Form 10-Q for period ending 06/30/2003

10-Q 1 d10q.htm FORM 10-Q FOR PERIOD ENDING 06/30/2003 Form 10-Q for period ending 06/30/2003

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended June 30, 2003

OR

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

For the transition period from __________ to __________

Commission File Number: 0-1649

NEWPORT CORPORATION
*(Exact name of registrant as specified in its charter)*

Nevada		94-0849175
*(State or other jurisdiction of incorporation or organization)*		*(IRS Employer Identification No.)*

1791 Deere Avenue, Irvine, California		92606
*(Address of principal executive offices)*		*(Zip Code)*

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x

No o

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

Yes x

No o

As of July 31, 2003, 38,748,185 shares of the registrant’s sole class of common stock were outstanding.

NEWPORT CORPORATION

FORM 10-Q

INDEX

		Page Number

PART I. FINANCIAL INFORMATION

Item 1:	Financial Statements:

	Condensed Consolidated Statements of Operations for the Three and Six Months ended June 30, 2003 and 2002	3

	Condensed Consolidated Balance Sheets as of June 30, 2003 and December 31, 2002	4

	Condensed Consolidated Statements of Cash Flows for the Three and Six Months ended June 30, 2003 and 2002	5

	Notes to Condensed Consolidated Financial Statements	6-11

Item 2:	Management’s Discussion and Analysis of Financial Condition and Results of Operations	12-26

Item 3:	Quantitative and Qualitative Disclosures About Market Risk	26-27

Item 4:	Controls and Procedures	27

PART II. OTHER INFORMATION

Item 4:	Submission of Matters to a Vote of Securities Holders	28

Item 6:	Exhibits and Reports on Form 8-K	29

SIGNATURES		29

Page 2

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

NEWPORT CORPORATION
Condensed Consolidated Statements of Operations
(In thousands, except per share data)
(Unaudited)

	Three Months Ended June 30,						Six Months Ended June 30,

	2003			2002			2003			2002

Net sales	$	33,781		$	43,021		$	67,085		$	86,039
Cost of sales		22,237			27,612			44,491			56,944

Gross profit		11,544			15,409			22,594			29,095
Selling, general and administrative expense		11,307			12,546			22,859			23,774
Research and development expense		4,724			6,339			9,712			12,442

Operating loss		(4,487	)		(3,476	)		(9,977	)		(7,121	)
Interest and other income, net		2,375			2,164			3,948			4,688
Asset write-down		—			(6,490	)		—			(6,490	)

Loss from continuing operations before income taxes		(2,112	)		(7,802	)		(6,029	)		(8,923	)
Income tax benefit		—			(1,424	)		—			(1,770	)

Loss from continuing operations		(2,112	)		(6,378	)		(6,029	)		(7,153	)
Loss from discontinued operations		(240	)		(973	)		(2,192	)		(4,365	)
Cumulative effect of a change in accounting principle		—			—			—			(14,500	)

Net loss	$	(2,352	)	$	(7,351	)	$	(8,221	)	$	(26,018	)

Basic and diluted loss per share:
Loss from continuing operations	$	(0.05	)	$	(0.17	)	$	(0.15	)	$	(0.19	)
Loss from discontinued operations		(0.01	)		(0.02	)		(0.06	)		(0.11	)
Cumulative effect of a change in accounting principle		—			—			—			(0.39	)

Net loss	$	(0.06	)	$	(0.19	)	$	(0.21	)	$	(0.69	)

Shares used in computation of basic and diluted net loss per share		38,607			37,969			38,563			37,588

See accompanying notes.

Page 3

NEWPORT CORPORATION
Condensed Consolidated Balance Sheets
(In thousands, except share data)

	(Unaudited) June 30, 2003				December 31, 2002

ASSETS
Current assets:
Cash and cash equivalents	$	11,343		$	44,059
Marketable securities		254,493			240,254
Accounts receivable, net of allowance for doubtful accounts of $874 and $753		22,829			18,534
Inventories		55,274			54,964
Prepaid expenses and other current assets		5,676			7,995
Assets of discontinued operations		1,083			3,840

Total current assets		350,698			369,646
Property and equipment, net		34,571			35,774
Goodwill		57,606			57,529
Deferred income taxes		15,570			15,570
Investments and other assets		10,972			7,819

	$	469,417		$	486,338

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	7,498		$	6,213
Accrued payroll and related expenses		7,655			9,900
Accrued expenses and other current liabilities		9,231			14,016
Accrued restructuring costs		1,217			3,910
Current portion of long-term debt		177			2,214

Total current liabilities		25,778			36,253
Long-term debt		160			1,230
Accrued restructuring costs and other liabilities		1,728			2,338
Commitments and contingencies
Stockholders’ equity:
Common stock, par value $0.1167 per share, 200,000,000 shares authorized; 38,663,698 and 38,560,409 shares issued and outstanding		4,512			4,500
Capital in excess of par value		439,168			439,466
Deferred stock compensation		(177	)		(215	)
Accumulated other comprehensive income (loss)		2,462			(1,241	)
Retained earnings (deficit)		(4,214	)		4,007

Total stockholders’ equity		441,751			446,517

	$	469,417		$	486,338

See accompanying notes.

Page 4

NEWPORT CORPORATION
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)

	Six Months Ended June 30,

	2003			2002

CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(8,221	)	$	(26,018	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		4,966			5,973
Provision for losses on inventories		(151	)		932
Impairment of goodwill		—			14,500
Tax benefit of stock option exercises		—			1,621
Loss on disposal of business segment		—			2,372
Asset write-down		—			6,490
Other non-cash items, net		(212	)		123
Increase (decrease) in cash due to changes in:
Accounts receivable		(3,247	)		1,235
Income tax receivable		(109	)		(4,413	)
Inventories		1,709			112
Prepaid expenses and other current assets		2,301			1,228
Other assets and liabilities		(4	)		234
Accounts payable		1,036			(2,273	)
Accrued payroll and related expenses		(2,523	)		(3,054	)
Accrued expenses and other current liabilities		(4,315	)		1,785
Accrued restructuring costs		(3,016	)		(2,048	)

Net cash used in operating activities		(11,786	)		(1,201	)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment		(1,397	)		(4,562	)
Proceeds from the sale of business and property and equipment		628			9,694
Business acquisitions, net of cash acquired		—			(5,960	)
Purchase of marketable securities		(360,095	)		(229,530	)
Proceeds from the sale of marketable securities		346,924			235,913
Purchase of equity investments and intellectual property		(4,030	)		(1,225	)

Net cash provided by (used in) investing activities		(17,970	)		4,330
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of long-term debt		(3,131	)		(5,224	)
Repurchase of the Company’s common stock		(2,484	)		—
Proceeds from the issuance of common stock under employee plans		2,197			2,749

Net cash used in financing activities		(3,418	)		(2,475	)
Impact of foreign exchange rate changes on cash balances		458			558

Net increase (decrease) in cash and cash equivalents		(32,716	)		1,212
Cash and cash equivalents at beginning of year		44,059			7,107

Cash and cash equivalents at end of period	$	11,343		$	8,319

Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest	$	121		$	433
Income taxes, net	$	109		$	3,190

See accompanying notes.

Page 5

NEWPORT CORPORATION
Notes to Condensed Consolidated Financial Statements
June 30, 2003

1. Basis of Presentation

The accompanying condensed consolidated financial statements include the financial statements of the Company and its wholly owned subsidiaries. These financial statements are unaudited and have been prepared in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X. In the opinion of management, all adjustments (consisting of normal and recurring accruals) considered necessary for a fair presentation have been included.

The accompanying condensed consolidated financial statements do not include certain footnotes and financial presentations normally required under generally accepted accounting principles and, therefore, should be read in conjunction with the consolidated financial statements and related notes contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2002. The results for the interim period are not necessarily indicative of results for the full year ending December 31, 2003. The December 31, 2002 balances reported herein are derived from the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2002.

Certain prior period amounts have been reclassified to conform to the current period presentation.

2. Derivative Instruments

The Company recognizes all derivative financial instruments in the consolidated financial statements at fair value regardless of the purpose or intent for holding the instrument. The accounting for changes in the fair value (i.e., gains or losses) of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship and further, on the type of hedging relationship. The Company does not engage in currency speculation. However, the Company uses forward exchange contracts to mitigate the risks associated with certain foreign currency transactions entered into in the ordinary course of business, primarily foreign currency denominated receivables and payables. Such contracts do not qualify for hedge accounting and accordingly, changes in fair values are reported in the statement of operations. The forward exchange contracts generally require the Company to exchange U.S. dollars for foreign currencies at maturity, at rates agreed to at the inception of the contracts. If the counterparties to the exchange contracts (AA or A+ rated banks) do not fulfill their obligations to deliver the contracted currencies, the Company could be at risk for any currency related fluctuations. Transaction gains and losses are included in the statement of operations.

Foreign exchange contracts totaled $1.1 million and $0.4 million at June 30, 2003 and December 31, 2002, respectively. All of the contracts outstanding at June 30, 2003 matured by July 31, 2003. None of the outstanding contracts at June 30, 2003 or December 31, 2002 qualified for hedge accounting. The unrealized losses on the outstanding contracts were not material at June 30, 2003 or December 31, 2002.

3. Income Taxes

The Company provides for income taxes in interim periods based on the estimated effective income tax rate for the complete fiscal year. The income tax benefit is computed on the pretax loss of the consolidated entities located within each taxing jurisdiction based on current tax law. Deferred taxes result from the future tax consequences associated with temporary differences between the amount of assets and liabilities recorded for tax and financial accounting purposes. A valuation allowance for deferred tax assets is recorded to the extent the Company cannot determine, in accordance with the provisions of Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes (SFAS No. 109), that the ultimate realization of net deferred tax assets is more likely than not.

The Company currently has significant deferred tax assets that are subject to periodic recoverability assessments. The Company recorded a valuation reserve in the third quarter of 2002 against its deferred tax assets pursuant to SFAS No. 109, due to the uncertainty as to the timing and ultimate realization of those assets. As such, the Company did not recognize any tax benefit on the losses recorded in the second quarter and first half of 2003. For the foreseeable future, the tax provision related to any future earnings will be substantially offset by a reduction in the valuation reserve, and any future pretax losses will not be offset by a tax benefit due to the uncertainty of the recoverability of the deferred tax asset.

Page 6

NEWPORT CORPORATION
Notes to Condensed Consolidated Financial Statements
June 30, 2003

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

4. Recent Accounting Pronouncements

In January 2003 the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 46, Consolidation of Variable Interest Entities (“FIN 46”). FIN 46 requires the primary beneficiary of a variable interest entity (“VIE”) to consolidate the entity and also requires majority and significant variable interest investors to provide certain disclosures. A VIE is an entity in which the equity investors do not have a controlling interest, equity investors participate in losses or residual interests of the entity on a basis that differs from its ownership interest, or the equity investment at risk is insufficient to finance the entity’s activities without receiving additional subordinated financial support from the other parties. For arrangements entered into with VIEs created prior to January 31, 2003, the provisions of FIN 46 are required to be adopted at the beginning of the first interim or annual period beginning after June 15, 2003. The Company is currently reviewing its investments and other arrangements to determine whether any of its investee companies are VIEs. The Company does not expect to identify any significant VIEs that would be consolidated, but may be required to make additional disclosures. The provisions of FIN 46 are effective immediately for all arrangements entered into with new VIEs created after January 31, 2003.

5. Discontinued Operations

In March 2003, the Company shut down its Plymouth, Minnesota operation and liquidated the majority of the remaining assets. In the first quarter of 2003, the Company recorded charges of $1.2 million for severance costs for employees terminated during the quarter and for facility closure costs, which amounts include the present value of lease payments, net of estimated sublease income. Lease payments will continue through the lease term, which expires in June 2006. All activities associated with this facility, including these charges, have been included in discontinued operations.

Also included in discontinued operations is the Company’s former Industrial Metrology Systems Division, which was discontinued in 2002.

6. Asset Write-Down

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

7. Cumulative Effect of a Change in Accounting Principle

8. Inventories

Inventories are stated at cost, determined on either a first in, first-out (FIFO) or average cost basis and do not exceed net realizable value.

Page 7

NEWPORT CORPORATION
Notes to Condensed Consolidated Financial Statements
June 30, 2003

Inventories consist of the following:

(In thousands)	June 30, 2003		December 31, 2002

Raw materials and purchased parts	$	30,699	$	29,360
Work in process		10,142		11,531
Finished goods		14,433		14,073

Total inventories	$	55,274	$	54,964

9. Warranty

Unless otherwise stated in the Company’s product literature, the Company provides a one-year warranty from the original invoice date on all product material and workmanship. Products sold to original equipment manufacturer (OEM) customers generally carry longer warranties, typically 15 to 24 months. Defective products will be either repaired or replaced, generally at the Company’s option, upon meeting certain criteria. The Company accrues a provision for the estimated costs that may be incurred for product warranties relating to a product as a component of cost of sales at the time revenue for that product is recognized.

The activity in accrued warranty obligations is as follows:

	Six Months Ended June 30,

(In thousands)	2003			2002

Balance at beginning of year	$	2,047		$	1,664
Additions charged to cost of sales		921			1,326
Warranty claims		(1,949	)		(1,752	)

Balance at end of period	$	1,019		$	1,238

Such amounts are included in accrued expenses and other current liabilities in the accompanying condensed consolidated balance sheets.

10. Accrued Restructuring Costs

The following table summarizes the Company’s accrued restructuring costs:

(In thousands)	Employee Severance			Facility Consolidation			Total

Balance at December 31, 2002	$	1,758		$	4,216		$	5,974
Cash payments		(1,712	)		(1,317	)		(3,029	)
Reclassifications		650			(650	)		—

Balance at June 30, 2003	$	696		$	2,249		$	2,945

The Company expects to pay in cash substantially all of the remaining accrued employee severance in 2003. The facility consolidation reserves will be paid over the associated lease terms, which expire at various dates between 2005 and 2008. As of June 30, 2003, 320 employees have been terminated under this restructuring plan. At June 30, 2003 and December 31, 2002, $1.2 million and $3.9 million, respectively, of accrued restructuring costs were expected to be paid within one year and are reflected in current liabilities; $1.7 million and $2.1 million, respectively, of accrued restructuring costs are included in long-term accrued restructuring costs and other liabilities in the accompanying condensed consolidated balance sheets. The Company expects to reassess the adequacy of its accrued restructuring liability in the third quarter of 2003 depending upon the outcome of certain ongoing subleasing activities.

Page 8

NEWPORT CORPORATION
Notes to Condensed Consolidated Financial Statements
June 30, 2003

11. Long-Term Debt

On April 11, 2003, the Company repaid the outstanding principal balance of $3.0 million owed on its 8.25% senior notes, maturing May 2004. The loss on the early extinguishment was not material.

12. Investments

In March 2003, the Company signed an agreement to purchase a minority interest in NEXX Systems, Inc., a privately-held developer of flip chip processing equipment for back-end semiconductor manufacturing applications, for $3.5 million, subject to customary conditions. The $1.0 million common stock component of the investment closed in March 2003, and the $2.5 million preferred stock component of the investment closed in April 2003. Both investments are reflected in investments and other assets in the condensed consolidated balance sheet. The Company will account for its investment using the cost method of accounting.

13. Interest and Other Income, Net

Interest and other income, net, consist of the following:

	Three Months Ended June 30,						Six Months Ended June 30,

(In thousands)	2003			2002			2003			2002

Interest and dividend income	$	1,813		$	2,272		$	3,779		$	4,700
Interest expense		(117	)		(139	)		(192	)		(284	)
Foreign exchange losses, net		(180	)		(121	)		(298	)		(32	)
Gains on sale of marketable securities, net		1,067			359			1,284			637
Other expense, net		(208	)		(207	)		(625	)		(333	)

Total interest and other income, net	$	2,375		$	2,164		$	3,948		$	4,688

14. Net Loss Per Share

The following table sets forth the computation of net loss per share:

	Three Months Ended June 30,						Six Months Ended June 30,

(In thousands)	2003			2002			2003			2002

Numerator for basic and diluted net loss per share:
Loss from continuing operations	$	(2,112	)	$	(6,378	)	$	(6,029	)	$	(7,153	)
Loss from discontinued operations		(240	)		(973	)		(2,192	)		(4,365	)
Cumulative effect of a change in accounting principle		—			—			—			(14,500	)

Net loss	$	(2,352	)	$	(7,351	)	$	(8,221	)	$	(26,018	)

Denominator:
Weighted average shares outstanding		38,672			38,043			38,628			37,662
Weighted unvested restricted stock outstanding		(65	)		(74	)		(65	)		(74	)

Denominator for basic and diluted net loss per share:		38,607			37,969			38,563			37,588


Basic and diluted loss per share:
Loss from continuing operations	$	(0.05	)	$	(0.17	)	$	(0.15	)	$	(0.19	)
Loss from discontinued operations		(0.01	)		(0.02	)		(0.06	)		(0.11	)
Cumulative effect of a change in accounting principle		—			—			—			(0.39	)

Net loss	$	(0.06	)	$	(0.19	)	$	(0.21	)	$	(0.69	)

Page 9

NEWPORT CORPORATION
Notes to Condensed Consolidated Financial Statements
June 30, 2003

15. Comprehensive Loss

The components of comprehensive loss, net of related tax, are as follows:

	Three Months Ended June 30,						Six Months Ended June 30,

(In thousands)	2003			2002			2003			2002

Net loss	$	(2,352	)	$	(7,351	)	$	(8,221	)	$	(26,018	)
Foreign currency translation gain (loss)		2,548			1,394			4,131			(75	)
Unrealized gain (loss) on marketable securities		(465	)		5,650			(428	)		4,195

Comprehensive loss	$	(269	)	$	(307	)	$	(4,518	)	$	(21,898	)

16. Stock Based Compensation

The Company applies the intrinsic value based method of accounting prescribed by Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB 25) and related Interpretations in accounting for its stock-based compensation. Accordingly, the Company does not recognize any compensation expense for employee stock options with exercise prices equal to or greater than the Company’s stock price on the date of grant. Costs related to restricted stock grants, representing the difference between the fair market value of the award as of the grant date and the purchase price, if any, of the related shares are fixed at the date of grant and amortized over the vesting period. Pro forma amounts adjusted for the effect of recording compensation cost for the Company’s stock option and employee stock purchase plans are determined based upon the fair value at the grant date for awards under these plans, consistent with the methodology prescribed under Statement of Financial Accounting Standards No. 148, Accounting for Stock-Based Compensation – Transition and Disclosure, and No. 123, Accounting for Stock-Based Compensation, are presented below:

	Three Months Ended June 30,						Six Months Ended June 30,

(In thousands)		2003			2002			2003			2002

Net loss – reported	$	(2,352	)	$	(7,351	)	$	(8,221	)	$	(26,018	)
Employee compensation expense under fair value method		(4,345	)		(4,744	)		(8,741	)		(10,635	)

Net loss – pro forma	$	(6,697	)	$	(12,095	)	$	(16,962	)	$	(36,653	)

Basic and diluted net loss per share – reported	$	(0.06	)	$	(0.19	)	$	(0.21	)	$	(0.69	)
Basic and diluted net loss per share – pro forma	$	(0.17	)	$	(0.32	)	$	(0.44	)	$	(0.98	)
Shares used in computation of basic and diluted net loss per share		38,607			37,969			38,563			37,588

17. Segment Reporting

The Company has two reportable business segments: Industrial and Scientific Technologies and Advanced Packaging and Automation Systems. Selected segment financial information follows:

(In thousands)	Industrial and Scientific Technologies		Advanced Packaging and Automation Systems			Total

Three Months Ended June 30, 2003:
Sales to external customers	$	26,290	$	7,491		$	33,781
Segment income (loss)		1,305		(2,939	)		(1,634	)
Three Months Ended June 30, 2002:
Sales to external customers	$	29,933	$	13,088		$	43,021
Segment income (loss)		3,348		(4,442	)		(1,094	)

Page 10

NEWPORT CORPORATION
Notes to Condensed Consolidated Financial Statements
June 30, 2003

(In thousands)	Industrial and Scientific Technologies		Advanced Packaging and Automation Systems			Total

Six Months Ended June 30, 2003:
Sales to external customers	$	53,048	$	14,037		$	67,085
Segment income (loss)		2,778		(6,932	)		(4,154	)
Six Months Ended June 30, 2002:
Sales to external customers	$	63,150	$	22,889		$	86,039
Segment income (loss)		7,906		(10,610	)		(2,704	)

The following reconciles segment loss to consolidated loss from continuing operations before income taxes:

	Three Months Ended June 30,						Six Months Ended June 30,

(In thousands)	2003			2002			2003			2002

Segment loss	$	(1,634	)	$	(1,094	)	$	(4,154	)	$	(2,704	)
Unallocated operating expenses		(2,853	)		(2,382	)		(5,823	)		(4,417	)
Interest and other income, net		2,375			2,164			3,948			4,688
Asset write-down		—			(6,490	)		—			(6,490	)

Loss from continuing operations before income taxes	$	(2,112	)	$	(7,802	)	$	(6,029	)	$	(8,923	)

Page 11

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations for the Three and Six Months Ended June 30, 2003 and 2002

INTRODUCTORY NOTE

This Quarterly Report on Form 10-Q contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 and we intend that such forward-looking statements be subject to the safe harbors created thereby. Words such as “may,” “will,” “expect,” “believe,” “anticipate,” “intend,” “could,” “estimate,” or “continue” or the negative or other variations thereof or comparable terminology are intended to identify forward-looking statements. In addition, any statements that refer to projections of our future financial performance, trends in our businesses, or other characterizations of future events or circumstances are forward-looking statements.

The forward-looking statements included herein are based on current expectations and involve a number of risks and uncertainties, all of which are difficult or impossible to predict accurately and many of which are beyond our control. As such, our actual results may differ significantly from those expressed in any forward-looking statements. Factors that may cause or contribute to such differences include, but are not limited to, those discussed in more detail under the subheading “RISKS RELATING TO OUR BUSINESS” on pages 20 through 26 of this Quarterly Report on Form 10-Q, and in Item 1 (Business) and Item 7 (Management’s Discussion and Analysis of Financial Condition and Results of Operations) in our Annual Report on Form 10-K for the year ended December 31, 2002. Readers should carefully review these risks, as well as the additional risks described in other documents we file from time to time with the Securities and Exchange Commission. In light of the significant risks and uncertainties inherent in the forward-looking information included herein, the inclusion of such information should not be regarded as a representation by us or any other person that such results will be achieved, and readers are cautioned not to place undue reliance on such forward-looking information. We undertake no obligation to revise the forward-looking statements contained herein to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

The following is our discussion and analysis of certain significant factors that have affected our earnings and financial position during the periods included in the accompanying financial statements. This discussion compares the three- and six-month periods ended June 30, 2003 and June 30, 2002. This discussion should be read in conjunction with the financial statements and associated notes.

ACQUISITIONS AND DISCONTINUED OPERATIONS

On February 15, 2002, we acquired Micro Robotics Systems, Inc. (MRSI), a privately held manufacturer of high precision, fully automated assembly and dispensing systems. MRSI’s operating results from the date of acquisition are included in our Advanced Packaging and Automation Systems operating segment and do not represent a full six months of results of operations for the first half of 2002.

In March 2003, we shut down our Plymouth, Minnesota operation and liquidated the majority of the remaining assets. In the first quarter of 2003, we recorded charges of $1.2 million for severance costs for employees terminated during the quarter and for facility closure costs, which amounts include the present value of lease payments, net of estimated sublease income. Lease payments will continue through the lease term, which expires in June 2006. All activities associated with this facility, including these charges, have been included in discontinued operations.

Also included in discontinued operations is our former Industrial Metrology Systems Division, which was discontinued in 2002.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Management’s Discussion and Analysis of Financial Condition and Results of Operations is based on our consolidated financial statements included in this Quarterly Report on Form 10-Q, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and related disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. On an ongoing basis, we evaluate these estimates and assumptions, including those related to allowance for doubtful accounts, inventory reserves, warranty

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obligations, restructuring reserves, asset impairment valuations and income tax valuations. We base these estimates on historical experience and on various other factors which we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. These estimates and assumptions by their nature involve risks and uncertainties, and may prove to be inaccurate. In the event that any of our estimates or assumptions are inaccurate in any material respect, it could have a material adverse effect on our reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods.

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

Revenue Recognition

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

Accounts Receivable

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

Inventory

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

Warranty

Unless otherwise stated in our product literature, we provide a one-year warranty from the original invoice date on all product material and workmanship. Products sold to original equipment manufacturer (OEM) customers generally carry longer warranties, typically 15 to 24 months. Defective products will be either repaired or replaced, generally at our option, upon meeting certain criteria. We accrue a provision for the estimated costs that may be incurred for product warranties relating to a product as a component of cost of sales at the time revenue for that product is recognized. While we engage in extensive product quality programs and processes, including actively monitoring and evaluating the quality of our component suppliers, our warranty obligation is affected by product failure rates, material usage and service delivery costs incurred in correcting a product failure. Should actual product failure rates, material usage and service delivery costs differ from our estimates, revisions to the estimated warranty obligation would be required which could adversely affect our operating results.

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Impairment of Assets and Restructuring Reserves

We assess the impairment of long-lived assets, other than goodwill, whenever events or changes in circumstances indicate that their carrying value may not be recoverable. The determination of related estimated useful lives and whether or not these assets are impaired involves significant judgments, related primarily to the future profitability and/or future value of the assets. Changes in our strategic plan and/or market conditions could significantly impact these judgments and could require adjustments to recorded asset balances. We hold minority interests in companies having operations or technologies in areas within or adjacent to our strategic focus, all of which are privately held and whose values are difficult to determine. We record an investment impairment charge in any reporting period where we believe an investment has experienced a decline in value that is other than temporary. Future adverse changes in market conditions or poor operating results of underlying investments could result in losses or an inability to recover the carrying value of the investments that may not be reflected in an investment’s current carrying value, thereby possibly requiring an impairment charge in the future. Such charges would adversely affect our operating results in those periods.

In 2001, the FASB issued Statement of Financial Accounting Standards No. 141, Business Combinations (SFAS No. 141), and No. 142, Goodwill and Other Intangible Assets (SFAS No. 142), which we adopted on January 1, 2002. Under SFAS No. 142, goodwill is no longer amortized but is subject to impairment tests based upon a comparison of the fair value of each of our reporting units, as defined, and the carrying value of the reporting units’ net assets, including goodwill. Pursuant to SFAS No. 142, upon adoption we tested our goodwill for impairment and recorded an impairment charge, based upon an independent valuation, of $14.5 million as the cumulative effect of a change in accounting principle as of January 1, 2002. SFAS No. 142 requires a review for impairment at least annually or when circumstances exist that would indicate an impairment of such goodwill. We perform the annual impairment review as of October 1st each year. The 2002 annual review resulted in no additional impairment of the carrying value of goodwill. At June 30, 2003, we had goodwill of approximately $57.6 million.

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

Income Taxes

We provide for income taxes in interim periods based on the estimated effective income tax rate for the complete fiscal year. The income tax provision (benefit) is computed on the pretax income (loss) of the consolidated entities located within each taxing jurisdiction based on current tax law. Deferred taxes result from the future tax consequences associated with temporary differences between the amount the assets and liabilities recorded for tax and financial accounting purposes. A valuation allowance for deferred tax assets is recorded to the extent the Company cannot determine, in accordance with the provisions of Statement of Financial Accounting Standards No. 109 (SFAS No. 109), Accounting for Income Taxes, that the ultimate realization of net deferred tax assets is more likely than not.

We currently have significant deferred tax assets, which are subject to periodic recoverability assessments. We recorded a valuation reserve in the third quarter of 2002 against our deferred tax assets pursuant to SFAS No. 109, due to the uncertainty as to the timing and ultimate realization of those assets. As such, we did not recognize any tax benefit on the losses recorded in the second quarter and first half of 2003. For the foreseeable future, the tax provision related to any future earnings will be substantially offset by a reduction in the valuation reserve, and any future pretax losses will not be offset by a tax benefit due to the uncertainty of the recoverability of the deferred tax asset.

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

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RESTRUCTURING CHARGES

The following table summarizes our accrued restructuring costs:

(In thousands)	Employee Severance			Facility Consolidation			Total

Balance at December 31, 2002	$	1,758		$	4,216		$	5,974
Cash payments		(1,712	)		(1,317	)		(3,029	)
Reclassifications		650			(650	)		—

Balance at June 30, 2003	$	696		$	2,249		$	2,945

We expect to pay in cash substantially all of the remaining accrued employee severance in 2003. The facility consolidation reserves will be paid over the associated lease terms, which expire at various dates between 2005 and 2008. As of June 30, 2003, 320 employees have been terminated under this restructuring plan. At June 30, 2003 and December 31, 2002, $1.2 million and $3.9 million, respectively, of accrued restructuring costs were expected to be paid within one year and are reflected in current liabilities; $1.7 million and $2.1 million, respectively, of accrued restructuring costs were included in long-term accrued restructuring costs and other liabilities in the accompanying condensed consolidated balance sheets. We expect to reassess the adequacy of our accrued restructuring liability in the third quarter of 2003 depending upon the outcome of certain ongoing sublease activity.

RESULTS OF OPERATIONS

The following table represents the results of operations for the periods indicated as a percentage of net sales:

	Percentage of Net Sales						Percentage of Net Sales

	Three Months Ended June 30,						Six Months Ended June 30,

	2003			2002			2003			2002

Net sales		100.0	%		100.0	%		100.0	%		100.0	%
Cost of sales		65.8			64.2			66.3			66.2

Gross profit		34.2			35.8			33.7			33.8
Selling, general and administrative expense		33.5			29.2			34.1			27.6
Research and development expense		14.0			14.7			14.5			14.5

Operating loss		(13.3	)		(8.1	)		(14.9	)		(8.3	)
Interest and other income, net		7.0			5.1			5.9			5.4
Asset write-down		—			(15.1	)		—			(7.5	)

Loss from continuing operations before income taxes		(6.3	)		(18.1	)		(9.0	)		(10.4	)
Income tax benefit		—			(3.3	)		—			(2.1	)

Loss from continuing operations		(6.3	)		(14.8	)		(9.0	)		(8.3	)
Loss from discontinued operations		(0.7	)		(2.3	)		(3.3	)		(5.1	)
Cumulative effect of a change in accounting principle		—			—			—			(16.8	)

Net loss		(7.0	)%		(17.1	)%		(12.3	)%		(30.2	)%

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Net Sales

Net sales for the quarter ended June 30, 2003 were $33.8 million, a decrease of 21.4% compared with $43.0 million for the quarter ended June 30, 2002. Net sales for the first half of 2003 were $67.1 million, a decrease of 22.0% compared with $86.0 million for the first half of 2002. The sales decreases for the quarter and first half were due to reductions in sales to the semiconductor equipment and fiber optic communications markets, which have experienced significant downturns from prior year levels, as well as to our other end markets due to generally weak macro-economic conditions. The sales decrease for the first half of 2003 was partially offset by the inclusion of the full first half of MRSI sales, which we acquired in February 2002.

Sales to the semiconductor equipment market for the quarter ended June 30, 2003 were $13.0 million, reflecting a decrease of $3.3 million, or 20.2%, compared with the corresponding prior-year period. Sales to this market for the first half of 2003 were $24.3 million, reflecting a decrease of $8.0 million, or 24.8%, compared with the first half of 2002. The decline reflects weakness in demand by semiconductor manufacturers for capital equipment, which led to lower demand for the components, subsystems and robots we sell to this market. The decline in sales to the semiconductor equipment market for the first half of 2003 was partially offset by the inclusion of a full first half of sales from MRSI, which we acquired in February 2002.

Sales for the quarter ended June 30, 2003 to our other markets, comprised primarily of research, aerospace and defense, life and health sciences and other end markets we serve were $18.8 million, a decrease of $4.4 million, or 19.0%, compared with the corresponding prior-year period. Sales to these markets for the first half of 2003 were $38.5 million, reflecting a decrease of $6.7 million, or 14.8%, compared with the corresponding prior-year period. The declines were primarily attributable to weak overall macro-economic conditions and a continued decline in sales to industrial customers supporting the telecommunications industry.

Sales to the fiber optic communications market for the quarter ended June 30, 2003 totaled $2.0 million, reflecting a decrease of $1.5 million, or 42.9%, compared with the corresponding prior-year period. Sales to this market for the first half of 2003 totaled $4.3 million, reflecting a decrease of $4.2 million, or 49.4%, compared with the corresponding prior-year period. The declines reflect the continued severe contraction in capital spending in this market.

Domestic sales totaled $22.9 million for the quarter ended June 30, 2003, reflecting a decrease of $8.7 million, or 27.5%, compared with the corresponding prior-year period. Domestic sales totaled $45.6 million for the first half of 2003, reflecting a decrease of $17.1 million, or 27.3%, compared with the corresponding prior-year period. The decreases for the second quarter and first half of 2003 were driven primarily by decreases in sales to the semiconductor equipment market and our other end markets, due to the factors discussed above. Domestic sales to the semiconductor equipment market for the quarter ended June 30, 2003 were $11.0 million, reflecting a decrease of $4.3 million, or 28.1%, compared with the corresponding prior-year period. Domestic sales to the semiconductor equipment market for the first half of 2003 were $21.1 million, reflecting a decrease of $9.6 million, or 31.3%, compared with the corresponding prior-year period. Domestic sales to our other end markets for the quarter ended June 30, 2003 were $10.8 million, reflecting a decrease of $3.5 million, or 24.5%, compared with the corresponding prior-year period. Domestic sales to our other end markets for the first half of 2003 were $21.9 million, reflecting a decrease of $5.0 million, or 18.6%, compared with the corresponding prior-year period. Domestic sales to the fiber optic communications market for the quarter ended June 30, 2003 were $1.1 million, reflecting a decrease of $0.9 million, or 45.0%, compared with the corresponding prior-year period. Domestic sales to the fiber optic communications market for the first half of 2003 were $2.6 million, reflecting a decrease of $2.5 million, or 49.0%, compared with the corresponding prior-year period.

International sales totaled $10.9 million for the quarter ended June 30, 2003, reflecting a decrease of $0.5 million, or 4.4%, compared with the corresponding prior-year period. International sales totaled $21.5 million for the first half of 2003, reflecting a decrease of $1.8 million, or 7.7%, compared with the corresponding prior-year period. The decreases in sales for the second quarter and first half of 2003 were driven primarily by decreases in sales to the fiber optic communications market and our other end markets due to the factors discussed above. The decreases were partially offset by favorable exchange rate changes and increases in sales to semiconductor back-end packaging customers, although the impact of such factors on the sales to each geographic market varies based on the composition of our sales to that geographic market. International sales to the fiber optic communications market were $0.9 million for the quarter ended June 30, 2003, reflecting a decrease of $0.6 million, or 40.0%, compared with the corresponding prior-year period. International sales to the fiber optic communications market were $1.7 million for the first half of 2003, reflecting a decrease of $1.7 million, or 50.0%, compared with the corresponding

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prior-year period. International sales to our other end markets for the quarter ended June 30, 2003 were $8.0 million, a decrease of $0.9 million, or 10.1%, compared with the corresponding prior-year period. International sales to our other end markets for the first half of 2003 were $16.6 million, a decrease of $1.7 million, or 9.3%, compared with the corresponding prior-year period. International sales to the semiconductor equipment market for the quarter ended June 30, 2003 were $2.0 million, reflecting an increase of $1.0 million, or 100%, compared with the corresponding prior-year period. International sales to the semiconductor equipment market for the first half of 2003 were $3.2 million, reflecting an increase of $1.6 million, or 100%, compared with the corresponding prior-year period.

Geographically, sales to European customers decreased $0.9 million, or 12.5% in the quarter ended June 30, 2003, and decreased $2.0 million, or 13.7% in the first half of 2003, compared with the corresponding prior-year periods. Sales to Pacific Rim customers increased $1.1 million, or 37.9% in the quarter ended June 30, 2003, and increased $0.9 million, or 14.5% in the first half of 2003, compared with the corresponding prior-year periods. Second quarter sales to Canadian customers were $0.4 million, a decrease of $0.4 million, or 50.0%, and were $1.0 million for the first half of 2003, a decrease of $0.4 million, or 28.6%, compared with the corresponding prior-year periods. Sales to other international customers were $0.2 million, a decrease of $0.3 million, or 60.0% in the second quarter, and were $0.8 million, a decrease of $0.3 million, or 27.3% in the first half of 2003, compared to the corresponding prior-year periods.

The results of our international operations are subject to currency fluctuations. As the value of the U.S. dollar weakens relative to other currencies, sales in those currencies convert to more U.S. dollars; conversely, when the value of the U.S. dollar strengthens relative to other currencies, sales in those countries convert to fewer U.S. dollars. Our net sales increased by $1.0 million in the quarter ended June 30, 2003, and by $2.1 million in the first half of 2003 due to fluctuations in the average value of the U.S. dollar relative to foreign currencies compared with the corresponding prior-year period.

We expect net sales for the third quarter of 2003 to increase over the second quarter due to increased order flow and higher backlog scheduled to ship in the third quarter, primarily in our other markets, comprised primarily of research, aerospace and defense, life and health sciences and other end markets we serve. Our business is subject to risks arising from market conditions in the semiconductor equipment and fiber optic communications markets, as well as from general economic conditions. The general economic recession has constrained capital spending in many of our end markets. The downturn in the fiber optic communications market worsened throughout 2002 and remains weak in 2003, and we expect our orders from and sales to this market to remain depressed throughout 2003 and most of 2004. The semiconductor equipment market continues to be constrained by capital spending controls at most major manufacturers, and we expect that any significant recovery in this market may not begin until early in 2004. The precise timing and extent of any recovery from these conditions in the semiconductor equipment and fiber optic communications markets is difficult to predict and represents a significant uncertainty with respect to our future operating results. We expect that our sales to our other markets, comprised primarily of the research, aerospace and defense and life and health sciences markets will fluctuate from period to period in line with changes in overall research and defense spending levels, but will increase in future periods as we increase our penetration of these markets and the life and health sciences markets in particular.

Gross Margin

Gross margin for the quarter ended June 30, 2003 was 34.2%, compared with a gross margin of 35.8% in the corresponding period in 2002. Gross margin for the first half of 2003 was 33.7%, compared with a gross margin of 33.8% in the corresponding period in 2002. Improvements resulting from the cost reduction actions that we have implemented over the last 12 months, including facility consolidations and headcount reductions, were offset by the lower sales volumes and production activity in 2003.

In the second half of 2003, we expect our margins to be negatively impacted by the effect of unabsorbed overhead cost variances. Products in our current inventory were produced during periods in which unabsorbed overhead costs were required to be allocated to inventory. These variances were capitalized when the inventory was produced and are charged to cost of sales when the related products are sold. Generally, we expect that our gross margin will fluctuate in future periods due to factors including absorption of fixed overhead due to sales volumes and production activity, product mix and the proportion of sales to OEM customers, material costs, changes in the carrying value of inventory and manufacturing efficiencies. In particular, because a significant portion of our manufacturing overhead is fixed in the short term, the impact of increases or decreases in sales on our gross margin will likely not be in proportion to the changes in sales.

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Selling, General and Administrative Expenses

Selling, general and administrative (SG&A) expenses for the quarter ended June 30, 2003 totaled $11.3 million, or 33.5% of net sales, compared with $12.5 million, or 29.2% of net sales for the same period in 2002. SG&A expenses for the first half of 2003 totaled $22.9 million, or 34.1% of net sales, compared with $23.8 million, or 27.6% of net sales for the same period in 2002. The decreases in SG&A expense in absolute dollars for both periods were primarily attributable to the effects of our cost reduction efforts. For the first half of 2003, these benefits were partially offset by increases in the first quarter of 2003 from the inclusion of a full quarter of SG&A expense relating to MRSI, which was acquired in February 2002, and for which there was not a full period of costs in the first quarter of 2002, and higher legal expenses incurred in the first quarter of 2003 to protect our intellectual property. We expect that SG&A expense as a percentage of sales will fluctuate in the future based on our sales level in any given period. Because a significant portion of our SG&A expense is fixed in the short term, these fluctuations will likely not be in proportion to the changes in sales.

Research and Development Expense

Research and development (R&D) expense for the quarter ended June 30, 2003 totaled $4.7 million, or 14.0% of net sales, compared with $6.3 million, or 14.7% of net sales, for the corresponding period in 2002. R&D expense for the first half of 2003 totaled $9.7 million, or 14.5% of net sales, compared with $12.4 million, or 14.5% of net sales, for the corresponding period in 2002. The year-over-year decrease in absolute dollars was primarily attributable to reductions in R&D spending in the fiber optic telecommunications area, as well as to our efforts to maximize the focus and efficiency of our R&D efforts, partially offset by the inclusion of a full quarter of R&D expenses associated with the operations of MRSI, for which there was not a full period of costs in the first quarter of 2002.

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

Interest and Other Income, Net

Interest and other income, net, totaled $2.3 million for the quarter ended June 30, 2003, compared with $2.2 million for the quarter ended June 30, 2002, and totaled $3.9 million in the first half of 2003, compared with $4.7 million in the first half of 2002. The increase in the second quarter was primarily attributable to higher gains realized from the sale of marketable securities, partially offset by lower interest yields and lower average balances of cash and marketable securities. The decrease in the first half of 2003 was due primarily to lower interest yields on and lower average balances of cash and marketable securities, partially offset by higher gains realized from the sale of marketable securities. We expect that our interest income will fluctuate in future periods based on our cash balances, changes in interest rates and the timing of sales of marketable securities.

Asset Write-Down

Two fiber optic component manufacturers in which we had made minority investments in prior years experienced severe financial difficulties during 2002. One manufacturer shut down its operations and liquidated its assets and the second manufacturer filed for bankruptcy protection. As a result, we wrote down these investments to their estimated fair value, resulting in a charge of $6.5 million in the second quarter of 2002. No such charges have occurred in 2003. However, we periodically value all of our minority investments and there can be no assurance that such a charge may not occur in the future.

Income Taxes

The effective tax rate from continuing operations for the quarter ended June 30, 2003, was 0% versus a tax benefit of 18.3% for the corresponding prior-year period. The effective tax rate from continuing operations for the first half of 2003 was 0% versus a tax benefit of 19.8% for the corresponding prior-year period. The decrease in the tax benefit for both periods resulted from a valuation reserve that was recorded against our deferred tax assets pursuant

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to SFAS No. 109, due to the uncertainty as to the timing and ultimate realization of those assets. As such, we did not recognize any tax benefit on the losses recorded in the current period. For the foreseeable future, the tax provision related to earnings will be substantially offset by a reduction in the valuation reserve. Any future pretax losses will not be offset by a tax benefit due to uncertainty of the recoverability of the deferred tax asset.

LIQUIDITY AND CAPITAL RESOURCES

Net cash used in our operating activities of $11.8 million for the first half of 2003 was primarily attributable to the cash portion of our net loss, a decrease in accrued expenses and an increase in accounts receivable, partially offset by a decrease in other current assets, a decrease in inventory and an increase in accounts payable.

Net cash used in investing activities of $18.0 million for the first half of 2003, was attributable to net purchases of marketable securities of $13.2 million, purchases of equity investments and intellectual property of $4.0 million, and net purchases of property, plant and equipment of $0.8 million.

Net cash used in financing activities of $3.4 million for the first half of 2003 was attributable to the repayment of long-term debt of $3.1 million, which includes the early repayment of the outstanding principal balance of $3.0 million owed on our 8.25% senior notes, and repurchases of our common stock of $2.5 million, partially offset by the proceeds from the issuance of common stock in connection with stock option and purchase plans of $2.2 million.

At June 30, 2003, we had cash and cash equivalents of $11.3 million and marketable securities of $254.5 million. These securities are divided into three portfolios, each managed by a professional investment management firm, under the oversight of the Investment Committee of our Board of Directors and our senior financial management team. Such portfolio managers invest the funds allocated to them in accordance with our Investment Policy, which is reviewed regularly by the Investment Committee and our senior financial management. We expect that our portfolio balances will fluctuate in the future based on factors such as cash used in or provided by ongoing operations, acquisitions or divestitures, investments in other companies, share repurchases, capital expenditures and contractual obligations, as well as changes in interest rates.

At June 30, 2003, we had in place a $5.0 million revolving line of credit expiring September 1, 2003. Certain of the marketable securities that are being managed by the lending institution collateralize the line of credit. The line bears interest at the prevailing prime rate, or the prevailing London Interbank Offered Rate plus 1.5%, at our option, plus an unused line fee of 0.25% per year. At June 30, 2003, there were no balances outstanding under the line of credit, with $4.4 million available under the line, after considering outstanding letters of credit totaling $0.6 million.

In March 2003, we signed an agreement to purchase a minority interest in NEXX Systems, Inc., a privately-held developer of flip chip processing equipment for back-end semiconductor manufacturing applications, for $3.5 million, subject to customary conditions. The $1.0 million common stock component of the investment closed in March 2003, and the $2.5 million preferred stock component of the investment closed in April 2003.

In April 2003, we announced that our board of directors had approved a share repurchase program. The authorization allows us to purchase up to 3.9 million shares, or 10% of our currently outstanding stock. The purchases may be made from time to time in the open market or in privately negotiated transactions, and the timing and amount of the purchases will be based on factors including our cash balances, expected cash requirements and general business and market conditions. The repurchase program is expected to utilize a total of between $10 million and $50 million of cash over the next 12 months. In the second quarter of 2003, we repurchased 159,732 shares at a cost of $2.5 million.

We believe our current working capital position, together with our expected future cash flows from operations and our existing credit availability, will be adequate to fund operations in the ordinary course of business, anticipated capital expenditures, anticipated repurchases of common stock, debt payment requirements and other contractual obligations, for the foreseeable future. However, this belief is based upon many assumptions and is subject to numerous risks (see “Risks Relating To Our Business,” on pages 20-26), and there can be no assurance that we will not require additional funding in the future. We have no present agreements or commitments with respect to any material acquisitions of other businesses, products, product rights or technologies. However, we continue to evaluate acquisitions of and/or investments in products, technologies or companies that complement our business and may make such acquisitions in the future. Accordingly, there can be no assurance that we will not need to obtain additional sources of capital in the future to finance any such acquisitions.

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RECENT ACCOUNTING PRONOUNCEMENTS

RISKS RELATING TO OUR BUSINESS

The following is a summary of certain risks we face in our business. They are not the only risks we face. Additional risks of which we are not presently aware or that we currently believe are immaterial may also harm our business and results of operations. The trading price of our common stock could decline due to the occurrence of any of these risks, and investors could lose all or part of their investment. In assessing these risks, investors should also refer to the other information contained or incorporated by reference in our other filings with the Securities and Exchange Commission, including our Annual Report on Form 10-K for the year ended December 31, 2002, including our consolidated financial statements and related notes included therein.

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

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

	•	fluctuations in our customers’ capital spending, industry cyclicality and other economic conditions within the markets we serve;

	•	demand for our products and the products sold by our customers;

	•	the level of orders within a given quarter and preceding quarters;

	•	the timing and level of cancellations and delays of orders for our products;

	•	the timing of product shipments within a given quarter;

	•	our timing in introducing new products;

	•	variations in the mix of products we sell in each of the markets in which we do business;

	•	changes in our pricing policies or in the pricing policies of our competitors or suppliers;

	•	market acceptance of any new or enhanced versions of our products;

	•	the availability and cost of key components and raw materials we use to manufacture our products;

	•	our ability to manufacture a sufficient quantity of our products to meet customer demand;

	•	fluctuations in foreign currency exchange rates;

	•	timing of new product introductions by our competitors; and

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•

our levels of expenses.

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

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

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

During industry downturns, our revenues from this market may decline suddenly and significantly. Our ability to rapidly and effectively reduce our cost structure in response to such downturns is limited by the fixed nature of many of our expenses in the near term and by our need to continue our investment in next-generation product technology and to support and service our products. In addition, due to the relatively long manufacturing lead times for some of the systems and subsystems we sell to this market, we may incur expenditures or purchase raw materials or components for products we cannot sell. Accordingly, downturns in the semiconductor capital equipment market may materially harm our operating results. Conversely, when upturns in this market occur, we must be able to rapidly and effectively increase our manufacturing capacity to meet increases in customer demand that may be extremely rapid, and if we fail to do so we may lose business to our competitors and our relationships with our customers may be harmed.

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

We rely on a limited number of customers for a significant portion of our sales to the semiconductor capital equipment market. Our top five customers in this market comprised approximately 64.7%, 75.2% and 61.1% of our sales to this market in the first half of 2003, and for the years ended December 31, 2002 and 2001, respectively, and our top two customers accounted for approximately 47.3%, 54.3% and 38.5%, respectively, of our sales to this market in these periods. In 2002, one customer in this market, Applied Materials, Inc., comprised 10.9% of our consolidated net sales for the year. If any of our principal customers discontinues its relationship with us, replaces us as a subsystem vendor for certain products or suffers downturns in its business, our business and results of operations could be harmed significantly. In addition, because a relatively small number of semiconductor capital equipment manufacturers dominate this market, it may be particularly difficult for us to replace our customers if we lose their business.

A significant portion of our expected future subsystem business in the semiconductor capital equipment market is comprised of products for the fabrication of 300mm semiconductor wafers. Wafer fabrication equipment for 300mm wafers is in a very early stage of its adoption, and is expected to be driven by the need for the ability to manufacture more semiconductor chips at lower cost. The deployment of such equipment requires a significant capital investment by semiconductor manufacturers, and many semiconductor manufacturers have delayed plans to deploy such equipment until market conditions improve. If the demand for capital equipment for 300mm wafers

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does not increase, or increases more slowly than expected, demand for our subsystem products will likewise be adversely affected, and our business and results of operations could be harmed significantly.

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

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

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

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

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

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

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

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

Our sales to the fiber optic communications market are largely dependent upon sales to companies that manufacture components for fiber optic communications systems. These component manufacturers are largely dependent upon telecommunications system manufacturers, who in turn depend on sales of their products to telecommunications carriers. As such, our success in this market will ultimately depend on the long-term growth of the communications industry, and in particular the growth of Internet usage and bandwidth demand. Demand for high-bandwidth service has not grown as quickly as the communications industry had forecast, and many carriers currently have significant excess capacity in their fiber optic networks. As a result, demand for optical components has decreased substantially, leaving many component manufacturers with significant excess manufacturing capacity. Unless and until higher demand for bandwidth increases network utilization and bandwidth pricing, telecommunications carriers will be unlikely to make significant investments in new fiber optic networks, and sales of the manufacturing and test equipment we supply to the companies that build this network equipment will be unlikely to increase significantly. In addition, several major telecommunications carriers have recently declared bankruptcy or are in significant financial distress, and others have significant debt service obligations that may limit their ability to purchase new network equipment, which may further delay the recovery of this market.

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

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

We face significant risks from doing business in foreign countries.

Our business is subject to risks inherent in conducting business internationally. In the first half of 2003, and for the years ended December 31, 2002 and 2001, our international revenues accounted for approximately 31.9%, 29.1% and 30.4%, respectively, of total net sales, with a substantial portion of sales originating in Europe. We expect that international revenues will continue to account for a significant percentage of total net sales for the foreseeable future. As a result of our international operations, we face various risks, which include:

	•	adverse changes in the political or economic conditions in countries or regions where we manufacture or sell our products;

	•	challenges of administering our business globally;

	•	compliance with multiple and potentially conflicting regulatory requirements including export requirements, tariffs and other trade barriers;

	•	longer accounts receivable collection periods;

	•	overlapping, differing or more burdensome tax structures;

	•	adverse currency fluctuations;

	•	differing protection of intellectual property;

	•	difficulties in staffing and managing each of our individual foreign operations;

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	•	increased risk of exposure to terrorist activities; and

	•	trade restrictions and licensing requirements.

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

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

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

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

We have in the past, and expect in the future, to achieve growth through a combination of internally developed new products and acquisitions. In recent years we have acquired several companies and technologies, and we expect to continue to pursue acquisitions of other companies, technologies and complementary product lines in the future to expand our product offerings and technology base to further our strategic goals. Each of our recent acquisitions involves, and any future acquisition would involve risks, including:

	•	a decline in demand by our customers for the products of the acquired business;

	•	our ability to integrate the acquired business’ operations, products and personnel;

	•	our ability to retain key personnel of the acquired businesses;

	•	our ability to manufacture and sell the products of the acquired businesses;

	•	our ability to expand our financial and management controls and reporting systems and procedures to integrate and manage the acquired businesses;

	•	our ability to realize expected synergies resulting from the acquisition;

	•	diversion of management’s time and attention;

	•	customer dissatisfaction or performance problems with the products or services of an acquired firm;

	•	assumption of unknown liabilities, or other unanticipated events or circumstances; and

	•	the need to record significant charges or write down the carrying value of intangible assets, which could lower our earnings.

We cannot assure that any business that we may acquire will achieve anticipated revenues and operating results. We have in the past and may in the future choose to close or divest certain acquired companies, which could require us

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to record losses relating to such closures or divestitures. Any of these risks could materially harm our business, financial condition and results of operations.

If we are delayed in introducing our new products into the marketplace, or if our new products contain defects, our operating results will suffer.

Because certain of our products are sophisticated and complex, we may experience delays in introducing new products or enhancements to our existing products. If we do not introduce our new products or enhancements into the marketplace in a timely fashion, our customers may choose to use competitors’ products. Our inability to introduce new or enhanced products in a timely manner could cause our business and results of operations to suffer. Our products may also contain defects or undetected errors. As a result, we could incur substantial expenses in fixing any defects or undetected errors, which could result in damage to our competitive position and harm our business and results of operations.

If we fail to protect our intellectual property and proprietary technology, we may lose our competitive advantage.

Our success and ability to compete depend in large part upon protecting our proprietary technology. We rely on a combination of patent, trademark and trade secret protection and nondisclosure agreements to protect our proprietary rights. The steps we have taken may not be sufficient to prevent the misappropriation of our intellectual property, particularly in foreign countries where the laws may not protect our proprietary rights as fully as in the United States. The patent and trademark law and trade secret protection may not be adequate to deter third party infringement or misappropriation of our patents, trademarks and similar proprietary rights. In addition, patents issued to us may be challenged, invalidated or circumvented. Our rights granted under those patents may not provide competitive advantages to us, and the claims under our patent applications may not be allowed. We have in the past and may in the future be subject to or may initiate interference proceedings in the United States Patent and Trademark Office, which can demand significant financial and management resources. The process of seeking patent protection can be time consuming and expensive and patents may not be issued from currently pending or future applications. Moreover, our existing patents or any new patents that may be issued may not be sufficient in scope or strength to provide meaningful protection or any commercial advantage to us. We may in the future initiate claims or litigation against third parties for infringement of our proprietary rights in order to determine the scope and validity of our proprietary rights or the proprietary rights of our competitors, which claims could result in costly litigation and the diversion of our technical and management personnel. For example, we have notified several manufacturers of semiconductor wafer handling robots and load ports that we believe that they are infringing upon certain of our U.S. patents. We will take such actions where we believe that they are of sufficient strategic or economic importance to us to justify the cost.

We have experienced, and may in the future experience, intellectual property infringement claims.

We have from time to time received communications from third parties alleging that we are infringing certain trademarks, patents or other intellectual property rights of others. In addition, we periodically receive correspondence from third parties alleging that certain of our products infringe patent rights held by them. Whenever claims arise, we evaluate their merits. Any claims of infringement brought by third parties could result in protracted and costly litigation, and we could become subject to damages for infringement, or to an injunction preventing us from selling one or more of our products or using one or more of our trademarks. Such claims could also result in the necessity of obtaining a license relating to one or more of our products or current or future technologies, which may not be available on commercially reasonable terms or at all. Any intellectual property litigation and the failure to obtain necessary licenses or other rights could have a material adverse effect on our business, financial condition and results of operations. In addition, the terms of our customer contracts typically require us to indemnify the customer in the event of any claim of infringement brought by a third party based on our products. Any such claims of this kind may have a material adverse effect on our business, financial condition or results of operations.

If we are unable to attract new employees and retain and motivate existing employees, our business and results of operations will suffer.

Our ability to maintain and grow our business is directly related to the service of our employees in each area of our operations. Our future performance will be directly tied to our ability to hire, train, motivate and retain qualified personnel. Competition for personnel in the technology marketplace is intense, and if we are unable to hire

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sufficient numbers of employees with the experience and skills we need or to retain our employees, our business and results of operations would be harmed.

We rely on several sole-source and limited source suppliers.

We obtain some of the materials used to build our systems and subsystems, such as the sheet steel used in some of our vibration isolation tables, from single or limited sources due to unique component designs as well as specialized quality and performance requirements needed to manufacture our products. If our components or raw materials are unavailable in adequate amounts or are unavailable on satisfactory terms, we may be required to purchase them from alternative sources, if available, which could increase our costs and cause delays in the production and distribution of our products. If we do not obtain comparable replacement components from other sources in a timely manner, our business and results of operations will be harmed. Many of our suppliers require long lead-times to deliver the quantities of components that we need. If we fail to accurately forecast our needs, or if we fail to obtain sufficient quantities of components that we use to manufacture our products, then delays or reductions in production and shipment could occur, which would harm our business and results of operations.

Terrorism and acts of war and the associated economic uncertainties may negatively impact our business.

Terrorist attacks and potential military activities have created economic and political uncertainties, contributing to the current global economic downturn. Future acts of terrorism or increased military action may create additional uncertainties and worsen or delay recovery of the global economy, which could negatively impact our business, financial condition or results of operations.

Natural disasters could disrupt or shut down our operations.

Our operations are susceptible to damages from earthquakes, floods, fire, loss of power or water supplies, or other similar contingencies. We have significant facilities in areas with above average seismic activity. If any of our facilities were to experience a catastrophic loss, it could disrupt our operations, delay production, shipments and revenue, and result in large expenses to repair or replace the facility, any of which would harm our business. We are predominantly uninsured for losses and interruptions caused by earthquakes.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

The principal market risks (i.e., the risk of loss arising from adverse changes in market rates and prices) to which we are exposed are foreign exchange rates which may generate translation and transaction gains and losses and interest rate risk.

Foreign Currency Risk

Operating in international markets sometimes involves exposure to volatile movements in currency exchange rates. The economic impact of currency exchange rate movements on our operating results is complex because such changes are often linked to variability in real growth, inflation, interest rates, governmental actions and other factors. These changes, if material, may cause us to adjust our financing and operating strategies. Consequently, isolating the effect of changes in currency does not incorporate these other important economic factors.

From time to time we use forward exchange contracts to mitigate the risks associated with certain foreign currency transactions entered into in the ordinary course of business, primarily foreign currency denominated receivables and payables. We do not engage in currency speculation. The forward exchange contracts generally require us to exchange U.S. dollars for foreign currencies at maturity, at rates agreed to at inception of the contracts. If the counterparties to the exchange contracts (AA or A+ rated banks) do not fulfill their obligations to deliver the contracted currencies, we could be at risk for any currency related fluctuations. Transaction gains and losses are included in our current net loss in our statement of operations. Net foreign exchange gains and losses were not material to our reported results of operations for the last three years.

The operating loss from international operations totaled $1.8 million for the quarter ended June 30, 2003, and totaled $3.1 million for the first half of 2003. As currency exchange rates change, translation of the income statements of international operations into U.S. dollars affects year-over-year comparability of operating results. We do not generally hedge translation risks because cash flows from international operations are generally reinvested locally.

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We do not enter into hedges to minimize volatility of reported earnings because we do not believe it is justified by the exposure or the cost.

Changes in currency exchange rates that would have the largest impact on translating future international operating profit include the euro, British pound, Canadian dollar and Swiss franc. We estimate that a 10% change in foreign exchange rates would not have had a material effect on reported net loss for the three month period ended June 30, 2003. We believe that this quantitative measure has inherent limitations because, as discussed in the first paragraph of this section, it does not take into account any governmental actions or changes in either customer purchasing patterns or financing and operating strategies.

Interest Rate Risk

The interest rates we pay on certain of our debt instruments are subject to interest rate risk. Our unsecured line of credit bears interest at either the prevailing prime rate, or the prevailing London Interbank Offered Rate plus 1.5%, at our option. Our investments in marketable securities, which totaled $254.5 million at June 30, 2003, are sensitive to changes in the general level of U.S. interest rates. We estimate that a 10% decline in the interest earned on our investment portfolio would not have had a material effect on our net loss for the quarter ended June 30, 2003.

The sensitivity analyses described in the interest rate and foreign exchange discussions above disregard the possibility that rates can move in opposite directions and that gains from one category may or may not be offset by losses from another category and vice versa.

Item 4. Controls and Procedures.

	(a)	Evaluation of Disclosure Controls and Procedures.

		Our chief executive officer and our chief financial officer, after evaluating our “disclosure controls and procedures” (as defined in Securities Exchange Act of 1934 (the “Exchange Act”) Rules 13a-15(e) and 15-d-15(e)) as of the end of the period covered by this Quarterly Report on Form 10-Q (the “Evaluation Date”) have concluded that as of the Evaluation Date, our disclosure controls and procedures are effective to ensure that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.

	(b)	Changes in Internal Control Over Financial Reporting.

		There was no change in our internal control over financial reporting that occurred during the period covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II – OTHER INFORMATION

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

Our annual meeting of stockholders was held on May 21, 2003. Of the 38,654,616 shares of common stock issued and outstanding and entitled to vote at the meeting, there were present at the meeting, in person or by proxy, the holders of 34,292,090 common shares, representing 88.71% of the total number of shares entitled to vote at the meeting. This percentage represents a quorum. The following three proposals were presented and voted on at the meeting:

Proposal 1

To elect two nominees, C. Kumar N. Patel and Peter J. Simone, as Class III members of our Board of Directors. The two nominees were elected by a plurality of the shares represented and entitled to vote at the meeting. The voting results were:

Nominee	For		Withheld

C. Kumar N. Patel		33,051,799		1,240,291
Peter J. Simone		33,049,931		1,242,159

Proposal 2

To approve the amendment and restatement of our Employee Stock Purchase Plan as of April 1, 2003, extending the term thereof for a period of ten (10) years expiring March 31, 2013, and increasing the number of shares of our common stock authorized for issuance thereunder by an additional 2,000,000 shares. Such proposal was approved by more than a majority of the shares represented and entitled to vote at the meeting. The voting results were:

For	Against		Abstain		Broker Non-Vote

21,588,295		1,694,519		734,591		10,274,685

Proposal 3

To approve the appointment of Ernst & Young LLP as our independent auditors for the fiscal year ended December 31, 2003. Such appointment was approved by more than a majority of the shares represented and entitled to vote at the meeting. The voting results were:

For	Against		Abstain		Broker Non-Vote

32,954,356		1,295,112		42,622		0

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Item 6. Exhibits and Reports on Form 8-K.

(a)

Exhibits.

	Exhibit Number		Description of Exhibit

	10.1		Amended and Restated Employee Stock Purchase Plan (incorporated by reference to Appendix B of the registrant’s Definitive Proxy Statement filed with the Securities and Exchange Commission on April 18, 2003).

	31.1		Certification of Chief Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934 (the “Exchange Act”).

	31.2		Certification of Chief Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Exchange Act.

	32.1		Certification of Chief Executive Officer pursuant to Rule 13a-14(b) or Rule 15d-14(b) of the Exchange Act and 18 U.S.C. Section 1350.

	32.2		Certification of Chief Financial Officer pursuant to Rule 13a-14(b) or Rule 15d-14(b) of the Exchange Act and 18 U.S.C. Section 1350.

	(b)	Reports on Form 8-K.

		On April 30, 2003, we filed a Current Report on Form 8-K, disclosing our financial results for the quarter ended March 31, 2003, and our business outlook for the second quarter of 2003. The information was provided under Item 12 of Form 8-K, but furnished under Item 9 of Form 8-K in accordance with the interim guidance issued by the Securities and Exchange Commission in Release No. 33-8216.

SIGNATURES

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

Dated: August 14, 2003	NEWPORT CORPORATION


	By:	/s/ CHARLES F. CARGILE

		Charles F. Cargile, Vice President and Chief Financial Officer (Principal Financial Officer and Duly Authorized Officer)

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EXHIBIT INDEX

Exhibit Number		Description of Exhibit

10.1		Amended and Restated Employee Stock Purchase Plan (incorporated by reference to Appendix B of the registrant’s Definitive Proxy Statement filed with the Securities and Exchange Commission on April 18, 2003).

31.1		Certification of Chief Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934 (the “Exchange Act”).

31.2		Certification of Chief Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Exchange Act.

32.1		Certification of Chief Executive Officer pursuant to Rule 13a-14(b) or Rule 15d-14(b) of the Exchange Act and 18 U.S.C. Section 1350.

32.2		Certification of Chief Financial Officer pursuant to Rule 13a-14(b) or Rule 15d-14(b) of the Exchange Act and 18 U.S.C. Section 1350.

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