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

FORM 10-K

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

For the Fiscal Year Ended June 1, 2002

Commission File Number: 0-12853

ELECTRO SCIENTIFIC INDUSTRIES, INC.

(an Oregon corporation)

93-0370304
(I.R.S. Employer Identification No.)

13900 N.W. Science Park Drive, Portland, Oregon 97229

Registrant’s telephone number: (503) 641-4141

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

Securities registered pursuant to Section 12(g) of the Act:
Common Stock, without par value
Preferred Stock Purchase Rights

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 ý    No o

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.ý

The aggregate market value of voting stock held by nonaffiliates of the Registrant was approximately $496,195,162 as of July 31, 2002 based upon the closing sales price ($17.96) of the Registrant’s Common Stock as reported by the Nasdaq Stock Market.

The number of shares outstanding of the Registrant’s Common Stock at July 31, 2002 was 27,627,793 shares.

DOCUMENTS INCORPORATED BY REFERENCE:

Portions of the definitive Proxy Statement for its 2002 Annual Meeting of Shareholders are incorporated by reference into Part III of this Form 10-K.

ELECTRO SCIENTIFIC INDUSTRIES, INC.

FORM 10-K
For the Fiscal Year Ended June 1, 2002

TABLE OF CONTENTS

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PART I

Item 1. Business

This form 10-K contains forward-looking statements that are subject to risks and uncertainties. Actual results may differ materially from the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those set forth under the caption “Factors That May Affect Future Results” under “Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations”.

Business Overview

Electro Scientific Industries, Inc. and its subsidiaries (“ESI”) provide high technology manufacturing equipment to the global electronics market. Our customers are primarily manufacturers of semiconductors, passive electronic components and electronic interconnect devices. Our equipment enables these manufacturers to reduce production costs, increase yields and improve the quality of their products. The components and devices manufactured by our customers are used in a wide variety of end-use products in the computer, communications and automotive industries.

We believe we are the leading supplier of advanced laser systems used to improve the production yield of semiconductor devices; high-speed test and termination equipment used in the high-volume production of multi-layer ceramic capacitors (MLCCs) and other passive electronic components; and advanced laser systems used to fine tune electronic components and circuitry. Additionally, we produce a family of laser drilling systems for production of high-density interconnect (HDI) circuit boards and advanced electronic packaging, as well as inspection systems and original equipment manufacturer (OEM) machine vision products.

Electronics Industry Overview

The electronic content of common items such as computers, communication products and automobiles continues to increase. For example, markets for consumer-oriented electronic products such as wireless telephones, computers, personal digital assistants, pagers, digital cameras and entertainment devices have developed rapidly as increasingly affordable products have been introduced that are smaller, lighter and more portable. In addition, automobile manufacturers now routinely include electronic ignition, anti-lock brakes, electronic fuel injection and other electronic systems in place of components that in the past were predominantly mechanical or hydraulic.

The increasing demand for electronic products has been accompanied by the need for faster, smaller, more complex, less expensive and higher quality electronic devices and circuits. To achieve these higher performance attributes and smaller device sizes, electronic device manufacturers are increasing the circuit densities in these devices and tuning them to precise electrical values. Manufacturers of wireless telephones, for example, must use miniaturized circuits to accommodate the size limitations of their finished products. These circuits must also be tuned to operate within precise frequency specifications, enabling the existing wireless frequency bands to accommodate more users without interchannel interference.

Smaller and lighter requirements also decrease the physical dimensions used in electronic interconnections within the electronic device, its surrounding package and the HDI circuit board on which it is mounted. Higher operating speeds of computers and communications products also require more input and output channels within these packages and between the packages and the HDI circuit board.

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The highly competitive consumer markets for electronic products drive the need for increasingly less expensive devices and components. Electronic devices and components are produced in large unit volumes and their production and testing is highly automated, utilizing a variety of manufacturing equipment. Manufacturers continuously seek to achieve reduced costs by improving the throughput, yield and quality of device and component production.

For example, semiconductor device manufacturers are continuing a transition from the use of 200mm and smaller silicon wafers to 300mm wafers. This enables manufacturers to fit significantly more electronic devices on a single silicon wafer. In addition, decreasing circuit densities enable more devices to be produced on a silicon wafer by reducing the size of each device on the wafer. The use of larger wafers and the design of smaller devices increases the throughput and capacity of electronic device manufacturing facilities, or fabs. Increasing circuit densities also requires the use of newer materials, such as copper, to create these miniaturized electronic circuits.

To improve production yield, or the number of acceptable devices produced per silicon wafer, device manufacturers are utilizing advanced yield improvement systems, such as memory repair, in the manufacture of memory devices such as Dynamic Random Access Memory, or DRAM, and non-memory devices such as logic with embedded memory, digital signal processors (DSPs) and high-end electronic game chips.

As semiconductor manufacturers move toward higher densities and more complex architectures, machine vision has also emerged as a critical technology. By allowing manufacturers to achieve greater precision, increased equipment speed and fewer errors, machine vision is enabling technology in the semiconductor manufacturing process, from wafer production through final assembly and packaging. In addition, the manufacture and placement of components in the surface mount assembly area requires the high-speed and accuracy that can be obtained through integrated machine vision solutions.

Our Solution

We believe our products address the needs of electronic component manufacturers by providing them with a high return on their investment due to measurable production benefits, including improved yield, increased throughput, higher performance, smaller component size, greater reliability and enhanced flexibility. Our production systems are designed to be upgraded to accommodate the next generation of technology, providing customers the flexibility to add capacity or improve product performance at a reasonable incremental cost.

Our technology strengths include a deep understanding of the interaction of lasers with materials used in electronic production, high-speed optics, real-time production control systems, small parts handling systems, and multiple elements of machine vision, including lighting, character and pattern recognition and software algorithms. We combine this core technology expertise in unique and innovative ways with a thorough understanding of our customers’ processes and objectives to develop new and improved products.

Our customers manufacture semiconductors, passive components and electronic interconnect devices. They, in turn, serve a wide range of electronic applications. The largest end-market applications for electronic devices and circuits that are produced using our systems are:

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Our Strategy

Our Products

Semiconductor Yield Improvement Systems. Our yield improvement product line is designed and developed to cost-effectively meet the production challenges faced by semiconductor manufacturers, including shrinking circuit sizes, material changes and increased wafer sizes. As circuit densities in semiconductor memory devices such as DRAM have increased, manufacturers have built redundant cells into their memory designs and connected them with small links on the device surface. During the manufacturing process, wafers with hundreds of individual memory devices are tested identifying defective cells. Our laser systems are then used to cut links to disconnect the defective portion and to replace it with one of the redundant cells.

Electronic Component Manufacturing Systems. We design and manufacture products that combine high-speed, small parts handling technology with microprocessor-based systems to provide highly automated, cost-effective solutions for manufacturers of MLCCs and other passive components such as arrays, inductors and varistors. These components are used in circuits that process analog and digital signals or operate at high frequencies in nearly all electronic products.

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Advanced Electronic Packaging Systems. Our laser drilling products are targeted at applications requiring the highest accuracy and smallest via, or hole, dimensions, in order to create electrical connections between layers in high-density circuit boards and electronic packages. We offer drilling and routing technology to address the rapidly changing applications in integrated circuit (IC) packages, multi-chip modules and HDI circuit boards. Our systems utilize either ultraviolet or CO₂ laser technology and come in single-head or dual-head configurations depending on customer requirements.

Vision and Inspection Systems. Our products include both machine vision subsystems sold to original equipment manufacturers (OEMs), and multi-function, stand-alone inspection systems sold to end users. In addition, our machine vision subsystems are a key component used in our other product lines.

In the OEM marketplace, we have concentrated our efforts on selling complete vision solutions and integration expertise to suppliers of semiconductor and electronics equipment. We have also developed and acquired new products to provide complete stand-alone inspection systems for semiconductor wafer sorting, inspection and defect review and integrated circuit mark and lead inspection.

We offer machine vision solutions that reduce application development time and shorten time- to-market for producers of equipment used to manufacture semiconductors and electronics. Products include patented specialized lighting, wafer alignment and identification products and application specific solutions for the surface mount industry.

Our machine vision systems are customer-specific solutions used to perform pick and place, wire bonding and other functions. They consist of:

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Our semiconductor automation and inspection product line is focused on IC package handling and inspection systems. Semiconductor wafer fabricators use our equipment to sort and inspect wafers throughout all phases of processing. These modular systems combine multiple handling and inspection functions onto single platforms. Device manufacturers and contract packaging houses use our equipment for mark and lead inspection and tape and reel packaging. Our systems inspect traditional devices with leads as well as newer leadless devices.

Circuit Fine Tuning Systems. We design and manufacture application-specific laser systems that adjust the electrical performance of a product or assembly containing many circuits by removing a precise amount of material from one or more components in the circuit. This is done to achieve the desired electrical specification for the entire product. This process is called “functional trimming,” and is performed while the product or assembly is under power. For example, in wireless phones, laser trimming of a few selected components in the product is used to tune the product to the desired frequency.

Our circuit fine tuning systems also adjust the resistance value of discrete resistors manufactured on ceramic substrates for use in surface mount technology end products. Typically, these discrete devices are produced at resistance values 20% to 30% below nominal levels and need to be trimmed to resistance value with very high accuracy. Our systems meet the demands for high-volume, high-accuracy miniature resistor trimming through precise positioning of the laser beam and high-speed measurement capability.

Our circuit fine tuning systems include:

We have also used our expertise in precise laser machining/trimming to develop additional products that expand our markets and applications. These include:

Historically, our circuit fine-tuning business has served as an incubator for our new businesses, including our semiconductor yield improvement and advanced packaging systems businesses.

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Customers

Our top twelve customers by revenue for fiscal 2002, listed alphabetically, were:

In fiscal years 2002, 2001 and 2000, no customer exceeded 10% of sales. Sales outside the U.S. accounted for 73.6%, 70.9% and 71.7% of our net sales for fiscal years 2002, 2001 and 2000, respectively. The most significant sales outside the U.S. were to Taiwan, Europe and Japan, which represented 23.4%, 16.1%, and 11.1% of our net sales for fiscal 2002, respectively.

Sales, Marketing and Service

We sell our products worldwide through direct sales and service offices located in or near: Austin; Boston; Portland (Oregon); Dallas; Los Angeles; San Diego; San Francisco; Tokyo, Oita and Nagoya, Japan; Seoul, Korea; Taipei and Chungli, Taiwan; Singapore; Guangzhou and Shanghai, China; Munich, Germany; West Sussex, England; and Fife, Scotland. We serve customers in additional countries through manufacturers’ representatives.

We have a substantial base of installed products in use by leading worldwide electronics manufacturers. We emphasize strong working relationships with these customers to meet their needs for additional systems and to facilitate the successful development and sale of new products to these customers.

We maintain service personnel wherever we have a significant installed base. New systems are tested prior to delivery to ensure they meet our product specifications and requirements. We offer a variety of maintenance contracts and parts replacement programs.

Backlog

Backlog consists of written purchase orders for products, spare parts and service, which we expect to ship within twelve months. Backlog was $27.2 million at June 1, 2002 versus $55.5 million at June 2, 2001 and $160.3 million at June 3, 2000.

Research, Development and Technology

We believe that our ability to compete effectively depends, in part, on our ability to maintain and expand our expertise in core technologies and product applications. The primary emphasis of our research and development is to advance our capabilities in:

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Our research and development expenditures for fiscal years 2002, 2001 and 2000 were $35.2 million (21.1% of net sales), $51.3 million (10.9% of net sales) and $35.1 million (11.7% of net sales), respectively.

Competition

Our markets are dynamic and highly competitive. The principal competitive factors in our markets are product performance, reliability, service, technical support, product improvement, price, established relationships with customers and product familiarity. We believe that our products compete favorably with respect to these factors. Some of our competitors have greater financial, engineering and manufacturing resources and larger distribution networks than we do. Some of our customers develop, or have the ability to develop, similar manufacturing equipment. There can be no assurance that competition in our markets will not intensify or that our technological advantages may not be reduced or lost as a result of technological advances by competitors or customers, or changes in electronic device processing technology.

Our principal competitor for semiconductor yield improvement systems is GSI Lumonics. For electronic component manufacturing equipment, our competitors include Tokyo Weld, Kanebo and Humo in Japan, as well as manufacturers that develop systems for internal use. Our advanced electronic packaging systems compete with laser systems provided by Hitachi Via Mechanics, Mitsubishi, Sumitomo and GSI Lumonics. Our vision products compete with vision suppliers such as Cognex, ICOS Systems, and Robotic Vision Systems. There are also numerous other vision companies and captive vendors in Japan, North America and Europe. Major competitors for circuit fine tuning systems include NEC and GSI Lumonics.

Manufacturing and Supply

Our largest production facilities are located in Portland, Oregon; Klamath Falls, Oregon; and Escondido, California. The manufacturing operations located in Portland consist of electronic subassembly and final system assembly for semiconductor yield improvement, advanced electronic packaging, and circuit fine tuning product lines. We now produce our vision products in Portland as a result of a relocation effort that took place in the first quarter of fiscal 2002. Electronic component manufacturing products are produced in our facilities in Escondido, California and Klamath Falls, Oregon.

We use qualified manufacturers to supply many components of our products. Our systems use high performance computers, peripherals, lasers and other components from various suppliers. Some of the components we use are obtained from a single source or a limited group of suppliers. An interruption in the supply of a particular component could require substitutions that would have a temporary adverse impact on us. We believe our relationships with our suppliers are good.

Employees

As of June 1, 2002, we employed 875 people, including 191 in engineering, research and development, 306 in manufacturing and 378 in marketing, sales, technical support, customer service and administration. Many of our employees are highly skilled, and our success will depend in part upon our ability to attract and retain such employees, who are in great demand. We have never had a work stoppage or strike and no employees are represented by a labor union or covered by a collective bargaining agreement. We consider our employee relations to be good.

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Item 2. Properties

Patents and Other Intellectual Property

We have a policy of seeking patents, when appropriate, on inventions relating to new products and improvements that are discovered or developed as part of our ongoing research, development and manufacturing activities. We own 79 United States patents and 126 patents issued outside of the United States. During fiscal 2002 we applied for 24 new patents in the United States and 30 new patents outside of the United States. Additionally, as of June 1, 2002 we had 35 patent applications pending in the United States and 162 patent applications pending outside of the United States. Although our patents are important, we believe that the success of our business depends to a greater degree on the technical competence and innovation of our employees.

We rely on copyright protection for our proprietary software. We also rely upon trade secret protection for our confidential and proprietary information. There can be no assurance that others will not independently develop substantially equivalent proprietary information and techniques, or that we can meaningfully protect our trade secrets.

Properties

Our executive and administrative offices, as well as one of our manufacturing facilities, are located in a three-building complex on 15 acres of land in Portland, Oregon. We own the buildings, which contain 196,500 square feet of space. In June of 2001 we began construction of a 62,000 square foot corporate headquarters building in Portland, Oregon. We plan to complete construction in September of 2002. We also own a 60,000 square foot plant on 10 acres of land in Escondido, California; a 29,000 square foot building on 3 acres of land near Minneapolis, Minnesota which is currently listed for sale; and a 53,000 square foot plant on 31 acres of land in Klamath Falls, Oregon.

We lease 21,945 square feet of office and industrial space in Ann Arbor, Michigan that is currently listed for sub-lease, and other office and service space in the United States and in eight foreign countries.

We believe the productive capacity of these facilities to be adequate and suitable for the requirements of our business.

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Item 3. Legal Proceedings

Legal Proceedings

On February 14, 2001, Cognex Corporation (Cognex) filed a lawsuit in the United States District Court for the District of Massachusetts (Cognex Corporation v. Electro Scientific Industries, Inc., No. 01-10287 RCL). The lawsuit alleges that our CorrectPlace ver. 5.0 product infringes United States Patent 5,371,690, which is owned by Cognex. The patent concerns the inspection of surface mount devices that are attached to the surface of an electronic circuit board. Cognex seeks injunctive relief, damages, costs and attorneys’ fees. We believe we have meritorious defenses to the action and intend to pursue them vigorously. Fact discovery is completed in the lawsuit. Additionally, certain of our customers have notified us that, in the event it is subsequently determined that their use of CorrectPlace ver. 5.0 infringes any patent, they may seek indemnification from us for damages or expenses resulting from this matter.

We initiated litigation against Dynamic Details, Inc. and GSI Lumonics, Inc. for patent infringement in March 2000 in the U.S. District Court for the Central District of California (Electro Scientific Industries v. Dynamic Details, Inc. and GSI Lumonics, Inc., No. SACV00-272 AHS (ANX)). We believe that Dynamic Details and GSI Lumonics are violating our U.S. patent 5,847,960 entitled “Multi-tool Positioning System”. The complaint alleges that Dynamic Details infringes our patent 5,847,960 and that GSI Lumonics has actively induced infringement of, and contributorily infringed, our patent 5,847,960. The complaint seeks injunctive relief and monetary damages. Dynamic Details, Inc. and GSI Lumonics, Inc. have filed a counterclaim for a declaratory judgment of non-infringement and invalidity of our patent 5,847,960. In August 2001, the District Court issued an order granting Dynamic Details and GSI Lumonics’ motion for summary judgment of non-infringement. We have appealed the District Court’s order to the U.S. Court of Appeals for the Federal Circuit and an appellate hearing has occurred. The appeal is pending.

Numerous users of our products have received notice of patent infringement from the Lemelson Medical, Educational & Research Foundation Limited Partnership (“Partnership”) alleging that their use of our products infringes certain patents transferred to the Partnership by the late Jerome H. Lemelson. Certain of these users have notified us that, in the event it is subsequently determined that their use of our products infringes any of the Partnership’s patents, they may seek indemnification from us for damages or expenses resulting from this matter.

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

No matters were submitted to a vote of our security holders during the fourth quarter ended June 1, 2002.

Executive Officers

Our executive officers, and their ages and positions as of July 3, 2002 are as follows:

Mr. Bolender was elected Chairman of the Board of ESI in January 1992 and named Acting President and Chief Executive Officer in April 2002. From February 1998 until his retirement in July 1999, Mr. Bolender was CEO of Protocol Systems, Inc., a manufacturer of vital sign monitoring equipment for the medical industry. Prior to his leadership of Protocol Systems, Mr. Bolender retired in 1991 from the position of President of the Electric Operations Group of PacifiCorp, a diversified public utility located in Portland, Oregon. Mr. Bolender is also a director of Benson Industries, Inc. Mr. Bolender is a TriMet board member, Oregon Medical Laser System advisory board member, and is a member of the Providence Governing Council.

Mr. Cooley joined us in 1993 as Director of Engineering for ESI’s laser based equipment products. He was elected Vice President in January 1999 and is responsible for Engineering and Corporate Research and Development. In April 1999, Mr. Cooley assumed the role of Chief Technology Officer. Prior to ESI, he held engineering management positions with Texas Instruments and Kulicke and Soffa Industries as well as several startup companies engaged in equipment development.

Mr. Dooley was elected Vice President and Chief Financial Officer in June 2000. In April 2002, he was elected Senior Vice President and Acting Chief Operating Officer. He joined us in 1992 as the Controller of Electronic Component Systems business and was named Corporate Controller in 1994. In 1996 he was named Director of Portland Manufacturing. Prior to joining us he held various financial management positions at IRT Corporation, Eli Lilly and Company, INTERMEDICS, Inc., and Johnson and Johnson, Inc.

Mr. Isselmann joined us in May 2000 as General Counsel. Before joining us, Mr. Isselmann was a Senior Attorney at Intel Corporation. Prior to working at Intel, he worked as an attorney for the Portland, Oregon law firm of Stoel Rives LLP from 1996-2000, and in 1998 at Tektronix Inc., Wilsonville, Oregon.

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Mr. Kapral joined us in May 2000 as Vice President responsible for our vision-based businesses and assumed responsibility for Human Resources in May 2002. From 1987 until he joined us, Mr. Kapral was both a corporate vice president and a business unit president of SGL Carbon Group, a major supplier to semiconductor manufacturers, with responsibility for SGL’s semiconductor activities in North America and Europe.

Mr. Klein joined us in September 2000 as Corporate Vice President of Manufacturing. In May 2002, he was named Vice President of Global Service. From 1998 until joining ESI, Mr. Klein was Vice President of Operations with the Furon Company. From 1994 to 1998, he was Vice President of Operations at Tech Industries. Prior to that, he held management positions with Rockbestos Company and the Eaton Corporation.

Mr. Kurdock joined us in February 1997 as Vice President and General Manager of Portland Operations and became responsible for company-wide Operations in May 2002. During the five years prior to joining us, Mr. Kurdock served as Vice President of the Surface Mount Division for Universal Instruments and previously held senior operating positions with the Silicon Valley Group and Perkin Elmer.

Mr. Longe joined us in October 2000 as Corporate Vice President. In May 2001 he was named Vice President of Worldwide Sales and in May 2002 he assumed responsibility for Sales, Marketing and Service. From 1992 until he joined ESI, he was with Evapco, Inc., where he was Vice President and Managing Director of Asia-Pacific operations and, prior to that, Vice President of the Industrial Products Group. His earlier experience included senior management positions with IMECO, a subsidiary of York International.

Mr. Reinhart joined us in 1993 as Communications and Contracts Manager and was named Director of Business Development in April 1995. Mr. Reinhart was elected a Vice President in September 1996 and was elected Corporate Secretary in June 1998. His experience includes finance, venture funding, mergers and acquisitions and administration in high-technology businesses.

Mr. Swenson joined us in 1961 as a project and applications engineer and was named Vice President, Advanced Development in 1979. Mr. Swenson was elected Senior Vice President of Advanced Research and Development in 1987.

Mr. Taft joined us in 1985 in our Electronic Component Manufacturing Systems unit and held various sales and management positions. Mr. Taft was named Asia Sales Manager in 1997 and was named Director of Sales and Marketing for our Semiconductor Yield Improvement Systems unit in 1998. He became General Manager of Semiconductor Products in 1999 and was elected Vice President of the Electronic Component Manufacturing Systems product line in April 2002. Prior to joining us, he was with Kyocera International.

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PART II

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

Common Stock Prices/Dividends

Our common stock trades on the Nasdaq National Market under the symbol ESIO. The following table shows, for the fiscal quarters indicated, the high, low and quarter end closing sales prices for the common stock as reported on the Nasdaq National Market.

We have not paid any cash dividends on our common stock during the last six fiscal years. We intend to retain our earnings for our business and do not anticipate paying any cash dividends in the foreseeable future.

The number of shareholders of record at June 1, 2002 was 756.

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Item 6. Selected Financial Data

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

Overview

Electro Scientific Industries, Inc. and its subsidiaries (“ESI”) provide high technology manufacturing equipment to the global electronics market. Our customers are primarily manufacturers of semiconductors, passive electronic components and electronic interconnect devices. Our equipment enables these manufacturers to reduce production costs, increase yields and improve the quality of their products. The components and devices manufactured by our customers are used in a wide variety of end-use products in the computer, communications and automotive industries.

We believe we are the leading supplier of advanced laser systems used to improve the production yield of semiconductor devices; high-speed test and termination equipment used in the high-volume production of multi-layer ceramic capacitors (MLCCs) and other passive electronic components; and advanced laser systems used to fine tune electronic components and circuitry. Additionally, we produce a family of laser drilling systems for production of high-density interconnect (HDI) circuit boards and advanced electronic packaging, as well as inspection systems and original equipment manufacturer (OEM) machine vision products.

Fiscal Year Ended June 1, 2002 Compared to Fiscal Year Ended June 2, 2001

Net sales for fiscal 2002 were $166.5 million, which was 64.7% or $305.3 million lower than for fiscal 2001. The decrease was due to lower unit sales across all of our product lines. For fiscal 2002, semiconductor yield improvement systems represented the largest percentage of net sales at 40.7%. For fiscal 2001 electronic component systems represented the largest percentage of net sales at 45.4%.

Gross margin for fiscal 2002 was 41.2%, down from 55.8% in the prior fiscal year. This decrease in gross margin as a percentage of net sales was due primarily to non-recurring charges of $12.5 million related to inventory write-offs, which was reflected in cost of sales, in addition to decreased capacity utilization resulting from lower unit volume and product mix.

Selling, service and administrative expenses were $60.9 million, a decrease of $20.9 million or 25.5% from fiscal 2001. The decrease in fiscal 2002 was primarily due to decreases in our selling, marketing and administrative headcount and lower costs of incentive and benefits programs. Selling, service and administrative expenses increased as a percentage of sales from 17.3% to 36.6%, primarily due to lower net sales in fiscal 2002.

Future operating results are highly dependent on our ability to maintain a competitive advantage in the products and services we provide. To protect this advantage we continue to make investments in research and development. Research, development and engineering expenses for fiscal 2002 decreased to $35.2 million from $51.3 million in the prior year. The decrease in fiscal 2002 was primarily due to decreases in research, development and engineering headcount and lower project costs. We continue to invest in a significant number of development projects that we see as important to our future. As a percentage of net sales, research, development and engineering expenses increased from 10.9% for fiscal 2001 to 21.1% for 2002. The increase as a percentage of net sales was due to lower net sales in fiscal 2002.

In order to better align our operating expenses with anticipated revenues, we implemented a restructuring plan in the first quarter of fiscal 2002. The restructuring plan consisted of reducing our work force and vacating several buildings. This reorganization resulted in restructuring charges to operating expenses of $7.0 million for fiscal 2002. The major components of the restructuring charge of $7.0 million were $4.6 million in employee severance and other employee expenses, $1.9 million in lease termination and other facility consolidation costs and $0.5 million in other expenses, net. We also recorded a $3.1 million inventory write-off related to discontinuing the manufacturing of certain products. This inventory write down was reflected in costs of sales.

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As part of our fundamental review of our strategy and product lines, in the fourth quarter of fiscal 2002 we decided to exit the mechanical drill business. Non-recurring charges of $11.2 million were incurred in relation to this strategic decision. The major components of these restructuring charges were $9.4 million of inventory related writedowns recorded as part of cost of goods sold, $1.4 million of intangible asset writedowns and fixed asset writedowns of $0.4 million recorded as non-recurring operating expense.

Interest income was $9.1 million for fiscal 2002, a decrease of $0.8 million from fiscal 2001. The decrease is primarily due to lower interest rates. Interest expense was $3.7 million for fiscal 2002, an increase of $3.7 million from fiscal 2001. The increase was related to our sale of $150 million aggregate principal amount of 4 ¼% convertible subordinated notes during fiscal 2002.

In fiscal 2002, we recorded an income tax benefit of $15.5 million compared to income tax expense of $50.0 million in fiscal 2001. The income tax benefit related to the fiscal 2002 operating loss and the cumulative impact of a historical research and development credit of $4.6 million. Our effective tax rate was a 49.2% benefit in fiscal 2002 compared to a 33.3% expense in fiscal 2001.

Net loss for the year ended June 1, 2002 was $16.0 million, or $0.58 per basic and diluted share. Net income for the year ended June 2, 2001 was $99.9 million, or $3.71 per basic share and $3.58 per diluted share. Excluding the non-recurring restructuring, inventory write-off charges and research and development credits and associated professional fees, fiscal 2002 net loss was $6.2 million, or $0.23 per basic and diluted share.

Fiscal Year Ended June 2, 2001 Compared to Fiscal Year Ended June 3, 2000

Net sales for fiscal 2001 were $471.9 million, which was 57.6% or $172.4 million higher than for fiscal 2000. The increase was due to higher sales of electronic component systems, semiconductor yield improvement systems and circuit fine tuning systems. These increases were partially offset by slightly lower sales of vision and inspection systems. Advanced electronic packaging equipment sales remained relatively flat. For both fiscal 2001 and 2000, electronic component systems represented the largest percentage of revenues at 45.4% and 37.9%, respectively.

Gross margin for fiscal 2001 was 55.8%, up from 51.9% in the prior fiscal year. This increase in gross margin as a percentage of net sales was due primarily to increased capacity utilization resulting from higher unit volume, as well as faster growth of higher margin product revenue.

Selling, service and administrative expenses were $81.8 million, an increase of $18.7 million or 29.6% from fiscal 2000. The increase in fiscal 2001 was primarily due to increases in our selling and marketing infrastructure and higher costs of incentive and benefit programs. Selling, service and administrative expenses decreased as a percentage of sales from 21.1% to 17.3%, primarily due to higher net sales.

Our future operating results depend to a considerable extent on our ability to maintain a competitive advantage in the products and services we provide. We continue to make substantial investments in our research and development efforts. Accordingly, research, development and engineering expenses for fiscal 2001 increased to $51.3 million from $35.1 million for the prior year. As a percentage of sales, research, development and engineering expenses decreased from 11.7% for fiscal 2000 to 10.9% for fiscal 2001. The decrease as a percentage of net sales was due to higher net sales for fiscal 2001.

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Non-recurring operating income consisted of a $13.9 million gain in connection with the GSI Lumonics litigation award net of $2.5 million of legal fees and other expenses directly related to the award settlement.

Interest income rose to $9.8 million, an increase of $7.1 million from fiscal 2000. The increase is due to increased cash and related investments as a result of a significant increase in earnings as well as $1.4 million of interest received related to the GSI Lumonics litigation award.

The effective tax rate of 33.3% for fiscal 2001 is higher than the fiscal 2000 effective rate as a result of relatively lower foreign sales corporation benefit on significantly higher earnings and a lower utilization of net operating losses in fiscal 2001. The lower effective tax rate as compared to the statutory federal tax rate is largely a result of the benefit of our foreign sales corporation.

Net income for the year ended June 2, 2001 was $99.9 million, or $3.71 per basic share and $3.58 per diluted share. Net income for the year ended June 3, 2000 was $40.9 million, or $1.55 per basic share and $1.49 per diluted share. Excluding the non-recurring GSI litigation award settlement, fiscal 2001 net income was $91.5 million, or $ 3.39 per basic share and $3.28 per diluted share.

Financial Condition and Liquidity

Our principal sources of liquidity at June 1, 2002 consisted of: existing cash, cash equivalents and marketable securities of $283.9 million, accounts receivable of $55.8 million, and a $20.0 million line of credit, under which no amount was outstanding at June 1, 2002. Refer to the notes to our consolidated financial statements, Line of Credit, for further discussion of the line of credit. At June 1, 2002, we had long-term debt of $145.9 and a current ratio of 17.1:1. Working capital increased to $341.9 million at June 1, 2002 from $264.6 million at June 2, 2001. We may acquire or invest in complementary businesses, product lines or technologies. These acquisitions or investments may require additional debt or equity capital to fund such activities.

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The following is a summary of our cash flow activities:

Operating Activities: Operating cash flows were approximately $0.4 million in fiscal 2002, as compared to $89.2 million in fiscal 2001. This decrease resulted from a net loss for fiscal 2002 which was offset by net changes in operating accounts. Trade receivables decreased $30.6 million due to decreased sales in comparison to last fiscal year. Income tax receivable increased $13.9 million as a result of refunds expected from current year loss carryback claims and the recovery of prior year research and development credits. Inventory decreased by $9.5 million from June 2, 2001 as a result of decreased sales reducing the need for larger inventories. Decreases in work-in-process and finished goods were directly related to decreased sales. Current liabilities decreased $22.3 million due to lower compensation accruals, which resulted from lower volume of business and decreased profitability.

Investing Activities: Net cash of $193.2 million was used in investing activities. We made net purchases of marketable securities of $178.0 million and property, plant and equipment purchases in the amount of $15.3 million to upgrade computing and manufacturing capabilities, and to renovate office and manufacturing space and to improve their utilization.

Financing Activities: Net cash of $153.6 million was provided by financing activities in fiscal 2002. Net proceeds of $145.5 million were generated by our sale of $150 million aggregate principal amount of 4 ¼% convertible subordinated notes due 2006. $8.1 million was generated by stock option exercises and sales under the employee stock purchase plan.

Capital Commitments: We have committed approximately $6.3 million for construction of a 62,000 square foot corporate headquarters building located on the Portland, Oregon campus. We expect that the facility will be completed in September 2002.

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Critical Accounting Policies and Estimates  

The preparation of our financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. Our estimates are based on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. These estimates form the basis for judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Pursuant to December 2001 Securities and Exchange Commission guidance to all registrants, we have prepared the following discussion of critical accounting policies. Refer to the notes to our consolidated financial statements, Summary of Significant Accounting Policies, for additional information.

Our critical accounting policies include the following:

Revenue Recognition  

We recognize systems, spare parts and other product revenue when the product has been delivered, risk of loss has passed to the customer and collection of the resulting receivable is highly probable. We design, market and sell our products as standard configurations. Accordingly, customer acceptance provisions are based on seller-specified criteria, which we demonstrate prior to shipment. Revenue on new products is deferred until we have established a record of customer acceptance on these new products. When customer-specified objective criteria exist, revenue is deferred until customer acceptance. Revenue associated with service or maintenance contracts is recognized ratably over the life of the contract, which is generally one year.

Inventory Writedowns  

We regularly evaluate the value of our inventory based on a combination of factors including the following: forecasted sales or usage, historical usage rates, estimated service period, product end of life dates, estimated current and future market values, service inventory requirements and new product introductions, as well as other factors. Purchasing requirements and alternative uses for the inventory are explored within these processes to mitigate inventory exposure. Raw materials with quantities in excess of forecasted usage are reviewed at least monthly for obsolescence by our engineering and operating personnel. Raw material obsolescence writedowns are typically caused by engineering change orders or product end of life adjustments in the market. Finished goods are reviewed at least monthly by product marketing and operating personnel to determine if inventory carrying costs exceed market selling prices. We record writedowns for inventory based on the above factors and take into account worldwide quantities and demand into our analysis. If circumstances related to our inventories change, our estimates of the value of inventory could materially change.

Product Warranty Reserves  

We evaluate our obligations related to product warranties quarterly. We offer a standard one-year warranty to our customers. We track historical system reliability on an individual system basis. Costs include labor to repair the system and replacement parts for defective items, as well as other costs incidental to warranty repairs. Any cost recoveries from warranties offered to us by our suppliers covering defective components are also considered. This data is then used to calculate the accrual based on actual sales for each system and remaining warranty periods. If circumstances change or if a dramatic change in warranty related incidents occurs, our estimate of the warranty accrual could change significantly.

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Allowance for Doubtful Accounts  

Credit limits are established through a process of reviewing the financial history and stability of each customer. Where appropriate, we obtain credit rating reports and financial statements of the customer to initiate and modify their credit limits. On certain foreign sales, we require letters of credit. We regularly evaluate the collectibility of our trade receivable balances based on a combination of factors. When a customer’s account becomes past due, we initiate dialogue with the customer to determine the cause. If it is determined that the customer will be unable to meet its financial obligation to us, such as in the case of a bankruptcy filing, deterioration in the customer’s operating results or financial position or other material events impacting their business, we record a specific reserve for bad debt to reduce the related receivable to the amount we expect to recover given all information presently available. If circumstances related to specific customers change, our estimates of the recoverability of receivables could materially change.

Factors That May Affect Future Results  

The statements contained in this report that are not statements of historical fact, including without limitation, statements containing the words “believes,” “expects,” and similar words, constitute forward-looking statements that are subject to a number of risks and uncertainties. From time to time we may issue other forward-looking statements. Investors are cautioned that such forward-looking statements are subject to an inherent risk that actual results may materially differ. The following information highlights some of the factors that could cause actual results to differ materially from the results expressed or implied by our forward-looking statements. Forward- looking statements should be considered in light of these factors. Factors that may result in such variances include, but are not limited to the following:

The industries that comprise our primary markets are volatile and unpredictable.

Our business depends upon the capital expenditures of manufacturers of components and circuitry used in wireless communications, computers, automotive electronics and other electronic products. In the past, the markets for electronic devices have experienced sharp downturns. During these downturns, electronics manufacturers, including our customers, have delayed or canceled capital expenditures, which has had a negative impact on our financial results.

The current economic downturn has resulted in a reduction in demand for our products and significant fluctuations in our profitability and net sales. We incurred a net loss of $16.0 million in fiscal 2002 on net sales of $166.5 million. This reflects a significant decrease from net income of $99.9 million in fiscal 2001 on net sales of $471.9 million. We cannot assure you when, or if, demand for our products will increase.

During any downturn, including the current downturn, it will be difficult for us to maintain our sales levels. As a consequence, in order to maintain profitability we will need to reduce our operating expenses. However, much of our operating expenses are fixed and our ability to reduce such expenses is limited. Moreover, we may be unable to defer capital expenditures, and we will need to continue investment in certain areas such as research and development. We may incur charges related to impairment of assets and inventory write-offs. We also may experience delays in payments from our customers. The combined effect of this will have a negative effect on our financial results.

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If the markets for our products improve, we must attract, hire and train a sufficient number of employees, including technical personnel, to meet increased customer demand. Our inability to achieve these objectives in a timely and cost-effective manner could have a negative impact on our business.

Our recent capacity expansion may not be utilized successfully or effectively, which could negatively affect our business.

We have completed a 53,000 square-foot manufacturing facility on a 31-acre parcel in Klamath Falls, Oregon. In June 2001, we began construction of a 62,000 square foot corporate headquarters building in Portland, Oregon. Both projects have been funded with existing capital resources and internally generated funds. Our capacity expansion involves risks. For example, the electronics industry has historically been cyclical and subject to significant economic downturns characterized by over-capacity and diminished demand for products of the type manufactured by us. In fiscal 2002 we adopted a restructuring plan that involved the closure of several of our manufacturing facilities in response to the current economic downturn. Unfavorable economic conditions affecting the electronics industry in general, or any of our major customers, may affect our ability to successfully utilize our additional manufacturing capacity in an effective manner, which could adversely affect our operating results.

Our ability to reduce costs is limited by our need to invest in research and development.

Our industry is characterized by the need for continued investment in research and development. Because of intense competition in the industries in which we compete, if we were to fail to invest sufficiently in research and development, our products could become less attractive to potential customers, and our business and financial condition could be materially and adversely affected. As a result of our need to maintain our spending levels in this area, our operating results could be materially harmed if our net sales fall below expectations. In addition, as a result of our emphasis on research and development and technological innovation, our operating costs may increase further in the future, and research and development expenses may increase as a percentage of total operating expenses and as a percentage of net sales.

We depend on a few significant customers and we do not have long-term contracts with these or any of our other customers.

Twelve large, multinational electronics companies constituted 49.4% of our fiscal 2002 net sales, and the loss of any of these customers could significantly harm our business. In addition, none of our customers have any long-term obligation to continue to buy our products or services, and any customer could delay, reduce or cease ordering our products or services at any time.

Delays in shipment or manufacturing of our products could substantially decrease our sales for a period.

We will continue to derive a substantial portion of our revenues from the sale of a relatively small number of products with high average selling prices, some with prices as high as $2.0 million per unit. We generally recognize revenue upon shipment of our products. As a result, the timing of revenue recognition from a small number of orders could have a significant impact on our net sales and operating results for a reporting period. Shipment delays could significantly impact our recognition of revenue and could be further magnified by announcements from us or our competitors of new products and technologies, which announcements could cause our customers to defer purchases of our existing systems or purchase products from our competitors. Any of these delays could result in a material adverse change in our results of operations for any particular period.

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We depend on manufacturing flexibility to meet the changing demands of our customers. Any significant delay or interruption of manufacturing operations as a result of software deficiencies, natural disasters, or other causes could result in ineffective manufacturing capabilities or delayed product deliveries, any or all of which could materially and adversely affect our results of operations.

Failure of critical suppliers of parts, components and manufacturing equipment to deliver sufficient quantities to us in a timely and cost-effective manner could negatively affect our business.

We use a wide range of materials in the production of our products, including custom electronic and mechanical components, and we use numerous suppliers to supply materials. We generally do not have guaranteed supply arrangements with our suppliers. We seek to reduce the risk of production and service interruptions and shortages of key parts by selecting and qualifying alternative suppliers for key parts, monitoring the financial stability of key suppliers and maintaining appropriate inventories of key parts. Although we make reasonable efforts to ensure that parts are available from multiple suppliers, key parts may be available only from a single supplier or a limited group of suppliers. Operations at our suppliers’ facilities are subject to disruption for a variety of reasons, including work stoppages, fire, earthquake, flooding or other natural disasters. Such disruption could interrupt our manufacturing. Our business may be harmed if we do not receive sufficient parts to meet our production requirements in a timely and cost-effective manner.

We may make additional acquisitions in the future, and these acquisitions may subject us to risks associated with integrating these businesses into our current business.

Although we have no commitments or agreements for any acquisitions, we have made, and plan in the future to make, acquisitions of, or significant investments in, businesses with complementary products, services or technologies. Acquisitions involve numerous risks, many of which are unpredictable and beyond our control, including:

Our inability to effectively manage these acquisition risks could materially and adversely affect our business, financial condition and results of operations. In addition, if we issue equity securities to pay for an acquisition, the ownership percentage of our existing shareholders would be reduced and the value of the shares held by our existing shareholders could be diluted. If we use cash to pay for an acquisition, the payment could significantly reduce the cash that would be available to fund our operations or to use for other purposes. In addition, the Financial Accounting Standards Board has disallowed the pooling-of-interests method of acquisition accounting. This could result is significant charges resulting from amortization of intangible assets recorded in connection with future acquisitions.

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Our markets are subject to rapid technological change, and to compete effectively we must continually introduce new products that achieve market acceptance.

The markets for our products are characterized by rapid technological change and innovation, frequent new product introductions, changes in customer requirements and evolving industry standards. Our future performance will depend on the successful development, introduction and market acceptance of new and enhanced products that address technological changes as well as current and potential customer requirements. The introduction by us or by our competitors of new and enhanced products may cause our customers to defer or cancel orders for our existing products, which may harm our operating results. We have in the past experienced a slowdown in demand for our existing products and delays in new product development, and similar delays may occur in the future. We also may not be able to develop the underlying core technologies necessary to create new products and enhancements or, where necessary, to license these technologies from others. Product development delays may result from numerous factors, including:

The development of new, technologically advanced products is a complex and uncertain process, requiring high levels of innovation and highly skilled engineering and development personnel, as well as the accurate anticipation of technological and market trends. We cannot assure you that we will be able to identify, develop, manufacture, market or support new or enhanced products successfully, if at all, or on a timely basis. Further, we cannot assure you that our new products will gain market acceptance or that we will be able to respond effectively to product announcements by competitors, technological changes or emerging industry standards. Any failure to respond to technological change would significantly harm our business.

We are exposed to the risks that others may violate our proprietary rights, and our intellectual property rights may not be well protected in foreign countries.

Our success is dependent upon the protection of our proprietary rights. In the high technology industry, intellectual property is an important asset that is always at risk of infringement. We incur substantial costs to obtain and maintain patents and defend our intellectual property. For example, we have initiated litigation alleging that certain parties have violated various of our patents. We rely upon the laws of the United States and of foreign countries in which we develop, manufacture or sell our products to protect our proprietary rights. These proprietary rights may not provide the competitive advantages that we expect, however, or other parties may challenge, invalidate or circumvent these rights.

Further, our efforts to protect our intellectual property may be less effective in some foreign countries where intellectual property rights are not as well protected as in the United States. Many U.S. companies have encountered substantial problems in protecting their proprietary rights against infringement in foreign countries. If we fail to adequately protect our intellectual property in these countries, it could be easier for our competitors to sell competing products in foreign countries.

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We may be subject to claims of intellectual property infringement.

Several of our competitors hold patents covering a variety of technologies, applications and methods of use similar to some of those used in our products. From time to time, we and our customers have received correspondence from our competitors claiming that some of our products, as used by our customers, may be infringing one or more of these patents. For example, in February 2001, Cognex Corporation filed a lawsuit against us claiming we infringed a patent owned by it. Competitors or others may assert infringement claims against us or our customers in the future with respect to current or future products or uses, and these assertions may result in costly litigation or require us to obtain a license to use intellectual property rights of others. If claims of infringement are asserted against our customers, those customers may seek indemnification from us for damages or expenses they incur.

If we become subject to infringement claims, we will evaluate our position and consider the available alternatives, which may include seeking licenses to use the technology in question or defending our position. These licenses, however, may not be available on satisfactory terms or at all. If we are not able to negotiate the necessary licenses on commercially reasonable terms or successfully defend our position, our financial condition and results of operations could be materially and adversely affected.

We are exposed to the risks of operating a global business, including risks associated with exchange rate fluctuations and legal and regulatory changes.

International shipments accounted for 73.6% of net sales for fiscal 2002, with 57.5% of our net sales to customers in Asia. We expect that international shipments will continue to represent a significant percentage of net sales in the future. Our non-U.S. sales and operations are subject to risks inherent in conducting business abroad, many of which are outside our control, including the following:

In addition, as a result of our significant reliance on international sales, we may also be adversely affected by challenges to U.S. tax laws that benefit companies with certain foreign sales. In February 2000, the World Trade Organization (WTO) ruled that foreign sales corporations (FSCs), which provide an overall reduction in effective tax rates for companies with FSCs, violate U.S. obligations under the General Agreement on Tariffs and Trade (GATT). Responding to the WTO’s decision that FSCs constitute an illegal export subsidy, the U.S. government repealed the FSC rules effective October 1, 2000, subject to certain transition rules, and created a new income tax benefit that permanently excludes “foreign extraterritorial income” from taxable income. The extraterritorial income (ETI) regime, which applies to transactions after September 30, 2000, provides a similar tax benefit for export sales as the FSC regime did. Following a European Union (EU) complaint, the WTO concluded in August 2001 that the ETI provisions are also not WTO-compliant as such provisions violate the GATT agreements. The United States appealed the decision, but in January 2002, an appellate body denied the appeal. A WTO arbitration panel subsequently began consideration of the EU’s request for retaliatory tariffs; a ruling is expected in mid August 2002. Following the issuance of that ruling, the EU will be in a position to have the authority to begin imposing trade sanctions on U.S. exports up to the level set by the arbitrators and the authority for such sanctions will continue until the United States rectifies the WTO violation. The U.S. government will likely choose to rectify the violation and is considering several options to do so. It is possible that the U.S. government will repeal the ETI regime and if the government does not replace it with an equivalent form of relief, our future results of operations may be adversely affected.

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Our establishment of direct sales in Asia exposes us to the risks related to having employees in foreign countries.

We have established direct sales and service organizations in China, Taiwan, Korea and Singapore. Previously, we sold our products through a network of commission-based sales representatives in these countries. Our shift to a direct sales model in these regions involves risks. For example, we may encounter labor shortages or disputes that could inhibit our ability to effectively sell and market our products. We also are subject to compliance with the labor laws and other laws governing employers in these countries and we will incur additional costs to comply with these regulatory schemes. Additionally we will incur new fixed operating expenses associated with the direct sales organizations, particularly payroll related costs and lease expenses. If amounts saved on commission payments formerly paid to our sales representatives do not offset these expenses, our operating results may be adversely affected.

Our business is highly competitive, and if we fail to compete our business will be harmed.

The industries in which we operate are highly competitive. We face substantial competition from established competitors, some of which have greater financial, engineering, manufacturing and marketing resources than we do. If we are unable to compete effectively with these companies, our market share may decline and our business could be harmed. Our competitors can be expected to continue to improve the design and performance of their products and to introduce new products. Furthermore, our technological advantages may be reduced or lost as a result of technological advances by our competitors. Their greater capabilities in these areas may enable them to:

In addition, new companies may in the future enter the markets in which we compete, further increasing competition in those markets.

We believe that our ability to compete successfully depends on a number of factors, including:

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We may not be able to compete successfully in the future, and increased competition may result in price reductions, reduced profit margins, and loss of market share.

Recent terrorist attacks have increased uncertainties for our business.

Like other U.S. companies, our business and operating results are subject to uncertainties arising out of the recent terrorist attacks on the United States, including the potential worsening or extension of the current global economic slowdown, the economic consequences of military action or additional terrorist activities and associated political instability, and the impact of heightened security concerns on domestic and international travel and commerce. In particular, due to these uncertainties we are subject to:

The loss of key management or our inability to attract and retain sufficient numbers of managerial, engineering and other technical personnel could have a material adverse effect upon our results of operations.

Our continued success depends, in part, upon key managerial, engineering and technical personnel as well as our ability to continue to attract and retain additional personnel. The loss of key personnel could have a material adverse effect on our business or results of operations. We may not be able to retain our key managerial, engineering and technical employees. Our growth may be dependent on our ability to hire a new Chief Executive Officer, new highly skilled and qualified technical personnel, and personnel that can implement and monitor our financial and managerial controls and reporting systems. Attracting qualified personnel is difficult, and our recruiting efforts to attract and retain these personnel may not be successful.

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Item 7A. Quantitative and Qualitative Disclosures about Market Risk  

Interest Rate Risk  

As of June 1, 2002, our investment portfolio includes marketable debt securities of $254.5 million. These securities are subject to interest rate risk and will decline in value if interest rates increase. These securities are classified as Securities Available for Sale; therefore, the impact of interest rate changes is reflected as a separate component of shareholder’s equity. Due to the short duration of our investment portfolio, an immediate 10% increase in interest rates would not have a material effect on our financial condition or the results of our operations. Our $150 million aggregate principal amount of 4 ¼% convertible subordinated notes due 2006 are at a fixed interest rate. Therefore, there is no associated volatility.

Foreign Currency Exchange Rate Risk  

We have limited involvement with derivative financial instruments and do not use them for trading purposes. Derivatives are used to manage well-defined foreign currency risks. We enter into forward exchange contracts to hedge the value of accounts receivable denominated in Japanese yen. The impact of exchange rates on the forward contracts will be substantially offset by the impact of such changes on the underlying transactions. The effect of an immediate 10% change in exchange rates on the forward exchange contracts and the underlying hedged positions, denominated in Japanese yen, would not be material to our financial position or the results of our operations.

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Item 8. Financial Statements and Supplementary Data  

Electro Scientific Industries, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(in thousands)

The accompanying notes are an integral part of these statements.

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Electro Scientific Industries, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ended June 1, 2002, June 2, 2001, and June 3, 2000
(in thousands, except per share data)

The accompanying notes are an integral part of these statements.

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Electro Scientific Industries, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
For the years ended June 1, 2002, June 2, 2001 and June 3, 2000
(in thousands)

The accompanying notes are an integral part of these statements.

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Electro Scientific Industries, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended June 1, 2002, June 2, 2001 and June 3, 2000
(in thousands)

Cash payments for interest were $3,725, $7 and $0 in 2002, 2001 and 2000, respectively.

The accompanying notes are an integral part of these statements.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data unless otherwise noted)

Business Environment

The accompanying consolidated financial statements include the accounts of Electro Scientific Industries, Inc. and its subsidiaries, all of which are wholly owned. We design and manufacture sophisticated products used around the world in electronics manufacturing including: laser manufacturing systems for semiconductor yield improvement, production and test equipment for the manufacture of surface mount ceramic capacitors, laser and mechanical advanced electronic packaging production systems, machine vision systems and circuit fine tuning systems. We serve the global electronics market from our headquarters in Portland, Oregon and through subsidiaries located in the United States, Europe and Asia.

Concentrations of Credit Risk  

We use financial instruments that potentially subject us to concentrations of credit risk. Such instruments include cash equivalents, marketable securities available for sale, trade receivables and financial instruments used in hedging activities. We invest our cash in cash deposits, money market funds, commercial paper, certificates of deposit and readily marketable debt securities. We place our investments with high credit quality financial institutions and limit the credit exposure from any one institution or instrument. To date, the amount of losses experienced on these investments have not been material. We sell a significant portion of our products to a small number of large electronics manufacturers; 49.4% of fiscal 2002 revenue was derived from twelve customers. Our operating results could be adversely affected if the financial condition and operations of these key customers decline.

Concentrations of Other Risks  

Our operations involve a number of other risks and uncertainties including but not limited to the cyclicality of the electronics market, rapidly changing technology, international operations and hedging exposures.

Summary of Significant Accounting Policies

Principles of Consolidation  

All material intercompany accounts and transactions have been eliminated.

Use of Estimates  

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

Stock Split  

Our Board of Directors approved a two-for-one stock split to shareholders of record at the close of business February 23, 2000, effective February 24, 2000. All per share and shares outstanding data in the Consolidated Financial Statements and Notes to Consolidated Financial Statements have been restated to reflect the stock split.

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Change in Fiscal Year End  

On September 30, 1999, we elected to change our fiscal quarters to correspond with a four week, five week, four week quarter, which means each quarter will end on a Saturday. Previously, the quarters ended on the last day of the calendar month. The fiscal year now ends on the Saturday following or directly preceding May 31, whichever Saturday is closest to May 31.

Reclassifications  

Certain reclassifications have been made in the accompanying consolidated financial statements for 2000 and 2001 to conform to the 2002 presentation.

Revenue Recognition  

We recognize systems, spare parts and other product revenue when the product has been delivered, risk of loss has passed to the customer and collection of the resulting receivable is highly probable. We design, market and sell our products as standard configurations. Accordingly, customer acceptance provisions are based on seller-specified criteria, which we demonstrate prior to shipment. Revenue on new products is deferred until we have established a record of customer acceptance on these new products. When customer-specified objective criteria exist, revenue is deferred until customer acceptance. Revenue associated with service or maintenance contracts is recognized ratably over the life of the contract, which is generally one year.

Product Warranty  

We generally warrant our systems for a period of up to 12 months for material and labor to repair and service the system. A provision for the estimated cost related to warranty is recorded upon shipment.

Research and Development  

Research and development costs are expensed as incurred.

Taxes on Unremitted Foreign Income  

Deferred income taxes have not been provided on unremitted earnings of foreign subsidiaries, as we believe any U.S. tax on such earnings would be substantially offset by associated foreign tax credits.

Comprehensive Income  

We have adopted Statement of Financial Accounting Standards No. 130, “Reporting Comprehensive Income” (SFAS 130). SFAS 130 establishes standards for reporting and presentation of comprehensive income and its components in financial statements. Comprehensive income includes net income and “other comprehensive income” which includes charges or credits to equity that are not the result of transactions to shareholders. Our only material components of “other comprehensive income” are cumulative foreign currency translation adjustments and unrealized gain or loss on securities available for sale and certain gains or losses on foreign currency forward contracts.

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Net Income Per Share  

We compute net income per share in accordance with Statement of Financial Accounting Standards No. 128, “Earnings Per Share” (SFAS 128). SFAS 128 requires the dual presentation of basic and diluted earnings per share and other additional disclosures. Basic earnings per share is computed by dividing net income by the weighted average number of shares outstanding. Diluted earnings per share is computed by dividing net income by the weighted average number of shares and share equivalents (shares issuable on exercise of stock options) outstanding.

Cash and Cash Equivalents  

We consider all highly liquid investments with a maturity of three months or less at date of purchase to be cash equivalents. Cash and cash equivalents were $29,435 and $68,522 at June 1, 2002 and June 2, 2001, respectively.

Inventories  

Inventories are principally valued at standard costs, which approximate the lower of cost (first-in, first-out) or market. Costs utilized for inventory valuation purposes include material, labor and manufacturing overhead.

Depreciation and Capitalization Policies  

Depreciation is determined on the straight-line method based on the following useful lives: buildings, 25 to 40 years; building improvements, 5 to 15 years; and machinery and equipment, 3 to 10 years.

Expenditures for maintenance, repairs and minor improvements are charged to expense. Major improvements and additions are capitalized. When property is sold or retired, the cost and related accumulated depreciation are removed from the accounts and the resulting gain or loss is included in other expense.

Recent Accounting Pronouncements:

Commissions Paid  

Based on guidance from the Emerging Issues Task Force of the FASB in issue EITF 01-09, we reclassified commissions paid to distributors from selling expense to sales discounts in the fourth quarter of fiscal 2002. The adoption did not have a material effect on fiscal 2002, but prior year revenue and selling expense was restated to conform to fiscal 2002 presentation.

Hedging Activities  

On June 3, 2001, we adopted Statement of Financial Accounting Standard No. 133 “Accounting for Derivative Instruments and Hedging Activities” (SFAS 133). SFAS 133 requires all derivatives to be recorded on the balance sheet at fair value. Changes in fair value of derivatives that do not qualify, or are not effective as hedges, must be recognized currently in earnings. Upon adoption, we recorded a cumulative transition gain of $.3 million to Other Comprehensive Income (“OCI”) and an immaterial transition gain to current income. The transition adjustments reflected the fair value of forward contracts hedging non-functional currency sales that were previously held off-balance sheet and the related time value that is excluded from effectiveness testing under SFAS133. All other derivatives were recorded at fair value on the balance sheet on June 2, 2001.

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We are exposed to foreign currency risk through our sales and occasional purchases of product in non-functional currencies. Our policy is to hedge forecasted and actual foreign currency risk to mitigate the effect of foreign exchange market volatility on our operating results. We currently use foreign currency forward contracts that expire within 12 months to hedge forecasted sales and non-functional currency denominated receivables and payables. Derivatives hedging non-functional currency monetary assets and liabilities are recorded on the balance sheet at fair value and any change in fair value is recognized currently in earnings.

In accordance with SFAS 133, hedges of anticipated transactions are designated and documented at inception as “cash flow hedges” and are evaluated for effectiveness, excluding time value, at least quarterly. The forward contracts designated by us to hedge anticipated sales are cash flow hedges. The critical terms of the forward contract, such as amount and timing, are matched to the forecasted sale. The effectiveness of the cash flow hedge is determined by comparing the change in value of the anticipated transaction to the change in value of the related forward contracts, excluding time value. The effective portion of the hedge is accumulated in OCI and any ineffectiveness along with the time value change in the instrument is recognized immediately in Other Income and Expense. OCI associated with the hedges of forecasted sales are reclassified to revenue upon revenue recognition. For the year ended June 1, 2002, immaterial amounts were recorded in Other Income and Expense relating to changes in time value of our hedging contracts. All amounts recorded in OCI at June 1, 2002 will be reclassified to earnings within 12 months.

The following table sets forth the changes in OCI related to hedging during the fiscal year ended June 1, 2002:

Business Combinations, Goodwill and Other Intangible Assets  

In June 2001, the Financial Accounting Standards Board issued SFAS No. 141, “Business Combinations,” and SFAS No. 142, “Goodwill and Other Intangible Assets.” SFAS No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. The use of the pooling-of-interest method will be prohibited on a prospective basis only. SFAS No. 142 changes the accounting for goodwill from an amortization method to an impairment-only approach. We adopted SFAS No. 142 in the first quarter of fiscal 2002 and therefore ceased amortization of goodwill recorded in past business combinations. Total goodwill included in other assets was $1.4 million net of accumulated amortization of $1.4 million at both June 1, 2002 and June 2, 2001. Based on our impairment analysis completed in the second quarter of fiscal 2002 and required by SFAS No. 142, we concluded that we do not have an impairment of goodwill under SFAS No. 142. An additional impairment analysis was completed at the end of fiscal 2002 and we have concluded that our goodwill remains unimpaired under SFAS No. 142.

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Asset Retirement Obligations  

In June 2001, the Financial Accounting Standards Board issued SFAS No. 143, “Accounting for Asset Retirement Obligations,” which is effective for fiscal years beginning after June 15, 2002. SFAS No. 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. SFAS No. 143 applies to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development, and normal operation of a long-lived asset, except for certain lease obligations. We are currently evaluating the impact of SFAS No. 143, but do not expect the adoption of SFAS No. 143 to have a significant impact on our financial position or the results of our operations.

Impairment or Disposal of Long-Lived Assets  

In August 2001, the Financial Accounting Standards Board issued SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” which applies to financial statements issued for fiscal years beginning after December 15, 2001. SFAS No. 144 supersedes Financial Accounting Standards Board Statement 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,” and portions of Accounting Principles Board Opinion 30, “Reporting the Results of Operations.” SFAS No. 144 provides a single accounting model for long-lived assets to be disposed of and significantly changes the criteria for classifying an asset as held-for-sale. Classification as held-for-sale is an important distinction since such assets are not depreciated and are stated at the lower of fair value or carrying amount. SFAS No. 144 also requires expected future operating losses from discontinued operations to be displayed in the period in which the losses are incurred, rather than as of the measurement date as presently required. We are currently evaluating the impact of SFAS No. 144, but do not believe that SFAS No. 144 will have a material impact on our financial position or the results of our operations.

Property, Plant and Equipment

Major classes of property, plant and equipment consist of the following:

Line of Credit

We have a $20.0 million short-term revolving line of credit with a domestic bank. This line expires in October 2002. At our option, the interest rate is either a fluctuating per annum one percent (1.00%) below the Prime Rate in effect from time to time, or a fixed one percent (1.00%) above LIBOR. There were no borrowings outstanding at June 1, 2002 or June 2, 2001.

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Employee Benefit Plans

We have an employee savings plan under the provisions of section 401(k) of the Internal Revenue Code. We contributed $1,406, $1,489 and $1,123 to the plan for the fiscal years ended June 1, 2002, June 2, 2001 and June 3, 2000, respectively.

Income Taxes

We account for income taxes under the asset and liability method as defined by the provisions of Statement of Financial Accounting Standards No. 109, “Accounting for Income Taxes,” (SFAS 109). Under this method, deferred income taxes are recognized for the future tax consequences attributable to temporary differences between the financial statement and tax balances of existing assets and liabilities. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under SFAS 109, the effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date.

The net deferred tax asset as of June 1, 2002 and June 2, 2001 consists of the following tax effects relating to temporary differences and carryforwards:

At June 1, 2002, there were net operating loss carryforwards from prior years of $10,484 available for U.S. federal income tax purposes. These losses were principally acquired as part of prior acquisitions and expire on various dates through 2013. The use of these losses is subject to certain limitations caused by the change in ownership of the acquired business. Accordingly, their utilization in future periods may be restricted. Given these limitations, some of these losses may not be realizable, and accordingly, a valuation allowance has been recorded. We believe it is more likely than not that the results of future operations will generate sufficient taxable income to realize the net deferred tax asset.

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The components of income before income taxes and the provision for income taxes are as follows:

The tax benefit related to stock option exercises has been recorded as an increase to common stock rather than a reduction to the provision for income taxes.

A reconciliation of the provision for income taxes at the federal statutory income tax rate to the provision for income taxes as reported is as follows:

The large U.S. credit in 2002 resulted from a historical study of available prior years’ research and development credits. Amended tax returns were filed in 2002. Consolidated income tax payments were $3,123, $47,804 and $12,856 for the years ended June 1, 2002, June 2, 2001, and June 3, 2000, respectively.

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Earnings Per Share

We compute net income per share in accordance with Statement of Financial Accounting Standards 128, “Earnings Per Share” (SFAS 128). All earnings per share amounts in the following table are presented to conform to the SFAS 128 requirements.

For purposes of computing diluted earnings per share, weighted average common share equivalents do not include the following stock options or shares issuable upon conversion of our 4¼% convertible subordinated notes due 2006 because inclusion would have an anti-dilutive effect on the earnings per share calculation.

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Commitments and Contingencies

We have limited involvement with derivative financial instruments and do not use them for trading purposes. Derivatives are used to manage defined foreign currency risks. We enter into forward exchange contracts to hedge the value of accounts receivable denominated in a foreign currency. Foreign exchange contracts have gains and losses that are recognized at the end of each fiscal period. At June 1, 2002 and June 2, 2001, we had forward exchange contracts totaling $6 and $27, respectively. In general, these contracts mature in less than one year and the counterparties are large, highly rated banks; therefore, risk of credit loss as a result of nonperformance by the banks is minimal. The use of derivatives does not have a significant effect on our financial position or the results of its operations.

We lease certain equipment, automobiles and office space under operating leases, which are non-cancelable and expire on various dates through 2009. The aggregate minimum commitment for rentals under operating leases beyond June 1, 2002 is as follows:

Rental expense for all operating leases was $1,091 in fiscal 2002, $1,690 in fiscal 2001 and $1,314 in fiscal 2000.

We entered into an agreement that allows us to sell accounts receivable from selected customers at a discount to a financial institution. Receivable sales have the effect of increasing cash and reducing accounts receivable and days sales outstanding. Receivables sold under these provisions have terms and credit risk characteristics similar to our overall receivables portfolio. Discounting fees were recorded in interest expense and were not material for fiscal 2002. Accounts receivable sales under these agreements were $9 million for fiscal 2002. At June 1, 2002, $9 million of sold receivables remained outstanding under this agreement, compared to no amounts outstanding at June 2, 2001.

Legal Matters

On February 14, 2001, Cognex Corporation (Cognex) filed a lawsuit in the United States District Court for the District of Massachusetts (Cognex Corporation v. Electro Scientific Industries, Inc., No. 01-10287 RCL). The lawsuit alleges that our CorrectPlace ver. 5.0 product infringes United States Patent 5,371,690, which is owned by Cognex. The patent concerns the inspection of surface mount devices that are attached to the surface of an electronic circuit board. Cognex seeks injunctive relief, damages, costs and attorneys’ fees. We believe we have meritorious defenses to the action and intend to pursue them vigorously. Fact discovery is completed in the lawsuit. Additionally, certain of our customers have notified us that, in the event it is subsequently determined that their use of CorrectPlace ver. 5.0 infringes any patent, they may seek indemnification from us for damages or expenses resulting from this matter.

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Capital Commitments

We have capital commitments of approximately $6.3 million for construction of a 62,000 square foot corporate headquarters building located on the Portland, Oregon campus. We expect that the facility will be completed in September 2002.

Marketable Securities

We classify our marketable securities, other than restricted investments as described below, as Securities Available for Sale in the accompanying Consolidated Balance Sheets. All of our marketable debt securities are invested in high credit quality securities.

During fiscal 2002, 2001 and 2000, proceeds of $414,539, $40,046 and $27,361, respectively, resulted from the sale or maturity of securities. There were no material realized gains or losses associated with these sales or maturities. Unrealized gains or losses are reported in a separate component of shareholders’ equity. Information regarding our marketable securities is as follows:

Restricted Investments

Restricted investments are a required pre-funding of certain interest payments on our 4 ¼% convertible subordinated notes. These securities are held to maturity and are recorded amortized cost. Information regarding our restricted investments is as follows:

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Shareholder Rights Plan

We renewed our Shareholder Rights Plan in May 1999 and accordingly declared a dividend distribution of one Right for each outstanding share of Common Stock, payable to holders of record on June 4, 1999. On March 1, 2001, we amended and restated our Rights Agreement appointing Mellon Investor Services as the Rights Agent, successor to First Chicago Trust Company of New York. Under certain conditions, each right may be exercised to purchase 1/100 of a share of Series A No Par Preferred Stock at a purchase price of $270, subject to adjustment. The Rights are not presently exercisable and will only become exercisable following the occurrence of certain specified events. Generally the Rights become exercisable after a person or group acquires or commences a tender offer that would result in beneficial ownership of 15 percent or more of our outstanding Common Stock. In addition, the Rights become exercisable if any party becomes a beneficial owner of 10 percent or more of the our outstanding Common Stock and is determined by the Board of Directors to be an adverse party. If a person or group acquires 15 percent of our outstanding Common Stock or the Board of Directors declares a person to be an Adverse Person, each Right will be adjusted to entitle its holder to receive, upon exercise, Common Stock or, in certain circumstances, other assets of ours having a value equal to twice the exercise price of the Right. If, after the Rights become exercisable, we are acquired in a merger or other business combination, each Right will be adjusted to entitle its holder to receive, upon exercise, Common Stock of the acquiring company having a value equal to twice the exercise price of the Right, depending on the circumstances. The Rights expire on May 7, 2009 and may be redeemed by the Company for $0.001 per Right. The Rights do not have voting or dividend rights and until they become exercisable, have no dilutive effect on our earnings.

Stock Plans

In September 1989, the shareholders approved the adoption of the 1989 Stock Option Plan (the “1989 Plan”) pursuant to which 4,400,000 shares of our common stock, as amended in September 1998, have been reserved for issuance. In September 2000, the shareholders approved the adoption of the 2000 Stock Option Incentive Plan (the “2000 Incentive Plan”), which replaced the 1989 Plan. There are 2,000,000 shares of our common stock reserved for issuance under the 2000 Incentive Plan plus any shares remaining available for grant under the 1989 Plan or that may become available for grant under the 1989 Plan through the expiration, termination, forfeiture or cancellation of grants. Options under the 2000 Incentive Plan generally vest 25% per year over a four-year period from the date of grant, expire ten years from the date of grant, and are exercisable at prices generally not less than the fair market value at the grant date. The 2000 Incentive Plan allows for automatic annual grants to non-employee directors for 6,000 shares of Common Stock on July 31 of each year, with an option price equal to the closing market price on the date of the grant, a ten-year term and a four-year vesting schedule. The 2000 Incentive Plan allows for grants of incentive stock options, as defined in Section 422 of the Internal Revenue Code of 1986 or non-statutory stock options. Stock appreciation rights may be granted in connection with options, although no options have been granted which include stock appreciation rights.

In September 1990, the shareholders approved the adoption of the 1990 Employee Stock Purchase Plan (the “ESPP”) pursuant to which 900,000 shares of our common stock, as amended in September 1998, have been reserved for issuance to participating employees. Eligible employees may elect to contribute up to 15 percent of their cash compensation during each pay period. The ESPP provides for one 12-month offering period beginning January 8 of each year. During the offering period, participants accumulate funds in an account via payroll deduction. At the end of the offering period, the purchase price is determined and the accumulated funds are used to automatically purchase shares of our common stock. The purchase price per share is equal to 85% of the lower of the fair market value of the common stock (a) on the enrollment date of the offering period or (b) on the date of purchase.

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In September 1996, the shareholders approved the 1996 Stock Incentive Plan (the “1996 Plan”) pursuant to which 500,000 shares of our common stock, as amended in September 1998, have been reserved for issuance to participating employees. The 1996 Plan allows for the grants of stock bonuses, restricted stock or performance-based awards. Our restricted stock grants vest based on certain performance criteria that are tied to our stock price. During fiscal 2002, 2001 and 2000, we recorded $0, $1,372 and $2,498, respectively, of compensation expense related to restricted stock grants.

In April 2000, the Board of Directors approved the adoption of the 2000 Stock Option Plan (the “2000 Plan”) pursuant to which 2,250,000 shares of our common stock, as amended in April 2001, have been reserved for issuance. The 2000 Plan allows for grants to non-officer employees of non-statutory stock options, stock bonuses or restricted stock. Options under the 2000 Plan generally vest 25% per year over a 4 year period from the date of grant, expire ten years from the date of grant, and are exercisable at prices generally not less than the fair market value at the grant date.

We account for our stock option plans and our employee stock purchase plan in accordance with the provisions of the Accounting Principles Board’s Opinion No. 25 (APB 25), “Accounting For Stock Issued to Employees.” In 1995, the Financial Accounting Standards Board released Statement of Financial Accounting Standard No. 123 (SFAS 123), “Accounting For Stock Based Compensation.” SFAS 123 provides an alternative to APB 25. We continue to account for our employee stock plans in accordance with the provisions of APB 25. Accordingly, we have elected to provide pro forma disclosures as required by SFAS 123.

We have computed, for pro forma disclosure purposes, the per share value of all options granted under the stock option plans to be $20.94, $20.87 and $29.19 for 2002, 2001 and 2000, respectively. The pro forma value of options granted under the employee stock purchase plan is immaterial for 2002, 2001 and 2000. These computations were made using the Black-Scholes option-pricing model, as prescribed by SFAS 123, with the following weighted average assumptions for grants in 2002, 2001 and 2000:

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The total value of options granted would be amortized on a pro rata basis over the vesting period of the options. Options generally vest equally over four years. If we had accounted for these plans in accordance with SFAS 123, our net income and net income per share would have decreased as reflected in the following pro forma amounts for the fiscal years ended as follows:

The following table summarizes activity in the stock plans for the years ended June 1, 2002, June 2, 2001 and June 3, 2000.

In addition to the options above, we had 31, 73 and 122 of restricted stock grants outstanding as of June 1, 2002, June 2, 2001 and June 3, 2000, respectively, none of which were exercisable.

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The following table sets forth the exercise price range, number of shares outstanding at June 1, 2002, weighted average remaining contractual life, weighted average exercise price, number of exercisable shares and weighted average exercise price of exercisable options by groups of similar price and grant date: