with the addition of a
breach of guarantee and breach of an additional agreement claims. The Company
intends to file a motion to quash service of the summons and complaint for lack
of personal jurisdiction. In addition, the Company intends to vigorously defend
Green Packaging's action and to vigorously pursue its claim against Green
Packaging for the above-referenced cancellation charges.

Regarding the Green Packaging project, the Company had incurred
approximately $8,000 in costs, received approximately $3,300 from the customer
and established a reserve of approximately $1,700. The Company has since
contracted to sell a majority of the inventory to another customer and expects
to recover the approximate $3,000 of net value on its balance sheet at June 29,
2003.

Product liability claims are asserted against the Company from time to time
for various injuries alleged to have resulted from defects in the manufacture
and/or design of its products. At June 29, 2003, there are currently seven such
claims either pending or that may be asserted against the Company. The Company
does not believe that the resolution of these claims, either individually or in
the aggregate, will have a material adverse effect on its financial condition,
results of operations or cash flow. Product liability claims are covered by the
Company's comprehensive general liability insurance policies, subject to certain
deductible amounts. The Company has established reserves for these deductible
amounts, which it believes to be adequate based on its previous claims
experience. However, there can be no assurance that resolution of product
liability claims in the future will not have a material adverse effect on the
Company's financial condition, results of operations or cash flow.

In addition to product liability claims, from time to time the Company is
the subject of legal proceedings, including claims involving employee,
commercial, general liability matters and similar claims, that are incidental to
the ordinary course of its business. Except as described above, there are no
such material claims currently pending. The Company maintains comprehensive
general liability insurance that it believes to be adequate for the continued
operation of our business.

NOTE 11 -- GOODWILL AND INTANGIBLE ASSETS

In the first quarter of fiscal 2002, the Company elected to early-adopt the
provisions of SFAS 142. The carrying value of goodwill is assessed for
recoverability by management at least on an annual basis. The annual impairment
date has been designated as the last day of the fiscal year.

F-23

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

The changes in the carrying amount of goodwill for the fiscal years ended
June 29, 2003 and June 30, 2002 were as follows:

At June 29, 2003, the Company had one definite-lived intangible asset. This
asset is unpatented technology and the gross carrying amount and accumulated
amortization at June 29, 2003 were $576 and $424, respectively. The amortization
expense related to the intangible asset was $116 for each of the fiscal years
ended June 29, 2003, June 30, 2002 and June 24, 2001. Amortization expense is
expected to be $116 for fiscal 2004 and $36 for fiscal 2005. The gross carrying
amount, accumulated amortization and amortization expense will vary depending on
the prevailing foreign currency exchange rate.

Prior to the adoption of SFAS 142, the excess of the purchase price over
the fair value of net assets acquired in business combinations (goodwill) was
capitalized and amortized on a straight-line basis over periods ranging from 15
to 40 years. Goodwill amortization charged to pre-tax income for the year ended
June 24, 2001 was approximately $5,296. Accumulated amortization at June 29,
2003 was approximately $28,372. A reconciliation of reported loss to common
stockholders and loss to common stockholders per diluted common share adjusted
for the exclusion of goodwill amortization for the last three completed fiscal
years is as follows:

The carrying value of goodwill is assessed for recoverability by management
based on an analysis of future expected cash flows from the underlying
operations of the Company's reporting units, unless other evidence of fair value
exists such as negotiated selling prices between willing parties or other
evidence of fair value determined by an independent party. The Company's
reporting units represent the various components of the Company's segments for
which discrete financial information is available and management regularly
reviews the results. All goodwill has been assigned to reporting units. Each
year the Company generates operating forecasts at the reporting unit level, upon
which the future expected cash flows are based. Under SFAS 142, the impairment
analysis is a two-step process whereby, in the first step, the fair value of the
Company's reporting units (as estimated using discounted future cash flows) is
compared to the respective carrying value

F-24

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

of the reporting unit as an indication of whether impairment exists. If the
carrying value exceeds the fair value, a second step is required whereby the
fair value of the reporting unit is allocated to all of the assets and
liabilities of the reporting unit resulting in an implied fair value of goodwill
that is then compared to the carrying value of goodwill.

Management performed the annual impairment assessment as of June 29, 2003.
Due to the continuing decline in the operating results of certain reporting
units and management's assumptions regarding future performance based on the
overall economic recession and reduction in capital spending levels, the Company
determined that goodwill recorded at certain reporting units had been impaired
and recorded a goodwill impairment charge of $49,380 in accordance with SFAS 142
($29,390 related to the Precision Assembly segment and $19,990 related to the
Packaging Systems segment). The fair value of the goodwill was based on
discounted expected future cash flows of the related reporting unit except for
the Packaging Systems reporting unit, which utilized an independent valuation of
fair value. The Company used a discount rate of 11%, which represents the
weighted average cost of capital adjusted for risk factors related to the
Company's reporting units.

As of June 30, 2002, management determined that the goodwill recorded at
the Company's reporting units had not been impaired based on the annual
impairment assessment. The Company calculated the present value of expected cash
flows to determine the fair value of the reporting units using a discount rate
of 10%, which represents the weighted cost of capital.

During the fourth quarter of fiscal 2001, management determined that an
assessment of the recoverability of goodwill by division was necessary. The
decision was based on a continuing decline in the operating results of certain
divisions and management assumptions regarding future performance based on the
overall economic recession and an evaluation of the organizational and
operational structure of the Company. The assessment was performed at the
divisional level as the divisions maintain distinctively identifiable goodwill
and represent the lowest level of identifiable cash flows. The Company
determined that goodwill recorded for certain subsidiaries had been impaired and
recorded an impairment charge of $38,219 in accordance with SFAS 121. The fair
value of the goodwill was based on discounted expected future cash flows of the
related division, except as described below regarding the Stokes division.

The components of the fiscal 2001 goodwill write-off were as follows:

Material Processing segment
Sencorp (Hyannis, Massachusetts).......................... $10,730
Stokes (Bristol, Pennsylvania)............................ 5,943
-------
16,673
Precision Assembly segment
Mid-West (Buffalo Grove, Illinois......................... $10,000
Packaging segment
Kalish (Montreal, Quebec)................................. 7,353
Assembly & Test segment
Hansford (Rochester, New York)............................ 4,193
-------
$38,219
=======

Each of these components relates to assets to be held and used, other than
the Stokes portion, which at the time of the analysis was under a letter of
intent to be sold. The value stated in the letter of intent was used as the fair
market value for purposes of determining goodwill impairment for the Stokes
division. The proposed sale of Stokes was ultimately terminated and the business
has since been rationalized into our Hyannis, Massachusetts operation. The total
fiscal 2001 impairment charge related to the Stokes division was

F-25

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

$9,249 of which $5,943 was for goodwill impairment, $2,738 was for excess and
obsolete inventory and $568 was for other asset write downs. The goodwill
impairment is included in the goodwill impairment charge separately disclosed on
the statement of operations, the excess and obsolete inventory charge is
included in cost of sales and the other asset write-downs are included in
selling, general and administrative expenses. During fiscal 2001, prior to the
charges discussed above, the Stokes division had revenues of $6,707 and an
operating loss of $1,238. At June 24, 2001, the carrying value of the net assets
of Stokes was approximately $3,693. The net loss on the disposal of Scheu &
Kniss recorded in fiscal 2001, as discussed in Note 6, included a full
impairment of the related goodwill of $5,018.

NOTE 12 -- DEPENDENCE ON SIGNIFICANT CUSTOMERS

Total net sales to a customer in the electronics industry, across the
Material Processing and Precision Assembly segments, were $54,409, $99,578 and
$141,884 in fiscal 2003, 2002 and 2001, respectively. Total net sales to a
customer in the appliance industry for the Material Processing segment were
$16,314 in fiscal 2003. Total net sales to two customers in the automotive
industry for the Assembly & Test segment were $16,708 and $11,438 in fiscal
2003. Total net sales to a customer in the tire industry for the Material
Processing segment were $38,690 in fiscal 2001.

At June 29, 2003, the Company had total trade receivables from the four
significant customers mentioned above of $8,843, of which $7,026 was collected
subsequent to year-end.

Trade receivables recorded for the significant customer in the electronics
industry at June 30, 2002 were $19,262, most of which was collected subsequent
to year-end.

NOTE 13 -- SUPPLEMENTAL BALANCE SHEET INFORMATION

F-26

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

The Company routinely incurs warranty costs after projects are installed
and completed. The Company reserves for such warranty costs based on its
historical warranty experience and consideration of any known warranty issues.

A summary and rollforward of the warranty reserves for the previous three
years are as follows:

F-27

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

NOTE 14 -- WRITE-DOWN OF ASSETS IN FISCAL 2001

The Company wrote down $21,809 of assets in the fourth quarter of fiscal
2001. A summary and roll-forward of the specific reserves are as follows:

The Company recorded inventory related charges of $9,811 (excess and
obsolete reserves and fair market value adjustments) in the fourth quarter of
fiscal 2001 resulting in an ending inventory reserve of $10,552. The Company
also took other inventory-related write-offs of $2,218 in June 2001, primarily
related to work-in-process items deemed unrecoverable by management.

The $9,811 charge, which increased excess and obsolete reserves and
adjusted certain inventory items to fair market value was comprised of the
following items:

- a charge of $1,400 to write-down the remaining assets of the discontinued
extrusion product line to an estimated fair market value of $400. The
product line was sold in fiscal year 2002 for $200 resulting in an
additional loss of $200 in fiscal year 2002;

- a charge of $2,738 related to excess and obsolete inventory of the Stokes
division based on a letter of intent to sell the Stokes assets. The sale
of the net assets of the Stokes division did not ultimately occur; and

- a charge of $5,673 related to various divisions that were determined to
have excess or obsolete inventory issues or inventory market value
concerns.

The inventory reserves established in fiscal 2001 assumed an estimated
salvage value on certain of the inventory items being reserved. The Company was
not able to achieve the estimated salvage value as it disposed of the inventory
in fiscal 2002 partially accounting for the incremental expense in fiscal 2002.
The Company's disposal activity during fiscal 2002 consisted of selling items
for scrap value, returning items to suppliers for credit and throwing items
away. The Packaging segment accounts for $4,092 of the reserve at June 30, 2002,
of which $2,176 is related to replacement parts held at facilities closed in
fiscal 2002 and deemed obsolete.

The Company recorded $8,330 of accounts receivable write-offs in the fourth
quarter of fiscal 2001 resulting in an accounts receivable allowance for
doubtful accounts of $8,921 at June 24, 2001. Of this total, $4,500 related to
two specific projects for which the Company determined it would not be able to
collect. The remaining reserve related to accounts deemed by management to be
uncollectible. Due to increased collection efforts, $2,498 of the accounts
receivable reserved for were collected in 2002 and therefore the related
reserves were reversed.

In addition to the above amounts, the Company also took an additional
charge of $1,450 in the fourth quarter of fiscal 2001 primarily related to
write-offs of fixed assets. The fixed asset write-off consisted primarily of
software development costs for systems that were expected to be rolled out
company-wide, which the new management team decided not to pursue.

The inventory related charges of $12,029 and the write-offs of fixed assets
of $1,450 were included in cost of sales in the statement of operations. The
accounts receivable write-offs of $8,330 were included in selling, general and
administrative expenses.

F-28

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

NOTE 15 -- RESTRUCTURING

FISCAL 2003 RESTRUCTURING

On December 13, 2002, the Company announced the closure of its Erie,
Pennsylvania facility (also known as Assembly Machines, Inc.), transferring
manufacturing operations and the customer base to its Buffalo Grove, Illinois
facility as part of its Precision Assembly segment. The Company completed the
shutdown and sold the facility in March 2003. The Company recorded a
restructuring charge in December 2002 of $1,700, including severance costs of
$598 for the termination of 62 employees. The remaining restructuring charge of
$1,102 included a $1,049 charge to write-down the land and building to the
estimated fair market value and $53 for non-cancellable office and plant
equipment leases.

In June 2003, the Company accrued an additional $500 restructuring charge
for idle facility lease commitment costs primarily related to its Rochester, New
York leased facility.

The following table summarizes the changes in the restructuring accruals
for the fiscal year ended June 29, 2003:

In July 2003, the Company announced the decision to shut down the
manufacturing operations in Buffalo Grove, Illinois of the Precision Assembly
segment. Future projects will be manufactured in Lebanon, Missouri as part of
the Material Processing segment. In fiscal 2004, the Precision Assembly segment
will be consolidated into the Material Processing segment for financial
reporting purposes. The Company will record a restructuring charge in the first
quarter of fiscal 2004 in connection with the shutdown of the Buffalo Grove
facility.

FISCAL 2002 RESTRUCTURING

During fiscal 2002, the Company announced several actions in connection
with its restructuring plan as outlined below. These actions resulted in an
aggregate of $12,553, as adjusted, of restructuring charges in fiscal 2002, net
of the restructuring charge reversal discussed below.

- Closure of its Rochester, New York facility, including termination of
employees in the fourth quarter of 2002 and the transfer of the customer
base of this facility primarily to its Dayton, Ohio and Buffalo Grove,
Illinois facilities. The closure was announced January 24, 2002. The
restructuring costs, which totaled $3,648 were recorded in the third
quarter of fiscal 2002 and included severance costs of $1,334 for the
termination of 114 employees. As of June 30, 2002, four employees
remained for final administrative duties, all of whom were discharged by
the end of the first quarter of fiscal 2003. The remaining restructuring
costs included $1,068 for future facility lease and related costs, $1,146
for assets write-offs and $100 for office equipment lease terminations
and miscellaneous other charges. The asset write-offs included the
remaining value of leasehold improvements, the computer system and show
machines. In fiscal 2003, the Company recorded an additional
restructuring charge of $500 for additional facility lease and related
costs.

F-29

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

- Closure of its Montreal, Quebec facility, including termination of
employees in August 2002, and the transfer of its customer base and
assets to its operations in Leominster, Massachusetts. The closure was
announced March 22, 2002. The restructuring costs of $2,299 were recorded
in the third quarter of fiscal 2002 and included severance costs of $993
for the termination of approximately 83 employees, offset by a reversal
of $451 associated with severance accrual recorded in fiscal 2001. The
terminations included 8 employees in fiscal 2002 and 75 employees in
fiscal 2003. The remaining restructuring costs included $664 for future
facility lease and related costs, $1,056 for asset write-offs and $37 of
other costs. The asset write-offs included the remaining value of
leasehold improvements and the computer system.

- Transfer of its manufacturing operations in Bristol, Pennsylvania to
Hyannis, Massachusetts as part of its Converting Technologies division.
The closure was announced March 22, 2002 and completed in September 2002.
The restructuring costs of $892 were recorded in the third quarter of
fiscal 2002 and included severance costs of $272 and termination of 15
employees (all terminations occurred in fiscal 2003). Approximately 10
employees remain in Bristol for sales and engineering support. The
remaining restructuring costs included $400 of asset write-offs, $192 for
facility lease and related costs and $28 of other costs. The asset
write-offs included the remaining value of leasehold improvements.

- Transfer of the Assembly and Test-Europe fabrication operations from
Gawcott, United Kingdom to its Buckingham, England plant in the fourth
quarter of fiscal 2002. The restructuring costs of $1,206 were recorded
in the third quarter of fiscal 2002 and included severance costs of $908
for the termination of 43 employees, all of whom were terminated by June
30, 2002. The restructuring costs included $264 for future lease payments
and $34 of other costs. Upon the approval of the trustees to the pension
plan, certain of the terminated employees were granted enhanced pension
benefits resulting in a curtailment/settlement loss to the defined
benefit pension plan of $2,221. The previously reported operating results
have been adjusted to reflect this curtailment/settlement loss as this
amount was not previously reflected in the consolidated financial
statements for fiscal 2002.

- The Company recognized additional restructuring charges of $2,287 in
fiscal 2002 ($1,521 in the second quarter, $463 in the third quarter, and
$303 in the fourth quarter) primarily related to severance costs
associated with management changes and workforce reductions at several
divisions, as well as lease payments resulting from the consolidation of
two Packaging segment divisions. The restructuring charge included
severance costs of $1,747 for termination of 125 employees, $300 for
future lease payments and $240 of asset write-offs. All of these
employees were terminated by June 30, 2002.

The following table summarizes the components of fiscal 2002 restructuring
accruals:

FISCAL 2001 RESTRUCTURING

In the fourth quarter of fiscal 2001, a restructuring charge of $3,694 was
established for severance costs associated with management changes and workforce
reductions, future lease costs on idle facilities and

F-30

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

personnel relocation costs resulting from the corporate office move and the
closure of four Packaging segment sales offices and non-cash asset write-downs.

The Company's fiscal 2001 restructuring plan consisted of the following
actions:

- Closure of Canadian operation's sales offices, including the termination
of 64 employees. These offices were closed in the fourth quarter of 2001.
In addition, there was a headcount reduction at the Montreal location.
These people were notified of termination in the fourth quarter of fiscal
year 2001. Total severance costs were $706 and future lease costs on
rented office space for the sales offices was $300. As mandated by
Canadian law, a six-month waiting period is required before termination
after notice is given. After notification, during the six-month period, a
number of employees left voluntarily and therefore received no benefits.
Accordingly, an amount of $451 was reversed to income in fiscal 2002 and
is included in the roll-forward.

- Consolidation of two of the Company's United Kingdom operations, which
included the termination of 28 employees in the first quarter of fiscal
2002 at a cost of $500.

- Relocation of the corporate offices from Springfield, Missouri to Dayton,
Ohio. Total moving costs incurred were $949 in the fourth quarter of
2001, which included personnel relocation costs of $747 and other moving
costs of $202. These moving costs were recognized when incurred. In
addition, the Company accrued future lease costs on the idle office space
in Springfield of $575. Lastly, severance of $545 was recorded for the
termination of 10 employees at the Springfield office.

The rollforward of the restructuring accrual related to fiscal 2001 is as
follows:

NOTE 16 -- BUSINESS SEGMENTS

The Company adopted Statement of Financial Accounting Standards No. 131
(SFAS 131), "Disclosures about Segments of an Enterprise and Related
Information," effective June 27, 1999. SFAS 131 requires disclosure of segment
information on the basis that it is used internally for evaluating segment
performance and deciding how to allocate resources to segments.

In fiscal 2002, the Company reorganized operations into four business
segments: Material Processing, Precision Assembly, Assembly and Test and
Packaging Systems. This structure streamlined product offerings, capitalized on
the combined strength of operating units, reduced overlap in the marketplace and
improved capacity utilization, internal controls, financial reporting and
disclosure controls. The Company began reporting financial results for these
four business segments in its Form 10-Q for the fiscal quarter ended September
29, 2002 and has restated the financial information presented for fiscal 2002
and 2001 to reflect these four business segments.

The Material Processing segment manufactures special machines, automated
systems, tooling and fixturing, the Peer(TM) brand of automated welding
equipment, high-speed rotary presses and plastic processing machines and
equipment for a wide variety of products, such as appliances, electronics,
building construction,

F-31

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

hardware, cosmetics, food and beverage, toys and automotive accessories. The
Material Processing segment is comprised of the DTE and Converting Technologies
divisions. The Precision Assembly segment designs, manufactures and integrates
custom precision assembly systems, primarily for customers in the medical,
electronics, consumer, bioscience and automotive markets. The Packaging Systems
segment designs and builds proprietary machines and integrated systems utilized
for packaging, liquid filling or tube filling applications that are marketed
under individual brand names and manufactured for specific industrial
applications using designs we own or license. The Assembly and Test segment
designs and builds custom non-synchronous assembly systems, rotary dial assembly
systems, electrified monorail material handling systems, fuel injection, engine
and transmission test systems, and lean assembly systems primarily for customers
in automotive-related and heavy equipment markets.

In July 2003, the Company announced the closure of its Precision Assembly
segment manufacturing facility in Buffalo Grove, Illinois and the transfer of
its manufacturing operation to the Material Processing segment's Lebanon,
Missouri facilities. An engineering, sales and service office will remain in
Illinois to serve Precision Assembly's customers. Beginning in the first quarter
of fiscal 2004, the Precision Assembly segment will be consolidated into the
Material Processing segment for financial reporting purposes.

In the first and second quarters of fiscal 2002, the Company sold the
assets that comprised its non-core businesses that produced precision-stamped
steel and aluminum components through its stamping and fabrication operations.

The Company evaluates performance and allocates resources to reportable
segments primarily based on operating income. The accounting policies of the
reportable segments are the same as those described in the summary of
significant policies. Inter-segment sales are not significant.

F-32

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

Financial information for the Company's reportable segments consisted of
the following:

F-33

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

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

(1) Operating income was adjusted from previously reported due to the recording
of an additional restructuring and related items charge of $2,221 related to
the curtailment/settlement loss on the U.K. pension plan at Assembly
Technology & Test, Ltd.

(2) Assets have been adjusted from that previously reported to properly reflect
the status of the U.K. pension plan, including the reduction in goodwill
related to the recording of an additional prepaid pension asset of $3,518.
The Company also made an adjustment to beginning retained earnings for the
reversal of certain opening balance sheet reserves of $2,160 related to the
acquisitions of Hansford and ATT, which were included in costs and earnings
in excess of amounts billed on uncompleted projects.

Included in operating income (loss) are the following items:

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

(1) The fiscal 2003 goodwill/asset impairment charge for the Precision Assembly
and Packaging Systems segments included $1,500 and $1,000, respectively, of
property, plant and equipment asset impairment.

F-34

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

(2) Operating income was adjusted from that previously reported due to the
recording of an additional restructuring and related items charge of $2,221
related to the curtailment/settlement loss on the U.K. pension plan at
Assembly Technology & Test, Ltd.

In addition to the items noted above, the corporate operating loss in
fiscal 2001 included approximately $3,487 of legal and professional fees
associated with the investigations into the prior years' accounting
irregularities.

The reconciliation of segment operating income (loss) to consolidated loss
before provision/benefit for income taxes consisted of the following:

Financial information related to the Company's operations by geographic
area consisted of the following:

Net sales are attributed to countries based on the shipping destination of
products sold. Long-lived assets consist of total property, plant and equipment,
net of accumulated depreciation.

F-35

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

NOTE 17 -- ADJUSTED HISTORICAL FINANCIAL STATEMENTS

As described in Note 1, the Company's balance sheet as of June 30, 2002 and
statement of operations for the fiscal year then ended have been adjusted. A
comparison of the previously reported and adjusted financial statement line
items for this period is presented below. The impact of these adjustments
resulted in an increase to the Company's net loss of $2,221 and to the Company's
loss to common stockholders per diluted common share of $0.20 per share.

CONSOLIDATED BALANCE SHEET LINE ITEMS

CONSOLIDATED STATEMENT OF OPERATIONS LINE ITEMS

In connection with the acquisition of Assembly Technology and Test (ATT) in
fiscal 1998, the Company assumed defined benefit plans for the United Kingdom
and Germany divisions. On the opening balance sheet, the Company did not record
a prepaid pension asset related to the U.K. plan nor subsequently adjusted the
prepaid pension asset in following years. The U.K. pension plan was overfunded
at the acquisition date. Due to stock market declines and actuarial changes, the
U.K. plan became underfunded in fiscal 2002 and required a charge to
stockholders' equity of $6,469 to establish a minimum pension liability. Also,
it was determined that a curtailment and a settlement loss occurred in fiscal
2002 due to enhanced pension benefits provided to 18 individuals terminated
between April and June of fiscal 2002. The curtailment and settlement losses,
although previously disclosed in the notes to the Company's 2002 financial
statements, were not previously recorded as part of the restructuring and
related items charge on the statement of operations for the fiscal year ended
June 30, 2002. The statement of operations impact in fiscal 2002 was an increase
in the restructuring and related items charge of $2,221. The previously reported
balance sheets since the acquisition of Assembly Technology and Test, in fiscal
1998 have also been adjusted to properly reflect the status of the U.K. pension
plan, including the recording of a prepaid pension asset at the acquisition date
of $3,518, the reduction in goodwill due to the additional prepaid pension asset
and a related reduction in goodwill amortization, and

F-36

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

adjustments to stockholders' equity -- other comprehensive income to reflect the
minimum pension liability in fiscal 2002.

The Company also made an adjustment to beginning retained earnings for the
reversal of certain opening balance sheet reserves of $2,160 related to the
acquisitions of Hansford and Assembly Technology and Test, which were included
in costs and earnings in excess of amounts billed on uncompleted projects.

NOTE 18 -- QUARTERLY FINANCIAL DATA (UNAUDITED)

As described in Note 2, the Company adjusted its net income during each of
the first three quarters of fiscal 2003. Also, as described in Note 2, the
Company adjusted its statement of operations for the year ended June 30, 2002,
of which the impact related to the fourth quarter of fiscal 2002. A comparison
of the previously reported and adjusted quarterly information is presented below
(in thousands, except per share data):

The principal items which affected the quarterly results for the fiscal
years ended June 29, 2003 and June 30, 2002 include the following pre-tax items:

Second quarter 2003:

- $1,700 restructuring charge included in operating expenses.

Fourth quarter 2003:

- $51,880 charge related to the write down of goodwill and fixed assets
included in operating expenses; and

- $500 restructuring charge included in operating expenses.

Second quarter 2002:

- $1,521 restructuring charge included in operating expenses.

Third quarter 2002:

- $8,508 restructuring charge included in operating expenses.

Fourth quarter 2002:

- $1,128 loss on disposal of the Hyannis facility, included in operating
expenses, and

- $2,221 restructuring charge related to the curtailment/settlement loss on
the U.K. pension plan (as adjusted).

See Note 6 regarding the dispositions of assets and Notes 14 and 15
regarding the write-down of assets and restructuring.

In general, the Company's business is not subject to seasonal variations in
demand for its products. However, because orders for certain of the Company's
products can be several million dollars, a relatively limited number of orders
can constitute a meaningful percentage of its revenue in any one quarterly
period. As

F-37

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

a result, a relatively small reduction or delay in the number of orders can have
a material impact on the timing of recognition of the Company's revenues. Almost
all of the Company's net sales are derived from fixed price contracts.
Therefore, to the extent that original cost estimates prove to be inaccurate,
profitability from a particular contract may be adversely affected. Gross
margins may vary between comparable periods as a result of the variations in
profitability of contracts for large orders of special machines as well as
product mix between the various types of custom and proprietary equipment
manufactured by the Company. Accordingly, the Company's results of operations
for any particular quarter are not necessarily indicative of results that may be
expected for any subsequent quarter or related fiscal year.

F-38

REPORT OF INDEPENDENT AUDITORS ON
FINANCIAL STATEMENT SCHEDULE

To the Board of Directors of DT Industries, Inc.

Our audits of the consolidated financial statements of DT Industries, Inc.
and its subsidiaries referred to in our report dated October 14, 2003, appearing
in this Form 10-K also included an audit of the financial statement schedule of
DT Industries, Inc. listed in Item 15 of this Form 10-K. In our opinion, the
financial statement schedule presents fairly, in all material respects, the
information set forth therein when read in conjunction with the related
consolidated financial statements.

PricewaterhouseCoopers LLP

St. Louis, Missouri
October 14, 2003

S-1

DT INDUSTRIES, INC.

SCHEDULE VIII
RULE 12-09 VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(IN THOUSANDS)

S-2

INDEX TO EXHIBITS

- ---------------
* Management contract or compensatory plan or arrangement.