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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-K

(Mark One)

For the fiscal year ended December 31, 2002

OR

For the transition period from            to            

Commission File Number: 0-1649

NEWPORT CORPORATION

(Exact name of registrant as specified in its charter)

1791 Deere Avenue, Irvine, California 92606

(Address of principal executive offices) (Zip Code)

Registrant’s telephone number, including area code:  (949) 863-3144

Securities registered pursuant to Section 12(b) of the Act:  None

Securities registered pursuant to Section 12(g) of the Act:  Common Stock, Stated Value $0.1167 per share

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.    ¨

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

As of February 28, 2003, 38,580,925 shares of the registrant’s sole class of common stock were outstanding. As of February 28, 2003, the aggregate market value of the common stock held by non-affiliates of the registrant was approximately $596 million, calculated based upon the closing price of our common stock as reported by the Nasdaq Stock Market on June 28, 2002.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s Proxy Statement for its Annual Meeting of Stockholders to be held on May 21, 2003 are incorporated by reference into Part III of this Annual Report on Form 10-K.

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This Annual Report on Form 10-K contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 and we intend that such forward-looking statements be subject to the safe harbors created thereby. For this purpose, any statements contained in this Annual Report on Form 10-K except for historical information may be deemed to be forward-looking statements. Without limiting the generality of the foregoing, words such as “may,” “will,” “expect,” “believe,” “anticipate,” “intend,” “could,” “estimate,” or “continue” or the negative or other variations thereof or comparable terminology are intended to identify forward-looking statements. These statements by their nature involve substantial risks and uncertainties, certain of which are beyond our control, and actual results may differ depending on a variety of important factors, including those described herein in the sections entitled “Business” and “Risks Relating To Our Business.”

PART I

Item 1.    Business

General Description of Business

Newport Corporation is a global supplier of advanced technology products and systems to a wide range of industries, including semiconductor manufacturing and advanced packaging equipment, aerospace and defense, life and health sciences, scientific research and fiber optic communications. We provide:

Our products leverage our expertise in precision robotics and automation, high-precision positioning systems, vibration isolation technology, precision optics and optomechanics to enhance the capabilities and productivity of our customers’ manufacturing, engineering and research applications.

Within the semiconductor industry, the manufacturing of devices is often divided into two areas – front-end wafer processing and back-end packaging. Over the years, we have developed a significant presence as a supplier to top-tier equipment manufacturers for front-end applications, providing high-performance components and subsystems that enhance the performance of these customers’ products. More recently, we have become an integrated systems supplier for advanced back-end packaging applications. With well-designed and tested products, a flexible product portfolio and a strong intellectual property position, we now offer our customers advanced products for both front-end and back-end semiconductor manufacturing processes.

In addition to our presence in the semiconductor industry, we also supply components, instruments and subsystems to a broad range of other markets, including basic and applied scientific research, aerospace and defense and, increasingly, in life and health sciences. Our component and subsystem products are often incorporated into the high-precision products of customers in these industries. We also provide high-performance components and instruments to commercial, academic and governmental research institutions worldwide that engage in research and development activities.

We also continue to be a leading supplier of automated and manually operated equipment used to assemble and test fiber optic telecommunications and data communications devices. Our unique machines, which combine our proven technology with advanced computer software and our in-depth industry and process expertise, are

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used around the world to manufacture and test active and passive telecommunication components. These systems provide our customers with the flexibility required to facilitate the development of new components and manufacturing processes for next-generation telecommunications equipment.

For over three decades we have serviced the needs of research laboratories for precision equipment. Since 1991, we have acquired a series of companies to expand our product offerings, technology base and geographic presence. Through these acquisitions and our internal development efforts, we have evolved from a provider of discrete components and instruments for research applications to a company that manufactures both components and integrated systems for research and commercial applications. In particular, during 2001 we acquired Kensington Laboratories, Inc. (KLI), a manufacturer of high-precision robotic and motion control equipment primarily for the semiconductor equipment industry, and during 2002 we acquired Micro Robotics Systems, Inc. (MRSI), a manufacturer of high-precision, fully-automated assembly and dispensing systems for back-end packaging applications in the semiconductor, microwave communications and fiber optic communications markets. Both of these acquisitions significantly increased our product offerings and expertise in these areas. We pursue acquisitions of companies, technologies and complementary product lines that we believe will provide us with key technologies, give us access to new markets or otherwise further our strategic objectives. Conversely, from time to time we review our different businesses, including our acquired companies, to ensure that they are key to our strategic plans, and close or divest businesses that we determine are no longer of strategic importance. See Management’s Discussion and Analysis of Financial Condition and Results of Operations – Overview and Note 3 of the Notes to Consolidated Financial Statements included in this Annual Report on Form 10-K.

Products and Services

We develop and sell a broad range of components, instruments, subsystems and systems to markets where high-precision, efficient manufacturing, test and assembly are critical. Our products are used in mission-critical applications in industries including semiconductor manufacturing, aerospace and defense, life and health sciences and fiber optic device manufacturing. We develop, manufacture and market products within two distinct business segments, Advanced Packaging and Automation Systems and Industrial and Scientific Technologies. During 2002, following our divestiture of our Industrial Metrology Systems division, we reorganized our business segments to align them more closely with customer and manufacturing requirements. This structure enables us to quickly incorporate customer feedback into new products and to respond rapidly to changing market requirements.

Advanced Packaging and Automation Systems Division

Within the semiconductor industry, the manufacturing of devices is often divided into two areas – front-end wafer processing and back-end packaging. Our Advanced Packaging and Automation Systems division offers a broad array of automation subsystem products for semiconductor front-end wafer processing applications, and also supplies complete turnkey systems for advanced back-end packaging applications. The division also offers a complete line of assembly and test automation systems for the fiber optic communications industry, addressing a wide spectrum of applications in the fiber optic component manufacturing process, from pre-test to assembly and packaging to final device testing and burn-in. These high-performance products provide our customers with the speed, accuracy, repeatability and dependability they require for high-throughput production environments.

Semiconductor Front-End Technologies

Our Advanced Packaging and Automation Systems division offers a broad array of products for front-end semiconductor process applications, including automated wafer handling subsystems such as atmospheric robots, load ports and wafer alignment stations. We are a leader in advanced robotic systems technologies, and we are committed to developing and manufacturing the highest performance, most reliable and most cost-effective atmospheric wafer handling robots and load ports in the industry.

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Advanced Packaging Systems

In February 2002, we acquired MRSI, a leading supplier of automated assembly and dispensing systems to the semiconductor packaging, microwave and fiber optic communications industries. We offer a full line of automated chip assembly equipment, including die bonding and flip chip bonding systems, as well as epoxy-dispensing and flip chip underfill systems, that are used to manufacture microwave, optical, radio frequency (RF) and multi-chip modules.

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Fiber Optic Communications

Our Advanced Packaging and Automation Systems division is a leading supplier of automated and manually operated equipment used to assemble and test fiber optic telecommunications and data communications devices. Our unique machines are used around the world to manufacture and test active and passive telecommunications components, and feature the flexibility required to facilitate the development of new components and manufacturing processes for next-generation telecommunications equipment. Our Advanced Process Technology group also offers a full range of process engineering services, from technology transfer and process development activities through complete package design/development and pilot lot manufacturing services, to enable our customers to develop and qualify their next generation photonic telecommunication and data communication devices.

Our product offering includes automated assembly, device characterization, fiber alignment and attachment and final device characterization and life testing systems. Of particular note are our automated assembly systems for the manufacture of various types of Vertical Cavity Surface Emitting Lasers (VCSELs) and VCSEL array devices. VCSELs are expected to be an important technology as metro-area fiber optic networks are implemented. Our fiber optic device manufacturing and test systems take advantage of many of our core technology strengths, including precision robotic parts handling, motion control, vibration isolation, optics, software integration and automation.

Engineering and Manufacturing Services

Due to our extensive experience in fiber optic device assembly, packaging and testing technology, we have a deep knowledge base and expertise in the processes and technologies necessary to build high-precision fiber optic components. In addition, our acquisitions in recent years have expanded our knowledge base and expertise in the use of flexible automation solutions for the manufacture of fiber optic components, as well as in the integration of production lines for chip packaging and module assembly. We apply this expertise to assist our customers in designing device packaging, developing manufacturing processes, developing and producing

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tooling and programming customized process automation software. These services help customers significantly reduce the development cycle for their products and improve the productivity, yields and quality of their manufacturing processes. In addition to helping customers become more productive, these services assist us in establishing a long-term relationship with our customers and allow us to identify additional opportunities for new products. We also offer device manufacturing and packaging services to enable customers to design and test new products. We believe that the extent of our capabilities and services in this area provides us with a key competitive advantage over other capital equipment suppliers to this market.

Industrial and Scientific Technologies Division

Our Industrial and Scientific Technologies division’s products are used across a wide range of industrial markets in applications that range from basic research and development activities to high-precision manufacturing. In addition, we sell subsystems to third parties that integrate these products into larger systems, particularly for semiconductor manufacturing. Our industrial and scientific products address a wide range of markets, including semiconductor equipment, life and health sciences, aerospace and defense, scientific research and fiber optic communications. These products and technologies also form the foundation of certain of the integrated, automated systems sold by our Advanced Packaging and Automation Systems division. We believe that purchasers of our Industrial and Scientific Technologies division’s products develop an appreciation for the quality of our products which makes them more likely to buy integrated, automated systems from us as the need for production and test systems grows. Our Industrial and Scientific Technologies division’s product lines include:

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We also offer subassemblies that are a value-added combination of standard and custom products drawn from the components, optics, robotics, motion control and vibration isolation product lines. We combine these items with additional engineering to create more highly integrated products to meet customer needs. These products are often subsystems of our original equipment manufacturer (OEM) customers’ products. We believe that this subassembly capability gives us a significant competitive advantage by differentiating us from competitors that offer a more limited product selection.

Financial information regarding our two business segments, and our operations by geographic area, is included in Note 15 of the Notes to Consolidated Financial Statements included in this Annual Report on Form 10-K beginning on page F-24. A discussion of our net sales by end market and geographic area is included in “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Sales and Marketing

We market and sell our products and services through our domestic and international sales organizations, an international network of independent distributors and sales representatives, technical catalogs and our web site. Our domestic and international sales organizations are comprised of teams of field sales persons, which work closely with strategic account managers and internal sales support personnel based in our Irvine, California headquarters. Our customers often have unique technical specifications and manufacturing processes, and may require specific system, subsystem or component designs. This requires close cooperation between the sales personnel and distributors and the engineering staff, and can result in long sales cycles for our subsystem and capital equipment products. As of December 31, 2002, we employed 72 persons in our domestic sales organization, and 35 persons in our international sales organization, located in Canada, France, Germany, Italy, the Netherlands, Singapore, Sweden, Switzerland, Taiwan, and the United Kingdom.

We currently engage 22 independent sales representatives and distributors that actively market and sell our products in certain markets outside of North America. We have written agreements with each of our representatives and distributors. In some cases we have granted representatives and distributors exclusive authorization to sell certain of our products in a specific geographic area. These agreements generally have terms of one year and are renewable on an annual basis, and are generally terminable by either party for convenience following a specified notice period. Most distributor agreements are structured to provide distributors with sales discounts below the domestic list price. Representatives are generally paid commissions for sales of products. No single independent representative or distributor accounted for more than 5% of our net sales in 2002.

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We also market our standard products through our product catalog and web site. Our principal marketing tool for the scientific market is our comprehensive product catalog, The Newport Resource^™. This catalog, numbering approximately 1,400 pages, provides detailed product information as well as extensive technical and applications data. We publish this catalog in English, French, German and Japanese, and mail it to approximately 40,000 existing and potential customers. New product supplements are also distributed between publications. Our web site features an online catalog, providing customers with access to the latest information regarding our products, technical/tutorial and application related materials, sales information, a literature and information request form, and the ability to purchase a majority of our standard products.

Research and Product Development

We continually seek to improve our technological leadership position through internal research, product development and licensing, and acquisitions of complementary technologies. As of December 31, 2002, we had 148 employees engaged in research and development in our continuing operations. We continually work to enhance our existing products and to develop and introduce innovative new products to satisfy the needs of our customers. In addition, we regularly investigate new ways to combine components manufactured by our various divisions to produce innovative technological solutions for the markets we serve. Research and development expenses were $24.4 million, or 14.9% of net sales, in 2002, $26.1 million, or 9.0% of net sales, in 2001, and $21.7 million, or 8.3% of net sales, in 2000. We are committed to product development and expect to continue our investment in this area in the current and future years.

We believe that the continual development or acquisition of innovative new products will be critical to our future success. Failure to develop, or introduce on a timely basis, new products or product enhancements that achieve market acceptance could have a material adverse effect on our business, operating results or financial condition.

Customers

We sell our products to a significant number of customers worldwide, in a wide range of diverse end markets, including semiconductor manufacturing and advanced packaging equipment, aerospace and defense, life and health sciences, scientific research and fiber optic communications. We believe that our diversification in this area minimizes our dependence on any single industry or group of customers. Sales during 2002 to one customer of our Advanced Packaging and Automation Systems division, Applied Materials, Inc., totaled $17.8 million, which represented 38.4% of our 2002 net sales to that segment and 10.9% of our consolidated net sales for the year. In addition, 2002 sales to one customer of our Industrial and Scientific Technologies division represented 13.1% of our 2002 net sales to that segment, but less than 10% of our consolidated net sales for the year. We believe that our relationships with these customers are good. However, if Applied Materials, Inc. or any other key customer discontinues or reduces its relationship with us, or suffers downturns in its business, it could have a significant negative impact on our financial results on a short-term basis, and our business and results of operations could be harmed going forward if we are unable to sufficiently expand our customer base to replace the lost business.

Competition

The markets for our products are intensely competitive and characterized by rapidly changing technology. In the semiconductor market, for front-end processing applications, our primary competitors are currently Asyst Technologies, Inc., Brooks-PRI Automation, Inc., Genmark Automation, Inc., Kawasaki Heavy Industries, Ltd., and Yaskawa Electric Corp. for our wafer handling robots; and Asyst Technologies, Inc., Brooks-PRI Automation, Inc. and TDK Corporation for our load ports. For semiconductor back-end packaging applications, our primary competitors are Datacon Technology AG, ESEC, F&K Delvotech, and Palomar Technologies, for our automated assembly systems, and Asymtek, Cookson Electronics, Inc., and Protec Co., Ltd. for our dispensing systems.

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In the fiber optic communications market, our primary competitors are currently AOI Sansho, EXFO Electro-Optical, Inc., Palomar Technologies and Suruga-Seiki Co., Ltd., for our assembly automation systems; and Agilent Technologies, Inc., Ando Corporation, Anritsu Corporation, EXFO Electro-Optical Inc., Moritex Corporation, and Racal, Inc. for our test and measurement systems.

In our industrial and scientific technologies business, our primary competitors are currently Aerotech Inc., Danaher Corporation, and Dover Corp. for our precision motion systems; Kinetic Systems, Inc., Melles Griot, Inc., and Technical Manufacturing Corp. for our vibration isolation products; and CVI Laser Corporation, Corning Tropel Corporation, Melles Griot, Inc., New Focus, Inc. and Thorlabs, Inc. for our precision optics and optomechanical products.

In each of our businesses, we also face competition from certain of our existing and potential customers who have developed or may develop their own systems, subsystems and components.

We believe that the primary competitive factors in our markets are:

We believe that we currently compete effectively with respect to each of these factors. However, we may not be able to compete successfully in the future against existing or new competitors.

We compete in various markets against a number of companies, some of which have longer operating histories, greater name recognition and significantly greater technical, financial, manufacturing and marketing resources than we do. In addition, some of these companies have long established relationships with our customers and potential customers in our markets. In addition to current competitors, we believe that new competitors, some of whom may have substantially greater financial, technical and marketing resources than us, will seek to provide products to one or more of our markets in the future. Such future competition could harm our business.

Intellectual Property and Proprietary Rights

Our success and competitiveness depends to an extent on our technology and other intellectual property such as trade secrets, patents and trademarks. We protect our technology by controlling access to our proprietary information and by maintaining confidentiality agreements with our employees and consultants and our customers and partners, and, in some cases, through the use of patents, trademark registrations, and licenses. We have been granted a number of patents in the U.S. and foreign jurisdictions. We also have trademarks registered in the U.S. and foreign jurisdictions. We actively pursue applications for new patents and trademarks as we deem appropriate.

It is possible that, despite our efforts, other parties may use, obtain or try to copy our products and technology. Policing unauthorized use of our products and technology is difficult and time consuming. We cannot guarantee that the steps we take to protect our rights will prevent any misappropriation of our products or technology. This is particularly the case in foreign jurisdictions, where the intellectual property laws may not afford our intellectual property rights the same protection as the laws of the United States. In addition, infringement, invalidity, right to use or ownership claims by third parties may be asserted against us in the future, which claims could materially harm our business, operating results or financial condition, regardless of the outcome.

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Manufacturing

We assemble, test and package components and systems at domestic manufacturing facilities located in Chandler, Arizona; Irvine, California; Richmond, California; and North Billerica, Massachusetts, and at our international manufacturing facilities in Beaune-la Rolande, France and La Boulonnie, France. In addition, we subcontract the manufacture of various products and components to a number of third-party subcontract manufacturers.

Our manufacturing processes are diverse and consist of: purchasing raw materials, principally stainless steel, aluminum and glass; processing the raw materials into components, subassemblies and finished products; purchasing components, assembling and testing components and subassemblies; and, for our larger products, assembling the subassemblies and components into integrated systems. We primarily design and manufacture components internally, although on a limited basis, we purchase completed products from certain third-party suppliers and resell those products through our distribution system. Most of these completed products are produced to our specifications and carry our name and logo.

We currently procure various components from single-sources due to unique component designs as well as certain quality and performance requirements. In addition, we manufacture certain components internally, and there are no readily available third-party suppliers of these components. If single-sourced components were to become unavailable or were to become unavailable on terms satisfactory to us, we would be required to purchase comparable components from other sources. While we believe that we would be able to obtain comparable replacement components from other sources in a timely manner, if we are unable to do so our business, results of operations or financial condition could be adversely affected.

We have not incurred significant expenses related to environmental compliance in past periods, and, due to the nature of our businesses, do not expect to incur such expenses in the future.

Backlog

Our consolidated backlog of products totaled $33.9 million and $50.3 million at December 31, 2002 and 2001, respectively. Orders for many of the products we sell to the semiconductor equipment and fiber optic communications markets, which comprise a significant portion of our sales, are often subject to cancellation or rescheduling by the customer, and we have from time to time experienced significant cancellations and pushouts of orders from these markets, which negatively affected our operating results in those periods. In addition, because we manufacture a significant portion of our standard catalog products for inventory, we often make shipments of these products upon or within a short time period following receipt of an order. As a result, our backlog of orders at any particular date may not be an accurate indicator of our sales for succeeding periods.

Investments

In addition to the ownership of subsidiaries detailed in Exhibit 21.1 to this Annual Report on Form 10-K, we from time to time make investments in companies involved in developing products and technologies related to our business, and we currently hold minority ownership interests in a number of small, privately-held companies. These investments are designed to further our strategic objectives and to support our key business initiatives. We want to support growth in new technologies, particularly those related to our strategic markets, in order to create and expand markets for our products. While financial returns are not our primary goal, our strategic investment program seeks to invest in companies that can succeed and have a positive impact on their markets. At December 31, 2002, the carrying value of our investments totaled $2.1 million. Investments in technology companies involve significant risks, including the risks that such companies may be unable to raise additional required operating capital on acceptable terms or at all, or may not achieve or maintain market acceptance of their technology or products. In the event that any of such risks occurs, the value of our investment could decline significantly. In addition, because there is no public market for the securities we acquire, our ability to liquidate

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our investments is limited, and such markets may not develop in the future. In 2002, two fiber optic component manufacturers in which we had made minority investments in prior years experienced severe financial difficulties. One manufacturer shut down its business and liquidated its assets, and the other manufacturer filed for bankruptcy protection. As a result, we recorded an asset write-down of $6.5 million relating to these investments. In the event that we are required to write-down the carrying value of one or more of our investments in the future, our earnings could be materially and adversely affected.

Employees

As of February 28, 2003, we had 1,088 employees worldwide engaged in our continuing operations. None of our employees are represented by a union. We believe that our relationships with our employees are good.

Availability of Reports

We make available free of charge on our web site at www.newport.com our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and any amendments to such reports, as soon as reasonably practicable after such reports are filed with the Securities and Exchange Commission. We will also provide electronic or paper copies of such reports free of charge, upon request made to our Corporate Secretary.

Item 2.    Properties

Our corporate headquarters is located in Irvine, California. We lease this facility under a lease expiring in February 2012. Our primary manufacturing operations for each of our divisions are located in the following facilities:

We own our La Boulonnie, France facility and a portion of our Beaune-la Rolande, France facility. We lease all other facilities under leases with expiration dates ranging from 2003 to 2030. In addition to these primary facilities, we lease 12 facilities worldwide for administration, research and development, sales and/or service. We believe that our facilities are adequate for our current needs and that suitable additional or substitute space will be available in the future on commercially reasonable terms to accommodate expansion of our operations.

Item 3.    Legal Proceedings

In August 1999, Newport Electronics, Inc., a manufacturer of electronic devices, filed suit against us in Federal District Court in Connecticut, claiming that our use of the “Newport” trademark infringes its rights with respect to such mark. In January 2002, a trial was held with respect to this litigation, and the jury returned a verdict in our favor on all of Newport Electronics’ claims. In February 2002, Newport Electronics filed a motion for a new trial, which was denied by the District Court. Newport Electronics appealed such judgment to the Second Circuit Court of Appeals, which affirmed the judgment of the District Court on February 24, 2003.

From time to time, we may be involved in litigation relating to claims arising out of our operations in the normal course of business. We currently are not a party to any legal proceedings, the adverse outcome of which,

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in management’s opinion, individually or in the aggregate, would have a material adverse effect on our results of operations or financial position or cash flows.

Item 4.    Submission of Matters to a Vote of Security Holders

No matters were submitted to a vote of security holders during the fourth quarter of the year ended December 31, 2002.

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PART II

Item 5.    Market for the Registrant’s Common Equity and Related Stockholder Matters

Price Range of Common Stock

Our common stock is traded on the Nasdaq National Market under the symbol NEWP. As of February 28, 2003, we had 1,260 common stockholders of record based upon the records of our transfer agent which do not include beneficial owners of common stock whose shares are held in the names of various securities brokers, dealers and registered clearing agencies. The quarterly high and low sales prices of our common stock for the fiscal years ended December 31, 2002 and 2001 are included in Note 17, Supplementary Quarterly Consolidated Financial Data (Unaudited), of the Notes to Consolidated Financial Statements on page F-27.

Dividends

We declared no dividends on our common stock during 2002. On May 30, 2001, we declared a semi-annual cash dividend of $0.01 per share of our common stock, which was paid on July 10, 2001 to all stockholders of record at the close of business on June 15, 2001. In September 2001, we announced the cancellation of our semi-annual $0.01 per share dividend, because we believe that the funds required for the dividend could be deployed more effectively in our business. We do not intend to pay cash dividends in the foreseeable future, however, we will periodically review this issue in the future based on changes in our financial position and investment opportunities, as well as any changes in the tax treatment of dividends.

Item 6.    Selected Financial Data

The table below presents selected consolidated financial data of Newport and our subsidiaries as of and for the years ended December 31, 2002, 2001, 2000, 1999, and 1998. Financial data presented incorporates the results of operations and financial position of Unique Equipment Co. (Unique) and KLI; both entities merged with Newport in 2000 and 2001, respectively, and were accounted for as poolings of interests for all periods presented. This data has been derived from our audited consolidated financial statements and should be read in conjunction with the full consolidated financial statements and associated notes and with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for such periods.

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Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations

This Item contains forward-looking statements that involve risks and uncertainties and actual results could differ materially from those anticipated in such statements as a result of various factors including those described below in “Risks Relating To Our Business.”

OVERVIEW

The following is a discussion and analysis of certain factors that have affected our results of operations and financial condition during the periods included in the accompanying financial statements. This discussion should be read in conjunction with the consolidated financial statements and associated notes.

Acquisitions

In February 2002, we acquired Micro Robotics Systems, Inc. (MRSI), a manufacturer of high-precision, fully-automated assembly and dispensing systems, for 2,084,825 shares of our common stock (including 1,087,541 shares issuable upon the exercise of assumed stock options) and $15.0 million in cash. Assets acquired in connection with this transaction included cash of approximately $10.4 million. The transaction was accounted for using the purchase method. The acquisition expands our product offerings and technological capability for back-end packaging applications in the semiconductor, microwave communications, and fiber optic communications markets.

In August 2000, we acquired Unique Equipment Co. (Unique), a systems integrator specializing in robotics and automation. In February 2001, we acquired Kensington Laboratories, Inc. (KLI), a manufacturer of high-precision robotic and motion control equipment primarily for the semiconductor industry. We issued approximately 3,526,000 shares of common stock to the KLI shareholders in the transaction. Also in February 2001, we acquired Design Technology Corporation (DTC), a systems integrator specializing in the use of robotics and flexible automation solutions for manufacturing processes. The DTC acquisition was accounted for using the purchase method. The Unique and KLI acquisitions were accounted for using the pooling of interests method.

This discussion includes the effects of the acquisitions of Unique and KLI for all years presented and the effects of the acquisitions of MRSI and DTC from their dates of acquisition.

Divestitures

During March 2002, to more efficiently deploy our resources to those areas that are critical to product development efforts for our strategic markets, our Board of Directors approved management’s plan to sell our Industrial Metrology Systems division (IMSD), including the business of CEJohansson AB, a Sweden-based global supplier of advanced metrology systems that we acquired in December 2000. The IMSD division consists of three businesses: the contact measurement business, the non-contact metrology business and the measurement and calibration business. The contact measurement and non-contact metrology businesses were sold in 2002 for cash of approximately $10 million.

During August 2002, to increase the efficiency of our product development and manufacturing efforts, our Board of Directors approved management’s plan to sell our facility in Plymouth, Minnesota, which manufactures high-precision motion stages for the semiconductor equipment, computer peripheral, fiber optic communications and life and health sciences markets and is part of our Industrial and Scientific Technologies division. In the first quarter of 2003, due to the weak response from potential buyers, we decided to shut down the facility and liquidate the majority of the remaining assets. We expect to complete the shutdown by April 2003.

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Both of these divestitures have been accounted for as discontinued operations pursuant to Financial Accounting Standards Board (FASB) Statement No. 144, Accounting for the Impairment or Disposal of Long Lived Assets and, accordingly, all prior periods presented have been adjusted to reflect the financial results of these operations as discontinued operations.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Management’s Discussion and Analysis of Financial Condition and Results of Operations is based on our consolidated financial statements included in this Annual Report on Form 10-K, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and related disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. On an ongoing basis, we evaluate these estimates and assumptions, including those related to allowance for doubtful accounts, inventory reserves, warranty obligations, restructuring reserves, asset impairment valuations and income tax valuations. We base these estimates on historical experience and on various other factors which we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. These estimates and assumptions by their nature involve risks and uncertainties, and may prove to be inaccurate. In the event that any of our estimates or assumptions are inaccurate in any material respect, it could have a material adverse effect on our reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods.

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

Revenue Recognition.    We record a sale after all significant obligations have been met, collectibility is probable and title has passed, which typically occurs upon shipment or completion of services. Customers generally have 30 days from the original invoice date (generally 60 days for international customers) to return a standard catalog product purchase for exchange or credit. The catalog product must be returned in its original condition and meet certain other criteria. Product returns of catalog items have historically been insignificant and are charged against revenue in the period returned. Custom, option-configured and certain other products as defined in our terms and conditions of sale cannot be returned.

Accounts Receivable.    We estimate the collectibility of customer receivables on an ongoing basis by periodically reviewing invoices outstanding over a certain period of time. We have recorded reserves for receivables deemed to be at risk for collection, as well as a general reserve based on our historical collections experience. A considerable amount of judgment is required in assessing the ultimate realization of these receivables, including the current credit-worthiness of each customer. In recent periods we have increased our reserves for uncollectible accounts due to adverse changes in the financial condition of certain of our customers in the fiber optic communications market. If the financial conditions of our customers in this market continue to deteriorate, or if the financial conditions of our customers in the semiconductor and other markets we serve begin to deteriorate, resulting in an impairment of their ability to make required payments, additional allowances may be required which could adversely affect our operating results.

Inventory.    We state our inventories at the lower of cost, determined on either a first-in, first-out (FIFO) or average cost basis, or market and provide reserves for potentially excess and obsolete inventory. In assessing the ultimate realization of inventories, we make judgments as to future demand requirements and compare that with the current or committed inventory levels. Reserves are established for inventory levels that exceed expected future demand. We have recorded significant reserves, primarily for excess inventory, in recent periods due to deterioration in our primary target markets, fiber optic communications and semiconductor capital equipment. It is possible that additional changes in required inventory reserves may occur in the future due to changes in market conditions.

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Warranty.    Unless otherwise stated in our product literature, we provide a one-year warranty from the original invoice date on all product material and workmanship. Products sold to certain original equipment manufacturer customers sometimes carry longer warranties. Defective products will be either repaired or replaced, generally at our option, upon meeting certain criteria. We accrue a provision for the estimated costs that may be incurred for product warranties relating to a product as a component of cost of sales at the time revenue for that product is recognized. While we engage in extensive product quality programs and processes, including actively monitoring and evaluating the quality of our component suppliers, our warranty obligation is affected by product failure rates, material usage and service delivery costs incurred in correcting a product failure. Should actual product failure rates, material usage and service delivery costs differ from our estimates, revisions to the estimated warranty obligation would be required which could adversely affect our operating results.

Impairment of Assets and Restructuring Reserves.    We assess the impairment of long-lived assets, other than goodwill, whenever events or changes in circumstances indicate that their carrying value may not be recoverable. The determination of related estimated useful lives and whether or not these assets are impaired involves significant judgments, related primarily to the future profitability and/or future value of the assets. Changes in our strategic plan and/or market conditions could significantly impact these judgments and could require adjustments to recorded asset balances. We hold minority interests in companies having operations or technologies in areas within or adjacent to our strategic focus, all of which are privately held and whose values are difficult to determine. We record an investment impairment charge in any reporting period where we believe an investment has experienced a decline in value that is other than temporary. In 2002, two fiber optic component manufacturers in which we had made minority investments in prior years experienced severe financial difficulties. One manufacturer shut down its business and liquidated its assets, and the other manufacturer filed for bankruptcy protection. As a result, we recorded an asset write-down of $6.5 million in 2002 relating to these investments. Future adverse changes in market conditions or poor operating results of underlying investments could result in losses or an inability to recover the carrying value of the investments that may not be reflected in an investment’s current carrying value, thereby possibly requiring an impairment charge in the future.

In 2001, the FASB issued Statement No. 141, Business Combinations (Statement 141), and No. 142, Goodwill and Other Intangible Assets (Statement 142), which we adopted on January 1, 2002. Under Statement 142, goodwill is no longer amortized but is subject to impairment tests based upon a comparison of the fair value of each of our reporting units, as defined, and the carrying value of the reporting units’ net assets, including goodwill. Pursuant to Statement 142, upon adoption we tested our goodwill for impairment and recorded an impairment charge, based upon an independent valuation, of $14.5 million as the cumulative effect of a change in accounting principle as of January 1, 2002. Statement 142 requires a review for impairment at least annually or when circumstances exist that would indicate an impairment of such goodwill. We perform the annual impairment review as of October 1 each year. The October 2002 annual review resulted in no additional impairment of the carrying value of goodwill. At December 31, 2002, we had goodwill of approximately $57.5 million. Had we not amortized goodwill, our net loss from continuing operations for the year ended December 31, 2001 would have decreased $2.5 million and our net income from continuing operations for the year ended December 31, 2000 would have increased $1.1 million.

During 2002 and 2001, we recorded significant reserves in connection with our restructuring and cost reduction programs. These reserves include estimates pertaining to employee separation costs and facility closure costs. Although we do not anticipate significant changes, the actual costs to settle such liabilities may differ from the amounts estimated.

Deferred Taxes.    We currently have significant deferred tax assets, which are subject to periodic recoverability assessments. We recorded a valuation reserve in the third quarter of 2002 against our deferred tax assets pursuant to FASB Statement No. 109, Accounting for Income Taxes (Statement 109), due to the uncertainty as to the timing and ultimate realization of those assets. As such, we did not recognize any tax benefit on the losses recorded in 2002 and recorded a valuation allowance against deferred tax assets previously recorded. For the foreseeable future, the tax provision related to earnings will be substantially offset by a

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reduction in the valuation reserve, and any future pretax losses will not be offset by a tax benefit due to the uncertainty of the recoverability of the deferred tax asset.

Realization of our deferred tax assets is principally dependent upon our achievement of future taxable income, the estimation of which requires significant management judgment. Our judgments regarding future profitability may change due to many factors, including future market conditions and our ability to successfully execute our business plans. These changes, if any, may require material adjustments to these deferred tax asset balances.

RESTRUCTURING AND IMPAIRMENT CHARGES

2002 Restructuring Plan

In August 2002, in response to the continued protracted downturn in the fiber optic communications market and the uncertainty with respect to the pace of recovery in the semiconductor equipment market, our Board of Directors approved management’s cost reduction plan to bring our operating costs in line with our business outlook at that time.

Facility Consolidations

As part of this cost reduction plan, we closed our Santa Ana, California fiber optics facility and consolidated those operations into our Irvine, California facility. In addition, we completed the closure of our San Luis Obispo, California facility and the consolidation of our former Design Technology facility in Billerica, Massachusetts into our MRSI facility, in North Billerica, Massachusetts. Restructuring and impairment charges for the year ended December 31, 2002 included $9.2 million for these facility consolidations. In addition, selling, general and administrative expenses for 2002 included $1.5 million of costs related to the closing of these facilities and the completion of the consolidation of our Garden Grove, California facility into our Irvine, California facility.

Employee Severance

The cost reduction plan included a workforce reduction of approximately 300 employees, of which 187 had been terminated as of December 31, 2002. Approximately one-half of the workforce reduction results from combining our automation businesses into the new Advanced Packaging and Automation Systems (APAS) division and reducing the scope of our investment in the fiber optic communications market. Approximately one-quarter of the reduction results from the divestiture of our discontinued operations, and the remaining reductions result from further streamlining of our operations. Restructuring and impairment charges for the year ended December 31, 2002 included $3.1 million for employee severance and related termination costs.

Inventory Reserves

As part of the cost reduction plan, we rationalized certain legacy products and discontinued certain product development initiatives. In addition, due to the reduced sales forecasts, we increased our reserves for slow moving inventory by $28.7 million, which is included in cost of sales for the year ended December 31, 2002. In addition, we established a reserve of $1.0 million for consignment and demonstration inventory that we deemed to be obsolete or slow moving, which is included in selling, general and administrative expenses for 2002.

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The restructuring and impairment charges, inventory reserves and other charges are classified in the accompanying consolidated statements of operations for the year ended December 31, 2002 as follows:

The restructuring and impairment charges, inventory reserves and other charges relate to the following business segments:

2001 Restructuring Plan

In 2001, we established restructuring reserves for the cost reduction actions implemented at that time, which included restructuring charges of $3.4 million related to workforce reductions, $9.3 million related to facility consolidations and $1.3 million related to other nonrecurring activities. In addition, we established additional reserves for excess and obsolete inventory of $24.4 million.

The restructuring and impairment charges, inventory reserves and other charges are classified in the accompanying consolidated statements of operations for the year ended December 31, 2001 as follows:

The restructuring and impairment charges, inventory reserves and other charges relate to the following business segments:

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The 2001 actions have been completed as of December 31, 2002, resulting in an excess restructuring reserve of $0.6 million. This amount has been used to reduce the 2002 restructuring and asset impairment charges and the related accrued restructuring costs.

The following table summarizes the activity in the accrued restructuring costs:

We expect to pay in cash substantially all the employee severance accrued at December 31, 2002 in 2003. The facility consolidation reserves will be paid through lease terms expiring at various dates between 2005 and 2008.

RESULTS OF OPERATIONS

Net Sales.    For 2002, 2001 and 2000, our net sales totaled $164.0 million, $290.0 million and $262.6 million, respectively. Net sales for 2002 decreased $126.0 million, or 43.4%, compared with 2001. The decrease in net sales was principally attributable to the significant downturns that continue to impact the fiber optic communications and semiconductor equipment markets, offset in part by a slight increase in sales to the aerospace and research markets. Net sales for 2001 increased $27.4 million, or 10.4%, compared with 2000, due primarily to sales increases to the semiconductor equipment market, offset in part by a decline in sales to the fiber optic communications market.

Sales to the semiconductor equipment market were $61.0 million, $86.6 million and $67.4 million for 2002, 2001 and 2000, respectively. Sales to this market in 2002 decreased $25.6 million, or 29.6%, compared with 2001, reflecting weakness in demand by semiconductor manufacturers for capital equipment, which led to a significant reduction in demand for the components, subsystems and robots we sell to this market. In 2001, sales to this market increased $19.2 million, or 28.5%, compared with 2000. The sales increase in 2001 compared with 2000 reflected the strong demand by semiconductor manufacturers for capital equipment through the second quarter of 2001, offset in part by a substantial decline in this market during the second half of 2001.

Sales to the research and aerospace, life and health sciences and related industrial markets were $86.0 million, $101.2 million and $84.5 million for 2002, 2001 and 2000, respectively. Sales to these markets in 2002 decreased $15.2 million, or 15.0%, compared with 2001. Sales to research and aerospace customers during 2002 were higher compared with 2001, but this increase was offset by a significant reduction in sales to industrial customers supporting the telecommunications industry. In 2001, sales to this market increased $16.7 million, or 19.8%, compared with 2000, due primarily to increased sales to industrial customers supporting the telecommunications industry.

Sales to the fiber optic communications market were $17.0 million, $102.2 million and $110.7 million for 2002, 2001 and 2000, respectively. Sales to this market in 2002 decreased $85.2 million, or 83.4%, compared with 2001, reflecting the continued severe market downturn in capital spending in this market. Sales to this

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market in 2001 decreased $8.5 million, or 7.7%, compared with 2000, as we began experiencing weak market demand during the second half of 2001.

For 2002, 2001 and 2000, domestic sales were $116.2 million, $201.7 million and $181.4 million, respectively. Domestic sales in 2002 decreased $85.5 million, or 42.4%, compared with 2001, due to sales decreases in the fiber optic communications, semiconductor equipment and other markets of $51.2 million, or 83.8%, $25.6 million, or 31.0%, and $8.7 million, or 15.0%, respectively. Domestic sales in 2001 increased $20.3 million, or 11.2%, compared with 2000, due primarily to sales increases in the semiconductor equipment and other markets of $20.3 million, or 32.5%, and $10.9 million, or 23.2%, respectively, offset in part by a decline in sales to the fiber optic communications market of $10.9 million, or 15.1%.

International sales totaled $47.8 million, $88.3 million and $81.2 million for 2002, 2001 and 2000, respectively. For 2002, international sales decreased $40.5 million, or 45.9%, compared with 2001, due primarily to decreases in the fiber optic communications market and the research and aerospace, life and health sciences and related industrial markets of $34.0 million, or 82.7%, and $6.5 million, or 15.0%, respectively. Geographically, the decrease in 2002 sales compared with 2001 was driven by reductions in sales of $25.8 million, or 46.4%, to European customers, $5.6 million, or 29.8%, to Pacific Rim customers, $7.8 million, or 74.3%, to Canadian customers, and $1.3 million, or 38.2%, to other international customers. The increase in international sales in 2001 compared with 2000 of $7.1 million, or 8.7%, was due primarily to increases in the fiber optic communications market and the research and aerospace, life and health sciences and related industrial markets of $2.4 million, or 6.2%, and $5.8 million, or 15.5%, respectively. This increase was offset in part by a decrease in international sales to the semiconductor equipment market of $1.1 million or 22.0%. Geographically, the increase in 2001 sales compared with 2000 was driven primarily by sales to European and other international customers of $16.4 million, or 41.8% and $1.2 million or 54.5%, respectively, offset in part by lower sales to Canadian and Pacific Rim customers of $4.8 million, or 31.4% and $5.7 million, or 23.3%, respectively.

Our business is subject to risks arising from market conditions in the semiconductor equipment and fiber optic communications markets, as well as from general economic conditions. During the second half of 2001, the semiconductor equipment and fiber optic communications markets experienced severe downturns. Additionally, the general economic recession constrained capital spending in many of our end markets. The downturn in the fiber optic communications market continued and worsened in 2002, and we expect orders from and sales to this market to remain depressed through 2003 and into 2004. The semiconductor equipment market recovered slightly in the second and third quarters of 2002, but that recovery stalled, and we expect the recovery in this market to be delayed until later in 2003. The precise timing and extent of any recovery from these conditions in the semiconductor equipment and fiber optic communications markets is difficult to predict and represents a significant uncertainty with respect to our future operating results. We expect that our sales to the aerospace and defense and research markets will fluctuate from period to period in line with changes in overall research and defense spending levels, but will show a long-term growth trend in line with growth in the United States gross domestic product.

Gross Margin.    Gross margin was 15.7%, 33.5% and 47.2% for 2002, 2001 and 2000, respectively. The reductions in gross margin for 2002 and 2001 resulted primarily from charges recorded in the third quarter of each year of $28.7 million and $22.7 million, respectively, for excess inventory related primarily to continued weakness in the telecommunications industry. (See “Restructuring And Impairment Charges” on pages 18-20). Excluding these charges, gross margin would have been 33.2% in 2002 and 41.4% in 2001. The reduction in gross margin for 2002 also resulted from significantly lower sales volume and lower fixed overhead absorption in 2002, offset in part by lower sales to OEM customers. The decrease in gross margin in 2001 compared with 2000 was due primarily to the charge described above, as well as to lower absorption of fixed overhead caused by the sharp decline in sales volume through the second half of 2001.

Generally, we expect that our gross margin will fluctuate in future periods due to factors including absorption of fixed overhead due to sales volumes and production activity, product mix and the proportion of

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sales to OEM customers, material costs, changes in the carrying value of inventory and manufacturing efficiencies. Because a significant portion of our manufacturing overhead is fixed in the short term, the impact of increases or decreases in sales on our gross margin will likely not be in proportion to the changes in sales.

Selling, General and Administrative (SG&A) Expense.    SG&A expense totaled $50.2 million, or 30.6% of net sales, $57.3 million, or 19.8% of net sales, and $51.5 million, or 19.6% of net sales, for 2002, 2001 and 2000, respectively. SG&A expense for 2002 included expenses in the third quarter of $2.5 million for costs incurred in connection with our cost reduction initiatives. Excluding these charges, SG&A expense for 2002 would have been $47.7 million, or 29.1% of sales. The expense decrease on a year-over-year basis resulted from lower variable expenses related to the lower sales volume and from the benefits of our cost reduction measures, offset in part by the addition of SG&A expenses relating to our MRSI subsidiary, acquired in February 2002, for which there was no comparable expense in the 2001 periods. SG&A expense for 2001 and 2000 included $2.5 million and $1.1 million, respectively, for amortization of goodwill. Pursuant to FASB Statement No. 142, Goodwill and Other Intangible Assets, beginning in 2002, goodwill is no longer required to be amortized, but instead is subject to periodic impairment testing. SG&A expenses in 2001 increased $5.8 million, or 11.3%, compared with 2000, primarily due to costs of the additional infrastructure added to be able to support the sales growth forecasted in late 2000 and early 2001, offset in part by the effects of the cost reduction efforts initiated in the second half of 2001 in response to the downturn in our primary end markets.

We expect that SG&A as a percentage of sales will fluctuate in the future based on our sales level in any given period. Because a significant portion of our SG&A expenses are fixed in the short term, these fluctuations will likely not be in proportion to the change in sales.

Research and Development (R&D) Expense.    R&D expense totaled $24.4 million, or 14.9% of net sales, $26.1 million, or 9.0% of net sales, and $21.7 million, or 8.3% of net sales, for 2002, 2001 and 2000, respectively. R&D expense decreased $1.7 million, or 6.5%, in 2002 compared with 2001 due primarily to our efforts to maximize the focus and efficiency of our R&D efforts, offset by additional R&D spending related to MRSI, for which there was no comparable expense in 2001. R&D expense increased $4.4 million, or 20.3%, in 2001 compared with 2000 due primarily to increased personnel costs related to the development of a number of new products and product enhancements, primarily in our APAS division.

We believe that the continued development and advancement of our key products and technologies is critical to our future success. Accordingly, we intend to continue to invest in key R&D initiatives, while working to ensure that the efforts are focused and the funds are deployed efficiently. We expect that R&D expense as a percentage of sales will fluctuate in the future based on our sales level in any given period. Because of our commitment to continued product development, and because a significant portion of our R&D expense are fixed in the short term, these fluctuations will likely not be in proportion to the change in sales.

Restructuring and Impairment Charges.    Restructuring and impairment charges related to the cost reduction and related initiatives discussed previously totaled $11.9 million for 2002 and $11.6 million in 2001.

Acquisition and Other Non-Recurring Charges.    During the first quarter of 2001, we recorded acquisition and other non-recurring charges of $10.7 million. These charges were comprised of $9.2 million for investment banking, legal and accounting fees related to our acquisition of KLI and a charge of $1.5 million related to the acceleration of stock options held by a retiring executive officer.

Interest and Other Income, Net.    Interest and other income, net of interest expense, totaled $10.3 million, $13.8 million and $6.0 million for 2002, 2001 and 2000, respectively. The decrease in 2002 from 2001 was due primarily to realized losses on foreign exchange transactions and reduced interest rate levels during 2002. In the third quarter of 2000, we completed a secondary public offering for which we received proceeds of $329.9 million (after underwriting discounts and commissions). The increase in 2001 compared with 2000 was primarily attributable to income from the investment of the proceeds from the secondary offering for the full year 2001.

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We expect that interest income will fluctuate in future periods based on cash balances and changes in interest rates and foreign exchange rates.

Asset Write-Down.    Two fiber optic component manufacturers in which we had made minority investments in prior years experienced severe financial difficulties during 2002. One manufacturer has shut down its operations and liquidated its assets and the second manufacturer filed for bankruptcy protection. As a result, we wrote-down these investments to their estimated fair value, resulting in a charge of $6.5 million during 2002.

Income Taxes.    Our effective tax rates from continuing operations were (24.6%), 35.7% and 22.7% for 2002, 2001 and 2000, respectively. The 2002 tax expense resulted from a valuation allowance that was recorded against a portion of our deferred tax assets pursuant to Statement 109, due to the uncertainty as to the timing and ultimate realization of those assets. As such, we did not recognize any tax benefit on the losses recorded in the current period and recorded a $52.8 million valuation allowance against deferred tax assets previously recorded. For the foreseeable future, the tax provision related to earnings will be substantially offset by a reduction in the valuation reserve, and any future pretax losses will not be offset by a tax benefit due to uncertainty of the recoverability of the deferred tax asset.

The increase in our effective tax rate in 2001 compared with 2000 was due primarily to the earnings attributable to our acquisition of KLI, which was accounted for as a pooling of interests. Prior to its acquisition, KLI was treated as an S-corporation for U.S. tax purposes and accordingly, recorded no income tax provision. Assuming that KLI had been taxed as a C-corporation for all periods presented, our effective tax rate in 2000 would have been 32.6%.

LIQUIDITY AND CAPITAL RESOURCES

Despite our net loss of $100.6 million, our operating activities in 2002 provided cash of $6.5 million. Cash provided by operations was primarily attributable to a decrease in other current assets of $3.3 million and collections of customer receivables of $14.8 million, offset in part by a decrease in accounts payable and accrued expenses of $13.7 million.

Net cash provided by investing activities of $31.3 million for 2002 was primarily attributable to net sales of marketable securities of $36.6 million and the proceeds from the sale of businesses of $9.9 million, partially offset by purchases of property, plant and equipment ($6.7 million) and net cash paid and cash expenses relating to our acquisitions of MRSI ($6.5 million) and certain intellectual property rights ($2.0 million).

Net cash used in financing activities in 2002 of $1.6 million was primarily attributable to payments on long-term borrowings of $6.6 million, offset in part by the sales of common stock in connection with stock option exercises and employee stock purchase plans, which generated $5.0 million in proceeds and resulted in the issuance of approximately 870,000 shares of common stock.

At December 31, 2002, we had cash, cash equivalents and marketable securities of $284.3 million. Substantially all of our marketable securities are divided into three portfolios, each managed by a professional investment management firm, under the oversight of the Investment Committee of our Board of Directors and members of our senior management team. Such portfolio managers invest the funds allocated to them in accordance with our Investment Policy, which is reviewed regularly by the Investment Committee and our senior financial management. We expect that our portfolio balances will fluctuate in the future based on factors such as cash used in or provided by ongoing operations, acquisitions or divestitures, investments in other companies, capital expenditures and contractual obligations, as well as changes in interest rates and foreign exchange rates.

At December 31, 2002, we had in place a credit agreement for a $5.0 million unsecured line of credit expiring September 1, 2003. Certain of the marketable securities that are being managed by the lending institution collateralize the line of credit. The line bears interest at the prevailing prime rate, or the prevailing

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London Interbank Offered Rate plus 1.5%, at our option, plus an unused line fee of 0.25% per year. At December 31, 2002, there were no balances outstanding under the line of credit, with $4.5 million available under the line, after considering outstanding letters of credit totaling $0.5 million.

At December 31, 2002, we had $3.0 million outstanding under a long-term debt agreement with an insurance company. These unsecured senior notes, sold at par, carry an 8.25% annual coupon and mature in May 2004. Principal and interest are payable semiannually. At December 31, 2002, we were not in compliance with a covenant under this agreement due to the net loss and the restructuring and impairment charges recorded in 2002. The insurance company has waived this noncompliance through December 31, 2002 and has amended the debt agreement effective December 31, 2002 to delete this covenant. We believe we will be in compliance with our other debt covenants on an ongoing basis.

We lease certain of our manufacturing and office facilities and equipment under non-cancelable operating leases.

Contractual obligations at December 31, 2002 are summarized as follows:

We believe our current working capital position together with estimated cash flows from operations and existing credit availability are adequate to fund operations in the ordinary course of business, anticipated capital expenditures, debt payment requirements and other contractual obligations, for the foreseeable future. However, this belief is based upon many assumptions and is subject to numerous risks (see “Risks Relating To Our Business,” on pages 26-32), and there can be no assurance that we will not require additional funding in the future.

Although we have no present agreements or commitments with respect to any material acquisitions of other businesses, products, product rights or technologies, we continue to evaluate acquisitions of and/or investments in products, technologies or companies that complement our business and may make such acquisitions in the future. Accordingly, there can be no assurance that we will not need to obtain additional sources of capital in the future to finance any such acquisitions.

NEW ACCOUNTING STANDARDS

In November 2002, the Financial Accounting Standards Board (FASB) issued Interpretation No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others (FIN 45), effective prospectively for guarantees issued or modified after December 31, 2002. The disclosure requirements of FIN 45 are effective for periods ending after December 15, 2002. Under FIN 45, a guarantor is required to recognize, at the inception of certain guarantees, a fair value liability for the obligations it has undertaken in issuing the guarantee, including its ongoing obligation to stand ready to perform over the term of the guarantee in the event that the specified triggering events or conditions occur. FIN 45 clarifies that a guarantor is required to disclose (a) the nature of the guarantee, including the term and circumstances giving rise to the guarantee; (b) the maximum potential amount of future payments under the guarantee; (c) the carrying amount of the liability, if any, for the guarantor’s obligation under the guarantee; and (d) the nature and extent of any recourse or collateral provisions. All guarantees subject to the disclosure provisions of FIN 45, such as product warranties, have been disclosed in the Notes to the Consolidated Financial

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Statements included in this Annual Report on Form 10-K. We do not have any other outstanding guarantees at December 31, 2002 that would be required to be disclosed or recorded as obligations upon adoption of FIN 45.

On January 1, 2002, we adopted FASB Statement No. 141, Business Combinations (Statement 141). Statement 141 eliminates the pooling of interests method of accounting for business combinations and changed the criteria to recognize intangible assets apart from goodwill. We accounted for the acquisition of MRSI in accordance with the provisions of Statement 141.

On January 1, 2002, we adopted FASB Statement No. 142, Goodwill and Other Intangible Assets (Statement 142). Under Statement 142, goodwill is no longer amortized but is subject to impairment tests based upon a comparison of the fair value of each of our reporting units, as defined, and the carrying value of the reporting units’ net assets, including goodwill. Pursuant to Statement 142, upon adoption we tested our goodwill for impairment and recorded an impairment charge of $14.5 million as the cumulative effect of a change in accounting principle on January 1, 2002. Statement 142 requires a review for impairment at least annually or when circumstances exist that would indicate an impairment of such goodwill. We perform the annual impairment review as of October 1 of each year. The October 2002 annual review indicated no further impairment of the carrying value of our goodwill. At December 31, 2002, we had goodwill of approximately $57.5 million. Had we not amortized goodwill, our net loss from continuing operations for the year ended December 31, 2001 would have decreased $2.5 million and our net income from continuing operations for the year ended December 31, 2000 would have increased $1.1 million.

On January 1, 2002, we adopted FASB Statement No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (Statement 144). Under Statement 144, long-lived assets, other than goodwill, are evaluated for impairment whenever events or changes in circumstances indicate that their carrying value may not be recoverable. In addition, assets held for sale are included in discontinued operations if the operations and cash flows will be or have been eliminated from the ongoing operations of the entity and the entity will not have any significant continuing involvement in the operations of the component. The discontinuances of our Industrial Metrology Systems Division and our Plymouth, Minnesota facility have been accounted for as discontinued operations under the provisions of Statement 144.

In July 2002, the FASB issued Statement No. 146, Accounting for Costs Associated with Exit or Disposal Activities (Statement 146). Statement 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies EITF Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring) (EITF 94-3). Statement 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. Statement 146 is effective for exit or disposal activities that are initiated after December 31, 2002. Because our cost reduction and other initiatives occurred prior to December 31, 2002, they have been accounted for under EITF 94-3, and the associated cost has been recognized as of the date of the Board of Directors’ approval of management’s cost reduction plan. If any restructuring activities are undertaken in future years, they will be accounted for under Statement 146.

In December 2002, the FASB issued Statement No. 148, Accounting for Stock-Based Compensation—Transition and Disclosure (Statement 148), providing alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, Statement 148 amends the disclosure requirements to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. We do not currently plan to change our stock-based employee compensation accounting to the fair value method. The accompanying consolidated financial statements reflect all of the disclosures required by Statement 148.

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RISKS RELATING TO OUR BUSINESS

Our operating results are difficult to predict, and if we fail to meet the expectations of investors and/or securities analysts, the market price of our common stock will likely decline significantly.

Our operating results in any given quarter have fluctuated and will likely continue to fluctuate. These fluctuations are typically unpredictable and can result from numerous factors including:

We may in the future choose to reduce prices, increase spending, or add or eliminate products in response to actions by competitors or in an effort to pursue new market opportunities. These actions may also adversely affect our business and operating results and may cause our quarterly results to be lower than the results of previous quarters. We believe that quarter-to-quarter comparisons of results from operations, or any other similar period-to-period comparisons, should not be construed as reliable indicators of our future performance. In any period, our results may be below the expectations of market analysts and investors, which would likely cause the trading price of our common stock to drop.

We are highly dependent on the semiconductor industry and on our customers who serve this volatile and unpredictable industry.

A substantial portion of our current and expected future business comes from sales of subsystem products to manufacturers of semiconductor fabrication and metrology equipment and sales of capital equipment to integrated semiconductor device manufacturers. The semiconductor market has historically been characterized by sudden and severe cyclical variations in product supply and demand. The timing, severity and duration of these market cycles are difficult to predict, and we may not be able to respond effectively to these cycles. The continuing uncertainty in this market severely limits our ability to predict our business prospects or financial results in this market.

During industry downturns, our revenues from this market may decline suddenly and significantly. Our ability to rapidly and effectively reduce our cost structure in response to such downturns is limited by the fixed nature of many of our expenses in the near term and by our need to continue our investment in next-generation product technology and to support and service our products. In addition, due to the relatively long manufacturing

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lead times for some of the systems and subsystems we sell to this market, we may incur expenditures or purchase raw materials or components for products we cannot sell. Accordingly, downturns in the semiconductor capital equipment market may materially harm our operating results. Conversely, when upturns in this market occur, we must be able to rapidly and effectively increase our manufacturing capacity to meet increases in customer demand that may be extremely rapid, and if we fail to do so we may lose business to our competitors and our relationships with our customers may be harmed.

The semiconductor capital equipment market is characterized by rapid technological change, frequent product introductions, changing customer requirements and evolving industry standards. Because our customers face uncertainties with regard to the growth and requirements of these markets, their products and components may not achieve, or continue to achieve, anticipated levels of market acceptance. If our customers are unable to deliver products that gain market acceptance, it is likely that these customers will not purchase our products or will purchase smaller quantities of our products. We often invest substantial resources in developing our systems and subsystems in advance of significant sales of these systems and/or subsystems to such customers. A failure on the part of our subsystem customers’ products to gain market acceptance, or a failure of the semiconductor capital equipment market to grow would have a significant negative effect on our business and results of operations.

We rely on a limited number of customers for a significant portion of our sales to the semiconductor capital equipment market. Our top five customers in this market comprised approximately 75.2% and 61.1% of our sales to this market in the fiscal year ended December 31, 2002 and 2001, respectively, and our top two customers accounted for approximately 54.3% and 38.5%, respectively, of our sales to this market in these periods. In 2002, one customer in this market, Applied Materials, Inc., comprised 10.9% of our consolidated net sales for the year. If any of our principal customers discontinues its relationship with us, replaces us as a subsystem vendor for certain products or suffers downturns in its business, our business and results of operations could be harmed significantly. In addition, because a relatively small number of semiconductor capital equipment manufacturers dominate this market, it may be particularly difficult for us to replace our customers if we lose their business.

A significant portion of our expected future subsystem business in the semiconductor capital equipment market is comprised of products for the fabrication of 300mm semiconductor wafers. Wafer fabrication equipment for 300mm wafers is in a very early stage of its adoption, and is expected to be driven by the need for the ability to manufacture more semiconductor chips at lower cost. The deployment of such equipment requires a significant capital investment by semiconductor manufacturers, and many semiconductor manufacturers have delayed plans to deploy such equipment until market conditions improve. If the demand for capital equipment for 300mm wafers does not increase, or increases more slowly than expected, demand for our subsystem products will likewise be adversely affected, and our business and results of operations could be harmed significantly.

In addition, a significant portion of our expected future capital equipment sales to the integrated semiconductor device manufacturing market is comprised of systems for flip chip bonding and other advanced die bonding techniques. Demand for these systems is expected to be driven in significant part by increases in demand for new technologies in industries such as communications and consumer electronics that require the use of such manufacturing techniques. If the demand for electronic devices requiring flip chip bonding and/or other advanced die bonding techniques does not increase, or increases more slowly than expected, demand for our capital equipment will likewise be adversely affected, and our business and results of operations could be harmed significantly.

Many of the markets and industries that we serve are subject to rapid technological change, and if we do not introduce new and innovative products or improve our existing products, our business and results of operations will be negatively affected.

Many of our markets are characterized by rapid technological advances, evolving industry standards, shifting customer needs and new product introductions and enhancements. Products in our markets often become

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outdated quickly and without warning. We depend to a significant extent upon our ability to enhance our existing products, to address the demands of the marketplace for new and improved technology, either through internal development or by acquisitions, and to be price competitive. If we or our competitors introduce new or enhanced products, it may cause our customers to defer or cancel orders for our existing products. In addition, because certain of our markets experience severe cyclicality in capital spending, if we fail to introduce new products in a timely manner we may miss market upturns, and may fail to have our subsystem products designed into our customers’ products. We may not be successful in acquiring, developing, manufacturing or marketing new products on a timely or cost-effective basis. If we fail to adequately introduce new, competitive products on a timely basis, our business and results of operations would be harmed.

We offer products for multiple industries and must face the challenges of supporting the distinct needs of each of the markets we serve.

We market products for the semiconductor capital equipment, aerospace and defense, life and health sciences, scientific research and fiber optic communications markets. Because we operate in multiple markets, we must work constantly to understand the needs, standards and technical requirements of several different industries and must devote significant resources to developing different products for these industries. Product development is costly and time consuming. Many of our products are used by our customers to develop, manufacture and test their own products. As a result, we must anticipate trends in our customers’ industries and develop products before our customers’ products are commercialized. If we do not accurately predict our customers’ needs and future activities, we may invest substantial resources in developing products that do not achieve broad market acceptance. Our decision to continue to offer products to a given market or to penetrate new markets is based in part on our judgment of the size, growth rate and other factors that contribute to the attractiveness of a particular market. If our product offerings in any particular market are not competitive or our analyses of a market are incorrect, our business and results of operations would be harmed.

Because the sales cycle for some of our products is long and difficult to predict, and certain of our orders are subject to rescheduling or cancellation, we may experience fluctuations in our operating results.

Many of our capital equipment and subsystem products are complex, and customers for these products require substantial time to make purchase decisions. These customers often perform, or require us to perform extensive configuration, testing and evaluation of our products before committing to purchasing them. The sales cycle for our capital equipment and subsystem products from initial contact through shipment typically varies, is difficult to predict and can last as long as one year. The orders comprising our backlog are often subject to cancellation and changes in delivery schedules by our customers without significant penalty. We have from time to time experienced order rescheduling and cancellations that have caused our revenues in a given period to be materially less than would have been expected based on our backlog at the beginning of the period. If we experience such rescheduling and/or cancellations in the future, our operating results will fluctuate from period to period. These fluctuations could harm our results of operations and cause our stock price to drop.

The severe downturn in the fiber optic communications market has harmed and may continue to harm our business.

Our sales to the fiber optic communications market are largely dependent upon sales to companies that manufacture components for fiber optic communications systems. These component manufacturers are largely dependent upon telecommunications system manufacturers, who in turn depend on sales of their products to telecommunications carriers. As such, our success in this market will ultimately depend on the long-term growth of the communications industry, and in particular the growth of Internet usage and bandwidth demand. Demand for high-bandwidth service has not grown as quickly as the communications industry had forecast, and many carriers currently have significant excess capacity in their fiber optic networks. As a result, demand for optical components has decreased substantially, leaving many component manufacturers with significant excess manufacturing capacity. Unless and until higher demand for bandwidth increases network utilization and

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bandwidth pricing, telecommunications carriers will be unlikely to make significant investments in new fiber optic networks, and sales of the manufacturing and test equipment we supply to the companies that build this network equipment will be unlikely to increase significantly. In addition, several major telecommunications carriers have recently declared bankruptcy or are in significant financial distress, and others have significant debt service obligations that may limit their ability to purchase new network equipment, which may further delay the recovery of this market.

Due to the decline in demand for optical components and our customers’ significant excess manufacturing capacity, our sales to this market have declined substantially, and may decline further in the future. While we have significantly reduced the cost structure of our operations serving this market, our ability to reduce these costs further is limited by our plans to continue our investment in certain critical next-generation product technology and to support and service our products. In addition, due to the relatively long manufacturing lead times for some of the systems and subsystems we sell to these markets, we may incur expenditures or purchase raw materials or components for products we cannot sell. We have in the past and may in the future be required to write off excess or obsolete inventory due to declines in our forecasted sales to this market.

Our component manufacturer customers have experienced severe business declines during this downturn. Several of these customers have recently ceased operations or announced their intent to exit this market. Others are currently operating at losses and are unable to make meaningful long-term predictions for their recovery, and hence their forecasted requirements for capital equipment. This continuing uncertainty severely limits our ability to predict the timing of any recovery in this market or our sales to this market in future periods.

We face significant risks from doing business in foreign countries.

Our business is subject to risks inherent in conducting business internationally. In 2002, 2001 and 2000, our international revenues accounted for approximately 29.1%, 30.4% and 30.9%, respectively, of total net sales, with a substantial portion of sales originating in Europe. We expect that international revenues will continue to account for a significant percentage of total net sales for the foreseeable future. As a result of our international operations, we face various risks, which include:

As a result of our international operations, fluctuations in foreign exchange rates could affect the sales price in local currencies of our products in foreign markets, potentially making our products less competitive. In addition, exchange rate fluctuations could increase the costs and expenses of our foreign operations or require us to modify our current business practices. If we experience any of the risks associated with international business, our business and results of operations could be significantly harmed.

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We face substantial competition, and if we fail to compete effectively, our operating results will suffer.

The markets for our products are intensely competitive, and we believe that competition from both new and existing competitors will increase in the future. We compete in several specialized markets, against a limited number of companies in each market. We also face competition in some of our markets from our existing and potential customers who have developed or may develop products that are competitive to ours. Many of our existing and potential competitors are more established, enjoy greater name recognition and possess greater financial, technological and marketing resources than we do. Other competitors are small and highly specialized firms that are able to focus on only one aspect of a market. We compete on the basis of product features, quality, reliability and price and on our ability to manufacture and deliver our products on a timely basis. We may not be able to compete successfully in the future against existing or new competitors. In addition, competitive pressures may force us to reduce our prices, which could negatively affect our operating results. If we do not respond adequately to competitive challenges, our business and results of operations would be harmed.

Acquisitions of additional businesses, products or technologies we may make could negatively affect our business.