0001104659-04-009529.txt : 20040406 0001104659-04-009529.hdr.sgml : 20040406 20040406161101 ACCESSION NUMBER: 0001104659-04-009529 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 20040228 FILED AS OF DATE: 20040406 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ELECTRO SCIENTIFIC INDUSTRIES INC CENTRAL INDEX KEY: 0000726514 STANDARD INDUSTRIAL CLASSIFICATION: MISCELLANEOUS ELECTRICAL MACHINERY, EQUIPMENT & SUPPLIES [3690] IRS NUMBER: 930370304 STATE OF INCORPORATION: OR FISCAL YEAR END: 0531 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-12853 FILM NUMBER: 04720517 BUSINESS ADDRESS: STREET 1: 13900 NW SCIENCE PARK DR CITY: PORTLAND STATE: OR ZIP: 97229 BUSINESS PHONE: 5036414141 MAIL ADDRESS: STREET 1: 13900 NW SCIENCE PARK DRIVE CITY: PORTLAND STATE: OR ZIP: 97229-5497 10-Q 1 a04-4147_110q.htm 10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended February 28, 2004

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: 0-12853

ELECTRO SCIENTIFIC INDUSTRIES, INC.

Oregon		93-0370304
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

13900 N.W. Science Park Drive, Portland, Oregon		97229
(Address of principal executive offices)		(Zip Code)

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

Registrant’s web address: www.esi.com

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o

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

The number of shares outstanding of the Registrant’s Common Stock at March 30, 2004 was 28,093,491 shares.

ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES

PART I - FINANCIAL INFORMATION

Item 1.	Consolidated Condensed Financial Statements (unaudited):

	Consolidated Condensed Balance Sheets – February 28, 2004 and May 31, 2003

	Consolidated Condensed Statements of Operations - Three Months and Nine Months Ended February 28, 2004 and March 1, 2003

	Consolidated Condensed Statements of Cash Flows - Nine Months Ended February 28, 2004 and March 1, 2003

	Notes to Consolidated Condensed Financial Statements

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations

Item 3.	Quantitative and Qualitative Disclosures About Market Risk

Item 4.	Controls and Procedures

PART II - OTHER INFORMATION

Item 1.	Legal Proceedings

Item 6.	Exhibits and Reports on Form 8-K

Signatures

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED BALANCE SHEETS

(In thousands)

(Unaudited)

	February 28, 2004			May 31, 2003
Assets
Current assets:
Cash and cash equivalents	$	41,874		$	31,017
Marketable securities	221,455			211,343
Restricted securities	6,196			9,422
Total cash and securities	269,525			251,782

Trade receivables, net of allowances of $871 and $2,245, respectively	44,255			37,160
Income tax refund receivable	32,274			16,499
Inventories, net	51,536			42,067
Shipped systems pending acceptance	5,443			7,058
Deferred income taxes	14,794			14,794
Assets held for sale	8,842			6,451
Other current assets	3,238			3,445
Total current assets	429,907			379,256

Long-term marketable securities	25,388			53,452
Long-term restricted securities	—			3,018
Total long-term securities	25,388			56,470

Property, plant and equipment, net of accumulated depreciation of $40,687 and $35,091, respectively	34,657			36,592
Deferred income taxes	5,820			5,188
Other assets	8,623			13,796
Total assets	$	504,395		$	491,302

Liabilities and shareholders’ equity
Current liabilities:
Accounts payable	$	14,567		$	4,395
Accrued liabilities	20,110			21,477
Deferred revenue	16,620			13,222
Total current liabilities	51,297			39,094
Convertible subordinated notes	142,542			141,891
Total liabilities	193,839			180,985

Shareholders’ equity:
Preferred stock, without par value; 1,000 shares authorized; no shares issued	—			—
Common stock, without par value; 100,000 authorized; 28,091 and 27,843 shares issued and outstanding, respectively	145,774			140,231
Retained earnings	165,207			169,475
Accumulated other comprehensive income (loss)	(425		)	611
Total shareholders’ equity	310,556			310,317
Total liabilities and shareholders’ equity	$	504,395		$	491,302

The accompanying notes are an integral part of these statements.

ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

(Unaudited)

	For the Three Months Ended						For the Nine Months Ended
	Feb. 28, 2004			Mar. 1, 2003			Feb. 28, 2004			Mar. 1, 2003

Net sales	$	58,770		$	31,631		$	125,399		$	114,407
Cost of sales	35,444			32,175			81,570			96,134
Gross profit	23,326			(544		)	43,829			18,273

Operating expenses:
Selling, service and administration	13,502			16,140			41,408			47,261
Research, development and engineering	5,429			5,706			16,593			20,618
	18,931			21,846			58,001			67,879
Operating income (loss)	4,395			(22,390		)	(14,172		)	(49,606		)

Interest income	1,764			2,358			5,660			7,680
Interest expense	(1,786		)	(1,810		)	(5,599		)	(5,591		)
Other income (expense), net	(197		)	147			(207		)	842
	(219		)	695			(146		)	2,931
Income (loss) before income taxes	4,176			(21,695		)	(14,318		)	(46,675		)
Income tax benefit	(5,798		)	(8,706		)	(10,050		)	(17,384		)
Net income (loss)	$	9,974		$	(12,989	)	$	(4,268	)	$	(29,291	)

Net income (loss) per share - basic (Note 7)	$	0.36		$	(0.47	)	$	(0.15	)	$	(1.06	)

Net income (loss) per share - diluted (Note 7)	$	0.34		$	(0.47	)	$	(0.15	)	$	(1.06	)

Weighted average number of shares - basic (Note 7)	28,030			27,782			27,933			27,715

Weighted average number of shares - diluted (Note 7)	32,187			27,782			27,933			27,715

The accompanying notes are an integral part of these statements.

ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

	For the Nine Months Ended
	February 28, 2004			March 1, 2003

Cash flows from operating activities:
Net loss	$	(4,268	)	$	(29,291	)
Adjustments to reconcile net loss to cash used in operating activities:
Depreciation and amortization	6,942			7,752
Tax benefit of stock options exercised	703			108
Provision for doubtful accounts	101			275
(Gain) loss on disposal of property and equipment	57			(269		)
Gain on debt extinguishment	—			(218		)
Deferred income taxes	(694		)	322
Changes in operating accounts:
(Increase) decrease in trade receivables, net	(6,336		)	7,463
Increase in income tax refund receivable	(15,775		)	(12,616		)
(Increase) decrease in inventories, net	(7,381		)	23,717
(Increase) decrease in shipped systems pending acceptance	1,615			(4,712		)
(Increase) decrease in other current assets	262			(223		)
Increase in current liabilities	7,960			252
Increase in deferred revenue	3,398			7,292
Net cash used in operating activities	(13,416		)	(148		)

Cash flows from investing activities:
Purchase of property, plant and equipment	(3,328		)	(8,040		)
Proceeds from the sale of property, plant and equipment	9			1,074
Maturity of restricted securities	6,244			6,054
Purchase of securities	(162,534		)	(181,798		)
Proceeds from sales of securities and maturing securities	179,351			180,237
(Increase) decrease in other assets	(309		)	3,438
Net cash provided by investing activities	19,433			965

Cash flows from financing activities:
Purchase of ESI-issued convertible notes	—			(4,676		)
Proceeds from exercise of stock options and stock plans	4,840			3,263
Net cash provided by (used in) financing activities	4,840			(1,413		)

Net change in cash and cash equivalents	10,857			(596		)

Cash and cash equivalents:
Beginning of period	31,017			29,435
End of period	$	41,874		$	28,839

Supplemental cash flow information:
Cash paid for interest	$	6,542		$	6,410
Income tax refunds received	2,183			5,604
Cash paid for income taxes	7,087			1,245

The accompanying notes are an integral part of these statements.

ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

Note 1 - Basis of Presentation

These unaudited interim consolidated condensed financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted in these interim statements. Accordingly, these interim statements include all adjustments (consisting of only normal recurring adjustments and accruals) necessary for a fair presentation of results for the interim periods presented. These consolidated condensed financial statements are to be read in conjunction with the financial statements and notes included in the Company’s Annual Report on Form 10-K. Certain prior year amounts have been reclassified to conform to current year presentation.

Results of operations for interim periods are not necessarily indicative of the results to be expected for the full year.

Note 2 - Inventories

Inventories are principally valued at standard costs, which approximate the lower of cost (on a first-in, first-out basis) or market. Components of inventories were as follows (in thousands):

	February 28, 2004		May 31, 2003
Raw materials and purchased parts	$	29,076	$	25,412
Work-in-process	11,998		2,074
Finished goods	10,462		14,581
Total inventories	$	51,536	$	42,067

Note 3 – Assets Held For Sale

At February 28, 2004, assets held for sale includes a 60,000 foot plant on 10 acres of land near Escondido, California, formerly used to house products included in our passive components group, which group has been moved to our headquarters in Portland, Oregon, and a parcel of land in Taiwan. The Company has contracted with real estate agents to find buyers for these properties and anticipates selling the assets within one year. See Note 13 – Subsequent Events.

The components of net assets held for sale were as follows (in thousands):

	February 28, 2004		May 31, 2003
Land	$	5,016	$	2,625
Buildings	3,826		3,826
	$	8,842	$	6,451

Note 4 – Accrued Liabilities

Accrued liabilities consisted of the following (in thousands):

	February 28, 2004		May 31, 2003
Payroll related	$	6,887	$	6,590
Warranty	3,611		3,501
Interest payable	1,264		2,781
Accrual for loss on purchase commitments	540		2,214
Other	7,808		6,391
	$	20,110	$	21,477

The accrual for loss on purchase commitments to our vendors decreased $1.7 million to $0.5 million at February 28, 2004 compared to May 31, 2003. This decrease is a result of payments made to vendors for settlement of purchase commitments and reclassification to inventory reserves as materials were received.

Note 5 – Product Warranty

The Company evaluates obligations related to product warranties quarterly. Products sold are inclusive of a standard one-year warranty. Costs to service the warranty include labor to repair the system and replacement parts for defective items, as well as other costs incidental to the repairs. Any cost recoveries from warranties offered by our suppliers covering defective components are also considered. This data is then used to calculate the warranty reserve based on remaining warranty periods. If circumstances change, or if a material change in warranty-related incidents occurs, the estimate of the warranty reserve could change significantly. Warranties issued and changes in estimates are recorded as an adjustment to cost of sales. Accrued warranty is included on the balance sheet as a component of accrued liabilities.

The following is a reconciliation of the changes in the aggregate warranty liability for the nine months ended February 28, 2004 (in thousands):

Warranty accrual, May 31, 2003	$	3,501
Reductions for warranty payments made	(2,726		)
Warranties issued and changes in estimates	2,836
Warranty accrual, February 28, 2004	$	3,611

Note 6 – Deferred Revenue

Revenue is recognized upon delivery, provided that acceptance criteria can be demonstrated prior to shipment. Installation services are not essential to the functionality of the delivered equipment. Where the acceptance criteria cannot be demonstrated prior to shipment, or in the case of substantially new products, revenue is deferred until acceptance has been received. For multiple element arrangements, we defer the fair value of any undelivered elements until they are delivered.

The following is a reconciliation of the changes in deferred revenue for the nine months ended February 28, 2004 (in thousands).

Deferred Revenue, May 31, 2003	$	13,222
Revenue deferred	30,442
Revenue recognized and other	(27,044		)
Deferred Revenue, February 28, 2004	$	16,620

Note 7 - Earnings Per Share

Following is a reconciliation of basic earnings (loss) per share (“EPS”) and diluted EPS (in thousands, except per share amounts):

	Three Months Ended February 28, 2004					Three Months Ended March 1, 2003
	Income		Shares	Per Share Amount		Loss			Shares	Per Share Amount
Basic EPS
Net income (loss) available to common shareholders	$	9,974	28,030	$	0.36	$	(12,989	)	27,782	$	(0.47	)

Diluted EPS
Effect of dilutive stock options	—		341			—			—
Effect of 4 ¹/₄% convertible subordinated notes		1,090	3,816			—			—
Net income (loss) available to common shareholders	$	11,064	32,187	$	0.34	$	(12,989	)	27,782	$	(0.47	)

	Nine Months Ended February 28, 2004							Nine Months Ended March 1, 2003
	Income			Shares	Per Share Amount			Loss			Shares	Per Share Amount
Basic EPS
Net income (loss) available to common shareholders	$	(4,268	)	27,933	$	(0.15	)	$	(29,291	)	27,715	$	(1.06	)

Diluted EPS
Effect of dilutive stock options	—			—				—			—
Effect of 4 ¹/₄% convertible subordinated notes	—			—				—			—
Net income (loss) available to common shareholders	$	(4,268	)	27,933	$	(0.15	)	$	(29,291	)	27,715	$	(1.06	)

The following common stock equivalents were excluded from the diluted EPS calculations because inclusion would have had an antidilutive effect (in thousands):

	Three Months Ended		Nine Months Ended
	February 28, 2004	March 1, 2003	February 28, 2004	March 1, 2003
Employee stock options	3,395	3,440	3,072	3,434
Convertible subordinated notes	—	3,816	3,816	3,816
	3,395	7,256	6,888	7,250

Note 8 – Comprehensive Income (Loss)

The components of comprehensive income (loss), net of tax, were as follows (in thousands):

	Three Months Ended					Nine Months Ended
	February 28, 2004		March 1, 2003			February 28, 2004			March 1, 2003
Net income (loss)	$	9,974	$	(12,989	)	$	(4,268	)	$	(29,291	)
Net unrealized gain (loss) on derivative instruments	10		(1		)	5			12
Foreign currency translation adjustment	108		21			94			126
Net unrealized gain (loss) on securities classified as available for sale	363		163			(1,135		)	668
Total comprehensive income (loss)	$	10,455	$	(12,806	)	$	(5,304	)	$	(28,485	)

Note 9 – Stock Based Compensation Plans

Stock-based compensation plans are accounted for under Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (APB 25). Disclosures of net loss and loss per share are provided as if the method prescribed by Statement of Financial Accounting Standards (SFAS) No. 123, “Accounting for Stock-Based Compensation” had been applied in measuring compensation expense. In December 2002, SFAS No. 148, “Accounting for Stock-Based Compensation - Transition and Disclosure” was issued. SFAS No. 148 amends SFAS No. 123 for certain transition provisions for companies electing to adopt the fair value method and amends SFAS No. 123 for certain financial statement disclosures, including interim financial statements.

No compensation cost has been recognized for stock options granted at fair value on the date of grant or issuance, or for employee share purchase plan (“ESPP”) shares issued at a fifteen percent discount of the lower of the market price on either the first day of the applicable offering period or the purchase date. In situations where stock options are granted at less than fair value on the date of the grant, and in accordance with APB 25, total compensation expense is calculated as the difference between the fair value on the date of grant and the stated option exercise price, applied to the number of options affected. The calculated total compensation expense is included in operating results over the vesting period of the underlying options using the straight-line method.

The Company’s stock option plans allow for grants of stock bonuses, restricted stock or performance-based awards. For the quarters ended Feb 28, 2004 and March 1, 2003, the company recorded $0.3 million and $0.1 million, respectively, of compensation expense related to restricted stock grants.

Had compensation cost for our stock option and ESPP plans been determined based on the provisions of SFAS No. 123 and No. 148, our net income (loss) and net income (loss) per share would have changed by the amounts shown as follows (in thousands, except per share amounts):

	Three Months Ended						Nine Months Ended
	February 28, 2004			March 1, 2003			February 28, 2004			March 1, 2003

Net income (loss), as reported	$	9,974		$	(12,989	)	$	(4,268	)	$	(29,291	)
Deduct – Recapture of stock-based employee compensation expense related to cancellations included in reported net income (loss), net of related tax effect	—			—			(144		)	—
Add – Stock-based employee compensation expense included in reported net income (loss), net of related tax effects	226			80			308			198
Deduct - total stock-based employee compensation expense determined under the fair value based method for all awards, net of related tax effects	(3,104		)	(4,713		)	(7,881		)	(13,845		)
Net income (loss), pro forma	$	7,096		$	(17,622	)	$	(11,985	)	$	(42,938	)

Net income (loss) per share – basic, as reported	$	0.36		$	(0.47	)	$	(0.15	)	$	(1.06	)
Net income (loss) per share – diluted, as reported	$	0.34		$	(0.47	)	$	(0.15	)	$	(1.06	)

Net income (loss) per share – basic, pro forma	$	0.25		$	(0.63	)	$	(0.43	)	$	(1.55	)
Net income (loss) per share – diluted, pro forma	$	0.22		$	(0.63	)	$	(0.43	)	$	(1.55	)

The Black-Scholes option pricing model is utilized to measure compensation expense. The following weighted average assumptions were made in calculating the value of all options granted during the periods presented:

	Three Months Ended		Nine Months Ended
	February 28, 2004	March 1, 2003	February 28, 2004	March 1, 2003
Risk-free interest rate	3.25%	3.33%	3.34%	3.35%
Expected dividend yield	0%	0%	0%	0%
Expected lives	5.6 years	5.6 years	5.5 years	5.6 years
Expected volatility	68.35%	69.00%	67.87%	68.92%

The following weighted average assumptions were made in calculating the value of all shares issued under the ESPP during the periods presented:

	Three Months Ended		Nine Months Ended
	February 28, 2004	March 1, 2003	February 28, 2004	March 1, 2003
Risk-free interest rate	2.47%	3.56%	2.47%	3.56%
Expected dividend yield	0%	0%	0%	0%
Expected lives	1.1 years	1.0 years	1.1 years	1.0 years
Expected volatility	59.39%	68.61%	59.39%	68.61%

Note 10 – Legal Claim

September 17, 2002 and at the latest April 15, 2003, and alleged violations of Section 10(b) of the Securities Exchange Act of 1934 (the “Act”) and Rule 10b-5 promulgated thereunder, as well as Section 20(a) of the Act. The complaints have been consolidated under the name In re Electro Scientific Industries, Inc. Securities Litigation, Case No. CV 03-404-HA. Lead plaintiffs and lead counsel for plaintiffs have been appointed. Plaintiffs’ consolidated class action complaint (the “Consolidated Complaint”) was filed on October 10, 2003, shortens the putative class to purchasers between September 17, 2002 and March 20, 2003, and adds Donald R. VanLuvanee (ESI’s President and CEO from 1992 until April 2002), John R. Kurdock (ESI’s former VP Operations), and James Lorenz (ESI’s former Corporate Controller) as additional defendants. The Consolidated Complaint alleges that defendants made false and misleading statements during the putative class period about ESI’s financial condition and performance, business prospects, and operations, artificially inflating ESI’s stock price and leading to the restatement first announced on March 20, 2003. In March 2003, our Audit Committee commenced an investigation into certain accounting matters. As a result of the investigation, which was completed on July 11, 2003, the Company restated its financial statements for the fiscal year ended June 1, 2002 and for the quarters ended August 31, 2002 and November 30, 2002. The restated financial statements for these periods are set forth in the Company’s annual report on Form 10-K/A and quarterly reports on Form 10-Q/A, each filed August 11, 2003. Discovery has not yet commenced. The Company expects that the litigation will be costly and will to some degree divert management’s attention from daily operations.

On March 31, 2003 and April 28, 2003, two separate purported shareholder derivative complaints were filed in the Circuit Court of Oregon in Washington County. The complaints were consolidated under the name In Re Electro Scientific Industries, Inc. Derivative Litigation, Lead Case No. C 031067 CV. A consolidated complaint (“Complaint”) was filed on September 24, 2003, and names as defendants James Dooley (former President and CEO), David Bolender (former director, CEO and Chairman), Joseph Reinhart (former Acting CFO), Barry Harmon (director and former President and CEO), and current or former directors W. Arthur Porter, Gerald Taylor, Larry Hansen, Vernon Ryles, Keith Thomson, and Jon Tompkins. ESI is named as a “nominal defendant.” The Complaint, which purports to be brought on behalf of ESI, alleges that all defendants breached fiduciary duties owed to ESI, abused their alleged control over ESI, wasted corporate assets, are liable for gross mismanagement, and were unjustly enriched by their conduct. The Complaint seeks an unspecified amount of monetary damages and seeks various equitable remedies, including a constructive trust on the proceeds received by the defendants from trading ESI common stock, and attorneys’ fees and costs. As filed, the Complaint is derivative in nature and does not seek monetary damages from ESI or the imposition of equitable remedies on ESI. A special litigation committee of the Company’s board of directors, with the assistance of independent legal counsel, is conducting an investigation relating to the allegations asserted in the Complaint and has obtained a stay of the action to April 12, 2004 pending the committee’s investigation.

The Company has entered into indemnification agreements in the ordinary course of business with its officers and directors and may be obligated throughout the class action and the derivative lawsuit to advance payment of legal fees and costs incurred by the defendants pursuant to the indemnification agreements and applicable Oregon law.

close of discovery, on October 8, 2002, the Company filed a motion for summary judgment of non-infringement. Cognex filed motions for summary judgment on the issues of unenforceability and mismarking on the same day. The court denied Cognex’s motion on the issue of unenforceability on April 25, 2003. The court subsequently allowed Cognex to supplement its expert disclosures in certain respects. ESI renewed its motion for summary judgment of non-infringement on March 26, 2004. Cognex’s motion on the issue of false marking is still pending. Additionally, certain of the Company’s customers have notified the Company that, in the event it is subsequently determined that their use of CorrectPlace infringes any patent, they may seek indemnification from the Company for damages or expenses resulting from this matter.

On August 18, 2003, GSI Lumonics Corporation (GSI) filed a lawsuit in the United States District Court for the Central District of California (GSI Lumonics Inc. v. Electro Scientific Industries, Inc. (ESI), Case No. CV-03-5863 PA (SHx). The lawsuit alleges that ESI infringes three GSI patents: U.S. Patent No. 6,181,728, entitled “Controlling Laser Polarization;” U.S. Patent No. 6,337,462, entitled “Laser Processing;” and U.S. Patent No. 6,573,473, entitled “Method and System for Precisely Positioning a Waist of a Material-Processing Laser Beam to Process Microstructures Within a Laser Processing Site.” These claims relate to the Company’s semiconductor yield improvement systems. GSI seeks injunctive relief, an unspecified amount of damages, costs, and attorneys’ fees. On September 2, 2003, GSI filed a First Amended Complaint which did not change the substantive allegations of patent infringement. By court order dated September 18, 2003, the case was transferred to the United States District Court for the Northern District of California. The case was re-assigned to a judge in the Northern District of California and has been renumbered CV-03-04302-MHP. On October 8, 2003, the Company filed its Answer to First Amended Complaint and Counterclaim for Declaratory Judgment of Invalidity and Noninfringement. Pretrial discovery has recently begun. A trial date has been set for July 19, 2005. The Company intends to defend this action vigorously. It is not possible at this time to reliably estimate any costs that may be incurred in connection with this lawsuit.

In addition to the legal matters described above, in the ordinary course of business, the Company is involved in various other legal matters and investigations. In the opinion of management, amounts accrued for awards or assessments in connection with these matters, which specifically excludes the class action lawsuits and related derivative complaints noted above, are management’s best estimate and ultimate resolution of these matters will not have a material effect on the Company’s consolidated financial position, results of operations or cash flow. The Company cannot reliably estimate the costs related to the class action lawsuits and related derivative complaints at this time; however, to the extent developments in the litigation result in the Company being able to estimate such costs, the Company will accrue for the estimated liability.

Note 11 – Restructuring and Cost Management Plans

In fiscal years 2004, 2003 and 2002, restructuring and other cost management plans were announced.

The following table reflects changes in accruals related to these restructuring and cost management activities, which are reflected in the “other” component of accrued liabilities in the accompanying balance sheets, from May 31, 2003 to February 28, 2004 (in thousands):

	Balances at May 31, 2003		Expenses Charged to Accruals	Amounts Paid		Balances at February 28, 2004
Facility consolidation costs	$	680	537	(665	)	$	552
Severance and other employee related costs	$	50	1,350	(1,400	)	$	—

Of the $1.9 million expenses charged for the nine months ended February 28, 2004, $0.1 million was included in cost of goods sold, $1.6 million was included in selling, service and administrative expenses, and $0.2 million was included in research and development.

Fiscal year 2004 cost management plan

The actions taken in the first nine months of fiscal year 2004 resulted in a reduction of 67 employees, impacting all employee groups. Severance and other employee related charges were approximately $1.0 million.

The following table reflects the changes in accruals related to the fiscal 2004 cost management plan from May 31, 2003 to February 28, 2004 (in thousands):

	Balance at May 31, 2003		Expenses Charged to Accruals	Amounts Paid		Balance at February 28, 2004
Severance and other employee related costs	$	—	993	(993	)	$	—

Fiscal year 2003 cost management plan

The fiscal year 2003 actions primarily related to relocating the manufacturing of the electronic component product line included in our passive components group from Escondido, California to the Company’s headquarters in Portland, Oregon. This action resulted in a reduction of 68 employees and the relocation of 37 employees to our headquarters. For the three months and nine months ended February 28, 2004, severance and other employee-related charges for these activities totaled approximately $0.1 million and $0.4 million, respectively. For the three and nine months ended February 28, 2004, facilities consolidation costs related to these activities totaled approximately $0.1 million and $0.2 million, respectively. For the three months and nine months ended March 1, 2003, severance and other employee-related charges for these activities totaled approximately $1.7 million and $3.9 million, respectively. Facilities consolidation costs related to these activities totaled approximately $0.9 million and $2.5 million for the three and nine months ended March 1, 2003, respectively. Fixed asset write-downs totaled approximately $0.4 million and $0.8 million for the three and nine months ended March 1, 2003, respectively. As a result of the closure of the California facility, the discontinuance of certain electronic component manufacturing product lines included in our passive components group, and downward revisions to previously projected product demand, we recorded charges of $6.8 million for the write-down of excess and obsolete inventory, $4.1 million for inventory write-downs related to the discontinuance of certain electronic component manufacturing product lines, $2.5 million related to open purchase order commitments on excess and obsolete inventory, and $1.8 million in inventory write-downs and long term asset impairments related to the discontinuance of certain other product lines, and a $0.2 million gain on the disposal of equipment for the nine months ended March 1 , 2003. For the three months ended March 1, 2003, we recorded $1.8 million in inventory write-downs and long term asset impairments related to the discontinuance of certain other product lines, offset by a $0.2 million gain on the disposal of equipment.

The following table reflects the changes in accruals related to the fiscal year 2003 cost management plan from May 31, 2003 to February 28, 2004 (in thousands):

	Balances at May 31, 2003		Expenses Charged to Accruals	Amounts Paid		Balances at February 28, 2004
Facility consolidation costs	$	—	179	(179	)	$	—
Severance and other employee related charges	$	50	357	(407	)	$	—

Fiscal year 2002 cost management plan

The fiscal year 2002 actions reduced the total work force by 419 employees in June and August 2001, with an additional 97 employees in October 2001. These reductions impacted all employee groups. The actions also included vacating buildings located in California, Massachusetts, Michigan, Minnesota, and Texas, as well as exiting the mechanical drill business and discontinuing the manufacturing of certain other products. For the nine months ended February 28, 2004, facilities consolidation charges related to these activities totaled approximately $0.4 million. For the three months and nine months ended March 1, 2003, facilities consolidation charges related to these activities totaled approximately $0.3 million and $0.4 million, respectively.

The following table reflects the changes in our accruals related to the fiscal year 2002 restructuring and cost management plan from May 31, 2003 to February 28, 2004 (in thousands):

	Balance at May 31, 2003		Expenses Charged to Accruals	Amounts Paid		Balance at February 28, 2004
Facility consolidation costs	$	680	358	(486	)	$	552

Accrued facility consolidation and lease termination fees will be paid through 2006.

Note 12 - Recent Accounting Pronouncements

On December 17, 2003, the Staff of the Securities and Exchange Commission (SEC or the Staff) issued Staff Accounting Bulletin No. 104, “Revenue Recognition” (SAB 104), which superceded Staff Accounting Bulletin No. 101 “Revenue Recognition in Financial Statements” (SAB 101). SAB 104 rescinds accounting guidance contained in SAB 101 related to multiple element revenue arrangements, superceded as a result of the issuance of Emerging Issues Task Force Issue No. 00-21 (EITF 00-21), “Accounting for Revenue Arrangements with Multiple Deliverables.” Additionally, SAB 104 rescinds the SEC’s Revenue Recognition in Financial Statements Frequently Asked Questions and Answers (the FAQ) issued with SAB 101 that had been codified in SEC topic 13, “Revenue Recognition.” While the wording of SAB 104 has changed to reflect the issuance of EITF 00-21, the revenue recognition principles of SAB 101 remain largely unchanged by the issuance of SAB 104. The adoption of SAB 104 did not have a material effect on the Company’s financial position or results of operations.

In May 2003, the Financial Accounting Standards Board (FASB) approved SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity.” SFAS No. 150 establishes standards for how to classify and measure financial instruments with characteristics of both liabilities and equity. It requires financial instruments that fall within its scope to be classified as liabilities. SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003 and it is effective for pre-existing financial instruments, as of July 1, 2003. We do not have any financial instruments that fall under the guidance of SFAS No. 150 and, therefore, the adoption did not have any effect on the Company’s financial position or results of operations.

In May 2003, the FASB issued SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities.” SFAS No. 149 addresses certain accounting issues related to hedging activity and derivative instruments embedded in other contracts. In general, the amendments require contracts with comparable characteristics to be accounted for similarly. In addition, SFAS No. 149 provides guidance as to when a financing component of a derivative instrument must be given special reporting treatment in the statement of cash flows. SFAS No. 149 is effective for contracts entered into or modified after June 30, 2003. The adoption of SFAS No. 149 did not have a material effect on the Company’s financial position or results of operations.

In January 2003, the FASB issued FASB Interpretation No. 46 (FIN 46), “Consolidation of Variable Interest Entities, An Interpretation of ARB No. 51.” FIN 46 provides guidance on: 1) the identification of entities for which control is achieved through means other than through voting rights, known as “variable interest entities” (VIEs); and 2) which business enterprise is the primary beneficiary and when it should consolidate the VIE. This new model for consolidation applies to entities: 1) where the equity investors (if any) do not have a controlling financial interest; or 2) whose equity investment at risk is insufficient to finance that entity’s activities without receiving additional subordinated financial support from other parties. In addition, FIN 46 requires that both the primary beneficiary and all other enterprises with a significant variable interest in a VIE make additional disclosures. FIN 46 is effective for all new VIEs created or acquired after January 31, 2003. For VIEs created or acquired prior to February 1, 2003, FIN 46 must be applied for the first interim or annual period beginning after June 15, 2003. Certain disclosures are effective immediately. The Company does not hold any variable interest entities, and therefore, the adoption of FIN 46 did not have any effect on the Company’s financial position or results of operations.

In June 2001, the FASB issued SFAS No. 143, “Accounting for Asset Retirement Obligations,” which is effective for fiscal years beginning after June 15, 2002. SFAS No. 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. SFAS No. 143 applies to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development, and normal operation of a long-lived asset, except for certain lease obligations. The adoption of SFAS No. 143 did not have a material effect on the Company’s financial position or results of operations.

Note 13 – Subsequent Events

On March 30, 2004 the Company sold a 60,000 square foot plant on 10 acres of land near Escondido, California. The asset, which is included in assets held for sale at February 28, 2004, had a book value of $6.5 million. Net proceeds from the sale of this asset were $6.6 million, resulting in a $0.1 million gain.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

We provide high technology manufacturing equipment to the global electronics market. Our customers are primarily manufacturers of semiconductors, passive electronic components and electronic interconnect devices. Our equipment enables these manufacturers to reduce production costs, increase yields and improve the quality of their products. The components and devices manufactured by our customers are used in a wide variety of end-use products in primarily the computer and communications industries.

We operate within one segment, high technology manufacturing equipment, which is comprised of three product groups: the semiconductor group, the passive components group and the electronic interconnect group. The semiconductor group supplies laser processing systems to improve the yield for advanced integrated circuits as well as vision subsystems for original equipment manufacturers (OEMs). High-speed test and termination equipment used in the high-volume production of multi-layer ceramic passives (MLCPs) and other passive electronic components as well as advanced laser systems used to fine tune electronic components and circuitry are produced by our passive components group. Products within the electronic interconnect group include a family of laser drilling systems for production of high-density interconnect (HDI) circuit boards and advanced electronic packaging.

In fiscal 2001, the electronics industry, and in particular the semiconductor subset of this industry, was at the peak of an extended period of expansion. During fiscal year 2002, the slowing worldwide demand for electronics and semiconductors resulted in a rapid decline in demand for manufacturing equipment. This sudden and steep decline in demand for manufacturing equipment continued to deepen throughout fiscal 2003.

In response to this prolonged and continuing downturn, we initiated plans to better align our infrastructure and operating costs with expected business conditions. These plans have included discontinuing certain products, consolidating facilities, relocating employees, reducing headcount, freezing salaries and wages and reducing discretionary spending.

In the first two quarters of fiscal year 2004 we began to see increases in demand, as evidenced by an increase in orders. Orders increased from $25.5 million in the fourth quarter of fiscal year 2003 to $42.7 million and $64.9 million in the first and second quarters of fiscal year 2004, respectively. This order growth was primarily driven by an increase in orders for products from our semiconductor group. During the third quarter of fiscal year 2004, overall order activity declined slightly to $61.2 million as orders slowed for products from our semiconductor and electronic interconnect groups, partially offset by a strong increase in orders for products from our passive component group. Shipments increased 27% this quarter over the second quarter of fiscal year 2004. Despite the increase in shipments from last quarter, backlog increased $5.7 million to $50.8 million at the end of the third quarter of fiscal year 2004 compared to $45.1 million in the prior quarter, as the level of orders remains strong.

Results of Operations

The following table sets forth results of operations data as a percentage of net sales.

	Three Months Ended				Nine Months Ended
	February 28, 2004		March 1, 2003		February 28, 2004		March 1, 2003

Net sales	100.0	%	100.0	%	100.0	%	100.0	%
Cost of sales	60.3		101.7		65.0		84.0
Gross margin	39.7		(1.7	)	35.0		16.0
Selling, service, and administrative	23.0		51.0		33.0		41.3
Research, development and engineering	9.2		18.1		13.3		18.1
Operating income (loss)	7.5		(70.8	)	(11.3	)	(43.4	)
Total other income (expense), net	(0.4	)	2.2		(0.1	)	2.6
Income (loss) before taxes	7.1		(68.6	)	(11.4	)	(40.8	)
Income tax benefit	(9.9	)	(27.5	)	(8.0	)	(15.2	)
Net income (loss)	17.0	%	(41.1	)%	(3.4	)%	(25.6	)%

Net Sales

Certain information regarding our net sales by product group is as follows (net sales in thousands):

	Three Months Ended
	February 28, 2004				March 1 , 2003
	Net Sales		% of Net Sales		Net Sales		% of Net Sales

Semiconductor Group (SG)	$	37,068	63	%	$	15,218	48	%
Passive Components Group (PCG)	12,562		21		10,120		32
Electronic Interconnect Group (EIG)	9,140		16		6,293		20
	$	58,770	100	%	$	31,631	100	%

	Nine Months Ended
	February 28, 2004				March 1 , 2003
	Net Sales		% of Net Sales		Net Sales		% of Net Sales

Semiconductor Group (SG)	$	70,941	57	%	$	56,893	50	%
Passive Components Group (PCG)	31,117		25		38,246		33
Electronic Interconnect Group (EIG)	23,341		18		19,268		17
	$	125,399	100	%	$	114,407	100	%

Net sales for the third quarter of fiscal year 2004 were $58.8 million, up 28% from $45.8 million in the prior quarter and up 86% from $31.6 million in the third quarter of last fiscal year. Both the sequential and comparative increases continue to be primarily driven by sales in the semiconductor group to major DRAM manufacturers purchasing our products in order to increase capacity and transition to newer technology, complimented by moderate increases in our other markets. Deferred revenue was $16.6 million at February 28, 2004 compared to $12.6 million at March 1, 2003. The increase in deferred revenue was primarily due to an increased level of shipments of substantially new products by our semiconductor group. Revenue is deferred on shipments of substantially new products until customer acceptance has been received. As a result, net sales can vary significantly from quarter to quarter based upon the timing of product delivery and customers’ acceptance. Semiconductor products represent the majority of the February 28, 2004 deferred revenue balance.

Changes in deferred revenues for the first three quarters of fiscal year 2004 were as follows (in thousands):

	Three Months Ended
	February 28, 2004			November 29, 2003			August 30, 2003

Beginning balance	$	19,877		$	21,684		$	13,222
Revenue deferred	11,708			8,295			10,439
Revenue recognized and other	(14,965		)	(10,102		)	(1,977		)
Ending balance	$	16,620		$	19,877		$	21,684

Net sales were $125.4 million for the nine months ended February 28, 2004 compared to $114.4 million for the nine months ended March 1, 2003, an increase of 10%. This increase is consistent with increased demand in all of our product groups described above, but was negatively impacted by the low volume of sales in the first quarter of fiscal year 2004 of $20.9 million and to a lesser degree by increases in deferred revenue for substantially new products pending customer acceptance.

Net sales by geographic region were as follows (net sales in thousands):

	Three Months Ended
	February 28, 2004				March 1, 2003
	Net Sales		% of Net Sales		Net Sales		% of Net Sales

United States	$	11,901	20	%	$	7,391	23	%
Asia	40,680		69		16,794		53
Europe	5,937		10		6,964		22
Other	252		1		482		2
	$	58,770	100	%	$	31,631	100	%

	Nine Months Ended
	February 28, 2004				March 1, 2003
	Net Sales		% of Net Sales		Net Sales		% of Net Sales

United States	25,390		20	%	23,268		20	%
Asia	86,654		69		75,858		66
Europe	12,502		10		14,144		13
Other	853		1		1,137		1
	$	125,399	100	%	$	114,407	100	%

Gross Profit

Gross profit for the three months ended February 28, 2004 increased by $23.9 million to $23.3 million compared to the three months ended March 1, 2003. The negative gross profit for the three months ended March 1, 2003 includes inventory write-down and other cost reduction charges of $2.0 million related to our cost management plans. Gross profit as a percentage of sales, or gross margin, was 40% in the third quarter of fiscal year 2004 as compared to negative 2% in the comparable period in fiscal year 2003. The negative gross margin for the three months ended March 1, 2003 was a result of low utilization of factory capacity, product mix, downward pricing pressures and the inventory write-down charges discussed above.

Sequentially, gross margin of 40% in the third quarter of fiscal year 2004 increased six percentage points from 34% in the second quarter of fiscal year 2004 primarily due to a reduction in per unit overhead costs as fixed manufacturing costs were spread over significantly increased production volume.

Gross profit for the nine months ended February 28, 2004 increased by $25.6 million to $43.8 million compared to the nine months ended March 1, 2003. Gross profit for the nine months ended February 28,

2004 and March 1, 2003 includes $0.1 million and $15.9 million, respectively, of charges related to cost management plans.

In fiscal years 2002 and 2003 we had $12.5 million and $17.2 million in inventory write-downs and other cost reduction charges, respectively. The write-downs in fiscal 2002 were primarily related to the discontinuance of our Advanced Packaging Mechanical Drilling product line. The associated inventory was reduced to an estimated recovery value of approximately 5%. In fiscal 2003 the write-downs related to the following: the consolidation of our Escondido, California facility into our Portland, Oregon operation, which resulted in a number of discontinued product lines; downward revisions to previously projected product demand; and the discontinuance of certain products associated with our semiconductor product line.

At February 28, 2004, approximately $3.4 million of the items subject to write-down had not yet been disposed of. We are actively working to dispose of these materials. These disposals have not materially affected gross margin and are not expected to do so in future quarters because the reduced value of these materials has been substantially reserved for and the current carrying value of the materials has approximated sale or disposal value.

Although gross margins have increased steadily over the last four quarters, they are still below historical levels achieved in fiscal year 2002 and previously. When older inventories with higher assigned overhead allocations are sold gross margin rates are negatively impacted. As manufacturing volumes increase, newly manufactured product will be burdened with lower overhead, positively impacting margin rates when sold. As a result, we anticipate gross margins will increase as manufacturing volumes increase and as processing and procurement efficiencies are improved. Product pricing had a minimal effect on the margin fluctuations.

Operating Expenses

Selling, Service and Administrative expenses

Selling, service and administrative expenses decreased $2.6 million to $13.5 million in the third quarter of fiscal 2004 compared to $16.1 million in the third quarter of fiscal year 2003. The primary items included in selling, service and administrative expenses are labor and other employee-related expenses, travel expenses, professional fees and facilities costs. Included in the three months ended February 28, 2004 and March 1, 2003 are $0.3 million and $2.6 million of charges related to our cost management plans, respectively. Also included in the three months ended February 28, 2004 are $0.7 million in legal and other professional fees related to the 2003 audit committee investigation, ongoing securities litigation, and regulatory filings. The decrease in selling, service and administrative expenses of $2.6 million as compared to the same quarter of the prior fiscal year is primarily a result of the $2.3 million decrease in cost management plan charges, $1.0 million is attributed to reduced headcount and administrative spending, offset by the $0.7 million in legal and other professional fees incurred this quarter as described above.

Charges during the third quarter of fiscal year 2004 related to our cost management plans of $0.3 million include $0.2 million of severance and other employee-related expense and $0.1 million of facility consolidation expense. As a result of the Escondido consolidation and other cost management plans discussed above, included in selling, service and administrative expenses in the third quarter of fiscal year 2003 were $1.2 million in severance and other employee-related expense, $1.0 million in facility consolidation expense and $0.4 million for the write-down of fixed assets for a total of $2.6 million in cost management plan charges. We expect charges associated with our cost management plans in the fourth quarter of fiscal year 2004 to be consistent with third quarter of fiscal year 2004 levels.

Legal and other professional fees related to the 2003 audit committee investigation, ongoing securities litigation, and related regulatory filings, were $0.7 million and $3.4 million for the three and nine months ended February 28, 2004, respectively. We expect to continue to incur significant legal and other professional fees related to the ongoing securities litigation throughout fiscal year 2004.

For the nine months ended February 28, 2004, selling, service and administrative expenses decreased $5.9 million to $41.4 million from $47.3 million for the nine months ended March 1, 2003. Included in selling, service and administrative expense for the nine months ended February 28, 2004 are $1.1 million in employee severance and other employee-related expenses and $0.5 million in facilities consolidation expenses for a total of $1.6 million in cost management plans charges. For the nine months ended March 1, 2003, $5.5 million of charges were incurred consisting of $2.2 million in employee severance and other employee-related expenses, $2.5 million in facilities consolidation expenses, and $0.8 million for the write-down of fixed assets. The remainder of the decrease in selling, service and administrative expense in the first nine months of fiscal year 2004 compared to the same period in the prior fiscal year was primarily the result of reduced expenses related to our cost management plans implemented during the year.

We estimate that quarterly selling, service and administrative expenses could increase in the fourth quarter of fiscal year 2004 from third quarter levels as overall increases in sales activities are experienced.

Research, Development and Engineering Expenses

Expenses associated with research, development and engineering totaled $5.4 million for the three months ended February 28, 2004, representing a $0.3 million decrease in expenses from the same period of fiscal year 2003. Research, development and engineering expenses are primarily comprised of labor and other employee-related expenses, professional fees, project materials, equipment and facilities costs. This comparative decrease resulted from $0.2 million of severance and other employee-related expenses included in the three months ended March 1, 2003 as well as $0.1 million in expense reductions generated by previous headcount reductions. The $0.2 million severance and other employee-related expenses relate to the Escondido consolidation and cost management plans discussed above.

Expenses for the nine months ended February 28, 2004 were $16.6 million, representing a $4.0 million decrease from expenses of $20.6 million for the nine months ended March 1, 2003. Included in research and development expenses for the nine months ended February 28, 2004 is $0.2 million in severance and other employee-related expenses related to our fiscal year 2004 cost management plan implemented during the first quarter of fiscal 2004. For the nine months ended March 1, 2003, these expenses included $1.1 million of severance and other employee-related expenses and $0.1 million of facilities consolidation costs for a total of $1.2 million. Excluding these charges, the overall decrease in research and development spending was $3.0 million during these periods and can be attributed to overall headcount reductions as well as spending fluctuations. Research and development spending often fluctuates from quarter to quarter as engineering projects move through their life cycles. We continue to invest in development projects that we believe are important to our future.

Other Income (Expense)

Interest income for the three and nine months ended February 28, 2004 was $1.8 million and $5.7 million, respectively, compared to $2.4 million and $7.7 million, respectively, for the comparable periods of fiscal year 2003. This decrease is primarily due to lower interest rates earned during the first nine months of fiscal year 2004 compared to comparable periods of fiscal year 2003 on a slightly lower average amount of invested assets.

Interest expense for the three and nine months ended February 28, 2004 was $1.8 million and $5.6 million, respectively, and approximately equivalent to interest expense for the comparable periods of fiscal year 2003.

Other net expense of $0.2 million in the third quarter of fiscal year 2004 increased $0.3 million compared to $0.1 million of other net income in the third quarter of fiscal year 2003. Other net income in the third quarter of fiscal year 2003 included a $0.2 million gain related to the repurchase of $5.0 million principal amount of our 4 ¼% convertible subordinated notes due 2006. For the nine months ended February 28, 2004, other net expense of $0.2 million increased $1.0 million when compared with $0.8 million other net income at March 1, 2003. Other net income of $0.8 million for the same nine months of fiscal year 2003 included $0.6 million in legal settlements, $0.2 million gain related to the repurchase of convertible subordinated notes as mentioned above, $0.4 million gain on sale of securities held for sale, offset by $0.1 million loss in foreign exchange transactions and $0.3 million in bank fees. For the nine months ended February 28, 2004, other net expense of $0.2 million included $0.1 million gain on the sale of securities offset by $0.3 million in bank fees.

Income Taxes

The income tax benefit rate for the nine months ended February 28, 2004 was 70% compared to 37% for the nine months ended March 1, 2003. The higher tax benefit in fiscal year 2004 is a result of the inclusion of certain export tax incentives and increased research and development tax credits for the current and prior periods, as a result of tax returns filed in the current year.

When pre-tax results move between loss and profit positions, the effective income tax rate can change significantly depending on the relationship of permanent income tax deductions and tax credits to estimated pre-tax earnings. Accordingly, it can be difficult to estimate the actual income tax rate within a narrow percentage range.

The income tax benefit for the third quarter of fiscal year 2004 was $5.8 million despite recording pre-tax income for the quarter. The year-to-date tax benefit for fiscal year 2004 totals $10.1 million on the loss before income taxes of $14.3 million. The resulting 70% benefit rate, which includes the impact of the tax incentive and credits described above, is not indicative of the tax rate expected for either the fourth quarter or for the fiscal year 2004. We currently estimate that the tax rate for the fourth quarter of fiscal year 2004 will be approximately 38% applied to pretax earnings. Our historical effective tax rates have averaged 33% over the past seven years, and we anticipate a return to a tax rate range of 32% to 34% in fiscal year 2005. In addition, as various outstanding state and federal tax examinations of prior years are finalized and our tax positions associated with those periods are closed, we could potentially record substantial tax adjustments in future periods.

Net Income (Loss)

Net income was $10.0 million ($0.36 per basic share and $0.34 per diluted share) for the three months ended February 28, 2004 compared to net loss of $13.0 million ($0.47 per basic and diluted share) for the three months ended March 1, 2003. For the nine months ended February 28, 2004 net loss was $4.3 million ($0.15 per basic and diluted share) compared to net loss of $29.3 million ($1.06 per basic and diluted share) for the same period of the prior fiscal year.

Financial Condition and Liquidity

At February 28, 2004, our principal sources of liquidity consisted of existing cash, cash equivalents and marketable and restricted securities of $294.9 million and accounts receivable of $44.3 million. At February 28, 2004, we had a current ratio of 8.4:1 and long-term debt of $142.5 million. Working capital increased to $378.6 million at February 28, 2004 from $340.2 million at May 31, 2003. We believe that our existing cash, cash equivalents and marketable securities are adequate to fund our operations for at least the next twelve months.

Trade receivables increased $7.1 million to $44.3 million at February 28, 2004 from $37.2 million at May 31, 2003 primarily because of an increase in quarterly net sales over the last two quarters.

Inventory was $51.5 million at February 28, 2004 compared to $42.1 million at May 31, 2003. Increases in inventories are primarily due to additional purchases necessary to support incremental increases in order volume.

Assets held for sale of $8.8 million at February 28, 2004 includes $6.4 million for a 60,000 square foot plant on 10 acres of land near Escondido, California, which we are no longer utilizing, and $2.4 million for an undeveloped parcel of land in Taiwan. On March 30, 2004 the Company sold the 60,000 square foot plant on 10 acres of land near Escondido, California. The asset, which is included in assets held for sale at February 28, 2004, had a book value of $6.5 million. Net proceeds from the sale of this asset were $6.6 million, resulting in a $0.1 million gain. We have contracted with a real estate agent to find a buyer for the property in Taiwan and anticipate that we will sell the asset within one year.

Purchases of property, plant and equipment of $3.3 million in the first nine months of fiscal year 2004 were primarily for machinery at our Klamath Falls facility.

Deferred revenue was $16.6 million at February 28, 2004 compared to $13.2 million at May 31, 2003. The increase is due to the shipment of substantially new products to a few customers where acceptance criteria had not been met at quarter end. When these criteria are met with respect to a given shipment, deferred revenue with respect to that shipment will be recognized in sales.

At February 28, 2004 we had $142.5 million recorded on our balance sheet related to our 4¼% convertible subordinated notes. The difference between the $145.0 million face value and the $142.5 million balance at February 28, 2004 relates to underwriting discounts, which originally totaled $4.5 million and are being amortized as additional interest expense over the life of the subordinated notes at a rate of $0.9 million per year. Amortization of these discounts is recorded as an increase to long-term debt on the face of the balance sheet.

Critical Accounting Policies and Estimates

The preparation of our financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. Our estimates are based on historical experience and on various assumptions that we believe to be reasonable under the circumstances. These estimates form the basis for judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Refer to Note 1, Summary of Significant Accounting Policies, of Notes to Consolidated Financial Statements, reported in our annual report on Form 10-K for our fiscal year ended May 31, 2003 as filed with the Securities and Exchange Commission on August 27, 2003 for additional information.

Our critical accounting policies and estimates include the following:

• Revenue recognition;

• Inventory write-downs;

• Product warranty reserves;

• Allowance for doubtful accounts;

• Income tax benefits, expenses and deferred taxes;

• Loss contingencies; and

• Long-lived asset valuations.

Revenue Recognition

We recognize revenue in accordance with SEC Staff Accounting Bulletin No. 104, “Revenue Recognition.” We recognize revenue when persuasive evidence of an arrangement exists, delivery has occurred or the services have been rendered, the sales price is fixed or determinable and collection of the related receivable is reasonably assured. Title and risk of loss generally pass to the customer at the time of delivery of the product to a common carrier. Revenue is recognized upon delivery, provided that acceptance criteria can be demonstrated prior to shipment. Installation services are not essential to the functionality of the delivered equipment. Where the acceptance criteria cannot be demonstrated prior to shipment, or in the case of substantially new products, revenue is deferred until acceptance has been received. For multiple element arrangements, we defer the fair value of any undelivered elements until they are delivered.

Revenues associated with sales to customers under local contracts in Japan are recognized upon title transfer, which generally occurs upon customer acceptance, with the exception of sales to our distributor in Japan, where revenues are recognized upon title transfer to the distributor.

Revenues related to spare parts and consumable sales are recognized upon shipment. Revenues related to maintenance and service contracts are recognized ratably over the duration of the contracts.

Revenues are difficult to predict, due in part to our reliance on customer acceptance related to a portion of our revenues. Any shortfall in revenue or delay in recognizing revenue could cause our operating results to vary significantly from quarter to quarter and could result in future operating losses.

Inventory Write-Downs

We regularly evaluate the value of our inventory based on a combination of factors including, but not limited to, the following: forecasted sales or usage, historical usage rates, estimated service period, product end-of-life dates, estimated current and future market values, service inventory requirements and new product introductions. Purchasing requirements and alternative uses for the inventory are explored within these processes to mitigate inventory exposure. Raw materials with quantities in excess of forecasted usage are reviewed quarterly for obsolescence by our engineering and operating personnel. Raw material obsolescence write-downs are typically caused by engineering change orders or product end-of-life adjustments in the market. Finished goods are reviewed quarterly by product marketing and operating personnel to determine if inventory carrying costs exceed market selling prices. We record write-downs for inventory based on the above factors and take into account worldwide quantities and demand into our analysis. If circumstances related to our inventories change, our estimates of the value of inventory could materially change. We record estimated inventory reserves quarterly as an increase to cost of sales.

Product Warranty Reserves

We evaluate our obligations related to product warranties quarterly. We offer a standard one-year warranty to our customers. Costs include labor to repair the system and replacement parts for defective items, as well as other costs incidental to warranty repairs. Any cost recoveries from warranties offered to us by our suppliers covering defective components are also considered. This data is then used to calculate the warranty reserve based on remaining warranty periods. If circumstances change, or if a dramatic change in warranty related incidents occurs, our estimate of the warranty reserve could change significantly. We record estimated warranties quarterly as an adjustment to cost of sales. Our warranty expense for the first nine months of fiscal year 2004 totaled $2.8 million.

Allowance for Doubtful Accounts

Credit limits are established by reviewing the financial history and stability of each customer. Where appropriate, we obtain credit rating reports and financial statements of the customer to initiate and modify their credit limits. On certain foreign sales, we require letters of credit. We regularly evaluate the collectibility of our trade receivable balances based on a combination of factors. When a customer’s account becomes past due, we talk with the customer to determine the cause. If we determine that the customer will be unable to fully meet its financial obligation to us, such as in the case of a bankruptcy filing or other material events impacting its business, we record a specific reserve for bad debt to reduce the related receivable to the amount we expect to recover given all information then available. If circumstances related to specific customers change, our estimates of the recoverability of receivables could materially change. We record estimated bad debts quarterly as an increase to selling, service and administrative expense. At February 28, 2004, our allowance for doubtful accounts totaled $0.9 million and bad debt expense for the first nine months of fiscal year 2004 was $0.1 million.

Deferred Taxes

Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under SFAS No. 109 “Accounting for Income Taxes,” the effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date. When management determines that is more likely than not that a deferred tax asset will not be fully realized, a valuation allowance is established to reduce deferred tax assets to the amount expected to be realized. Should management’s assumptions and expectations be inaccurate, our results of operations and financial condition could be

adversely affected in future periods. At February 28, 2004, our net deferred tax assets totaled $20.6 million, net of a valuation allowance of $2.8 million.

Loss Contingencies

Where we can make a reasonable estimate of the liability relating to pending litigation, we record a liability. As additional information becomes available, we assess the potential liability and revise estimates as appropriate. Because of uncertainties relating to litigation, however, the amount of our estimates could be wrong. Moreover, plaintiffs may not specify an amount of damages sought. In addition to the direct costs of litigation and the use of cash, pending or future litigation could divert management’s attention and resources from the operation of our business. Accordingly, our operating results and financial condition could suffer. At February 28, 2004, we had $1.9 million accrued for anticipated costs related to defending and/or settling current litigation, which does not include an accrual for the class action lawsuit and other securities related litigation.

Long-Lived Asset Valuations

Long-lived assets, principally property and equipment and identifiable intangibles held and used by us are reviewed for impairment whenever events or circumstances indicate that the carrying amount of assets may not be recoverable in accordance with SFAS No. 144. We evaluate recoverability of assets to be held and used by comparing the carrying amount of an asset to estimated future net undiscounted cash flows to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured as the amount by which the carrying amount of the assets exceeds the fair value of the assets. In addition, when appropriate, we utilize independent, third party valuations.

Factors That May Affect Future Results

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

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

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

The most recent economic downturn resulted in a reduction in demand for our products and significant reductions in our profitability and net sales. We had a net loss of $50.1 million during fiscal year 2003 on net sales of $136.9 million and a net loss of $17.8 million during fiscal 2002 on net sales of $162.9

million. During any downturn, including the most recent downturn, it is difficult for us to maintain our sales levels. As a consequence, to maintain profitability we need to reduce our operating expenses. However, because there is a lag between actions we take to reduce expense and the actual reductions of the costs, our ability to quickly reduce these fixed operating expenses is limited. Moreover, we may be unable to defer capital expenditures, and we will need to continue to invest in certain areas such as research and development. An economic downturn may also cause us to incur charges related to impairment of assets and inventory write-offs and we may also experience delays in payments from our customers. For example, in the fourth quarter of fiscal 2003, we wrote-down our Klamath Falls, Oregon facility by $9.1 million. The combined effect of asset impairments, inventory write-offs and payment delays could have a significant negative effect on our financial results.

Although we are currently experiencing an increase in demand, we cannot assure you that demand for our products will continue to increase. Even if demand for our products does increase, there may be significant fluctuations in our profitability and net sales.

Pending or future litigation could have a material adverse impact on our operating results and financial condition.

In addition to intellectual property litigation, we have been, from time to time, subject to legal proceedings and claims, including a putative securities class action lawsuit and other securities-related litigation. The class action lawsuit alleges that we and six of our current and/or former officers and directors violated the anti-fraud provisions of the securities laws by making false and misleading statements regarding our business prospects and operations. The other securities-related litigation is a shareholder derivative suit alleging that certain current and/or former officers and directors violated their fiduciary duties to us and were unjustly enriched. See “Part II, Item 1. Legal Proceedings.” As of the date of this report we cannot reliably estimate the costs related to the class action lawsuits and other securities-related litigation. When we are able to make a reasonable estimate of the liability relating to any of those claims based upon developments in the litigation, we will record a liability. When recorded, those estimated liabilities could be significant and could materially and adversely affect our operating results. Further, the actual costs of those claims, which may differ from our estimates, could materially and adversely impact our operating results and financial condition.

We have entered into indemnification agreements in the ordinary course of business with our officers and directors and may be obligated throughout the class action and the derivative lawsuits to advance payment of legal fees and costs incurred by the defendant current and former officers and directors pursuant to the indemnification agreements and applicable Oregon law. We may also be obligated to indemnify any of those former and/or current directors and officers for judgments and amounts paid in settlement if the person acted in good faith and in a manner reasonably believed to be in or not opposed to our best interests.

We face risks relating to governmental inquiries and the results of our internal investigation of accounting matters.

On March 20, 2003, we contacted the SEC in connection with our issuance of a press release announcing the need to restate our financial results for the quarters ended August 31, 2002 and November 30, 2002. In March 2003, the audit committee of our board of directors, with the assistance of outside legal counsel and independent forensic accountants, commenced an internal investigation of certain accounting matters. The investigation involved the review of (1) the circumstances surrounding the reversal of an accrual for employee benefits, (2) unsupported accounting adjustments and clerical errors primarily relating to inventory and cost of goods sold, and (3) certain other areas where potential accounting errors could have occurred, including revenue recognition and restructuring reserves. As a result of the investigation, we determined that our unaudited consolidated condensed financial statements for the three months ended August 31, 2002 and November 30, 2002, and our audited consolidated financial statements for the year ended June 1, 2002 (and the quarters contained therein) required restatement. We will cooperate with all government investigations into the matters addressed by the internal investigation. Depending on the scope, timing and result of any governmental investigation, management’s attention and our resources could be diverted from operations, which could adversely affect our operating results and contribute to future stock price volatility. Governmental investigations also could lead to further restatement of our prior period financial statements or require that we take other actions not currently contemplated.

Our management is implementing what it believes to be improvements in our internal accounting and disclosure controls and procedures. Nonetheless, future accounting restatements could occur because these controls and procedures prove to be ineffective or for other reasons.

In addition to any governmental investigation, the restatement of our previously issued financial statements may lead to new litigation, may expand the claims and the class periods in pending litigation, and may increase the cost of defending or resolving current litigation.

Our operating results could suffer as we have recently experienced significant changes in our senior management and plan to add new members to our management team.

Since June 2003 we terminated our President and Chief Executive Officer and one of our Vice Presidents in connection with our internal investigation of accounting matters. In addition, since September 2002, seven other members of senior management have resigned, including six vice presidents, one of whom was our Chief Financial Officer, and our General Counsel.

We have appointed five new members of senior management since January 2003: Barry L. Harmon, who served as President and Chief Executive Officer from April 2003 until succeeded by Nicholas Konidaris in January 2004; J. Michael Dodson, Senior Vice President of Administration, Chief Financial Officer and Secretary; Robert Chamberlain, Senior Vice President, Customer Operations; and Kerry Mustoe, Corporate Controller and Chief Accounting Officer. In April 2003 we appointed Jon D. Tompkins, who is a non-employee director, Chairman of the Board. Since June 2003 we have added three new independent directors to our board: Richard J. Faubert, Frederick A. Ball and Robert R. Walker. In October 2003, two of our directors, David F. Bolender and Vernon B. Ryles, Jr., left the board in accordance with the board’s retirement policy. In January 2004 Mr. Konidaris became a member of ESI’s Board of Directors. Mr. Harmon continues to serve as a member of the Board of Directors.

We intend to continue to add new members to our senior management team. Changes in management may be disruptive to our business and negatively impact our operating results and may result in the departure of existing employees or customers. Further, it could take an extended period of time to locate, retain and integrate qualified management personnel.

Our inability to attract and retain sufficient numbers of managerial, financial, engineering and other technical personnel could have a material adverse effect upon our results of operations.

Our continued success depends, in part, upon key managerial, financial, engineering and technical personnel as well as our ability to continue to attract and retain additional personnel. The loss of key personnel could have a material adverse effect on our business or results of operations. On January 7, 2004, we announced the appointment of Nicholas Konidaris as President and Chief Executive Officer. Our Chief Financial Officer has been in that position since May 2003, and the position of Corporate Controller was vacant from March 2003 until filled in September 2003. We cannot be certain that the employees hired to fulfill these duties will perform at the level necessary to ensure that our internal controls are not compromised. In addition, we may not be able to retain our key managerial, financial, engineering and technical employees. Our growth may be affected by our ability to hire new managerial personnel, highly skilled and qualified technical personnel, and personnel that can implement and monitor our financial controls and reporting systems. Attracting and retaining qualified personnel is difficult, and our recruiting efforts to attract and retain these personnel may not be successful.

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

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

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

Our top ten customers for fiscal 2003 accounted for approximately 54% of total net sales in fiscal 2003, with one customer, Samsung, accounting for approximately 16% of total net sales. No other customer in fiscal 2003 accounted for more than 10% of total net sales. In fiscal 2002 and 2001, no customer exceeded 10% of total net sales. In addition, none of our customers has any long-term obligation to continue to buy our products or services, and any customer could delay, reduce or cease ordering our products or services at any time.

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

We derive a substantial portion of our revenues from the sale of a relatively small number of products with high average selling prices, some with prices in excess of $1.0 million per unit.

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

Shipment and/or customer acceptance delays could significantly impact our recognition of revenue and could be further magnified by announcements from us or our competitors of new products and technologies, which announcements could cause our customers to defer purchases of our existing systems

or purchase products from our competitors. Any of these delays could result in a material adverse change in our results of operations for any particular period.

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

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

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

Although we have no commitments or agreements for any acquisitions, we have made, and plan in the future to make, acquisitions of, or significant investments in, businesses with complementary products, services or technologies.

Acquisitions involve numerous risks, many of which are unpredictable and beyond our control, including:

• Difficulties and increased costs in connection with integration of the personnel, operations, technologies and products of acquired companies;

• Diversion of management’s attention from other operational matters;

• The potential loss of key employees of acquired companies;

• Lack of synergy, or inability to realize expected synergies, resulting from the acquisition;

• The risk that the issuance of our common stock in a transaction could be dilutive to our shareholders if anticipated synergies are not realized; and

• Acquired assets becoming impaired as a result of technological advancements or worse-than-expected performance by the acquired company.

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

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

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

• Changing product specifications and customer requirements;

• Difficulties in hiring and retaining necessary technical personnel;

• Difficulties in reallocating engineering resources and overcoming resource limitations;

• Difficulties with contract manufacturers;

• Changing market or competitive product requirements; and

• Unanticipated engineering complexities.

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

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

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

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

We may be subject to claims of intellectual property infringement.

Several of our competitors hold patents covering a variety of technologies, applications and methods of use similar to some of those used in our products. From time to time, we and our customers have

received correspondence from our competitors claiming that some of our products, as used by our customers, may be infringing one or more of these patents. Competitors or others may assert infringement claims against our customers or us in the future with respect to current or future products or uses, and these assertions may result in costly litigation or require us to obtain a license to use intellectual property rights of others. For example, Cognex Corporation filed a suit against us alleging that we have infringed on one of its patents. See Part II, Item.1, “Legal Proceedings.” If claims of infringement are asserted against our customers, those customers may seek indemnification from us for damages or expenses they incur.

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

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

International shipments accounted for 80% of net sales for the first nine months of fiscal 2004, with 69% of net sales for the first three quarters of fiscal year 2004 to customers in Asia. We expect that international shipments will continue to represent a significant percentage of net sales in the future. Our non-U.S. sales and operations are subject to risks inherent in conducting business abroad, many of which are outside our control, including the following:

• Periodic local or geographic economic downturns and unstable political conditions;

• Price and currency exchange controls;

• Fluctuation in the relative values of currencies;

• Difficulties protecting intellectual property;

• Unexpected changes in trading policies, regulatory requirements, tariffs and other barriers; and

• Difficulties in managing a global enterprise, including staffing, collecting accounts receivable, managing distributors and representatives and repatriation of earnings.

None of these risks have materially impacted our operations to date.

In addition, our ability to address normal business transaction issues internationally is at risk due to outbreaks of serious contagious diseases. For example, in response to the Severe Acute Respiratory Syndrome outbreak in Asia in 2002, management limited travel to Asia in accordance with the World Health Organization’s recommendations.

Our direct sales force in Asia exposes us to the risks related to employing persons in foreign countries.

We have established direct sales and service organizations in China, Taiwan, Korea and Singapore. Previously, we sold our products through a network of commission-based sales representatives in these countries. Our shift to a direct sales model in these regions involves risks. For example, we may encounter labor shortages or disputes that could inhibit our ability to effectively sell and market our products. We also are subject to compliance with the labor laws and other laws governing employers in these countries and we will incur additional costs to comply with these regulatory schemes. Additionally we will incur new fixed operating expenses associated with the direct sales organizations, particularly

payroll related costs and lease expenses. If amounts saved on commission payments formerly paid to our sales representatives do not offset these expenses, our operating results may be adversely affected.

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

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

Their greater resources in these areas may enable them to:

• Better withstand periodic downturns;

• Compete more effectively on the basis of price and technology; and

• More quickly develop enhancements to and new generations of products.

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

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

• Performance of our products;

• Quality of our products;

• Reliability of our products;

• Cost of using our products;

• Our ability to ship products on the schedule required;

• Quality of the technical service we provide;

• Timeliness of the services we provide;

• Our success in developing new products and enhancements;

• Existing market and economic conditions; and

• Price of our products as compared to our competitors’ products.

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

Possibilities of terrorist attacks have increased uncertainties for our business.

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

• The risk that future tightening of immigration controls may adversely affect the residence status of non-U.S. engineers and other key technical employees in our U.S. facilities or our ability to hire new non-U.S. employees in such facilities;

• The risk of more frequent instances of shipping delays; and

• The risk that demand for our products may not increase or may decrease.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

There have been no material changes in our reported market risks since we filed our 2003 Annual Report on Form 10-K with the Securities and Exchange Commission on August 27, 2003.

Item 4. Controls and Procedures

Attached to this quarterly report as exhibits 31.1 and 31.2 are the certifications of our President and Chief Executive Officer and our Chief Financial Officer required by Section 302 of the Sarbanes-Oxley Act of 2002 (the “Section 302 Certifications”). This portion of our quarterly report on Form 10-Q is our disclosure of the conclusions of our management, including our President and Chief Executive Officer and our Chief Financial Officer, regarding the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report based on management’s evaluation of those disclosure controls and procedures. You should read this disclosure in conjunction with the Section 302 Certifications for a more complete understanding of the topics presented.

Disclosure Controls and Procedures

Our management has evaluated, under the supervision and with the participation of our President and Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report pursuant to Rule 13a-15(b) under the Securities Exchange Act of 1934, as amended (Exchange Act). Based on that evaluation and, in part, on changes to our internal control over financial reporting described below, our President and Chief Executive Officer and our Chief Financial Officer have concluded that, as of the end of the period covered by this report, our disclosure controls and procedures are effective in ensuring that information required to be disclosed in our Exchange Act reports is (1) recorded, processed, summarized and reported in a timely manner, and (2) accumulated and communicated to our management, including our President and Chief Executive Officer and our Chief Financial Officer as appropriate to allow timely decisions regarding required disclosure.

Internal Control Over Financial Reporting

In March 2003, the audit committee of our board of directors, with the assistance of outside legal counsel and forensic accountants, commenced an internal investigation of certain accounting matters. The investigation involved the review of (1) the circumstances surrounding the reversal of an accrual for employee benefits, (2) unsupported accounting adjustments and clerical errors primarily relating to inventory and cost of goods sold, and (3) certain other areas where potential accounting errors could have occurred, including revenue recognition and restructuring reserves. On July 15, 2003, we announced that the audit committee had completed its review of these matters. As a result of the review, we determined that the unaudited consolidated condensed financial statements for the three months ended August 31, 2002 and November 30, 2002 and the audited consolidated financial statements for the year ended June 1, 2002 required restatement. On August 11, 2003, we filed with the Securities and Exchange Commission the related amendments for those periods.

In connection with management’s review of the restatement adjustments and its evaluation of our internal control over financial reporting and our disclosure controls and procedures, management previously noted to the audit committee deficiencies relating to:

1. Lack of complete sales documentation, particularly as it relates to customer specified acceptance criteria;

2. Lack of adequate job transition/cross training and poorly documented “desk” processes and procedures in the finance/accounting area;

3. Changes to accounting methodologies without notification to, or proper authorization by, accounting oversight parties (i.e., the audit committee and independent auditors); and

4. Lack of adequate tracking and monitoring of finished goods inventory that was transferred out of the inventory management information system.

The independent auditors previously advised the audit committee that these internal control deficiencies constituted reportable conditions and, collectively, a material weakness as defined in statement of auditing standards No. 60. Certain of these internal control weaknesses may also constitute deficiencies in our disclosure controls.

Since May 31, 2003, we have made improvements to our internal controls over financial reporting to correct these weaknesses. During the third quarter, ended February 28, 2004, we made the following improvements in our internal controls over financial reporting:

1. The performance of additional procedures designed to ensure that these internal control deficiencies did not lead to material misstatements in our consolidated financial statements;

2. Continued review and revision of our processes and procedures for applying revenue recognition policies, including more formalized training of finance, sales, order management and other personnel;

3. Continued enhancement of accounting/finance training programs and desk processes and procedures documentation; and

4. Enhanced documentation for all completed systems in the inventory management information system to ensure they are properly accounted for.

We will continue to evaluate the effectiveness of our disclosure controls and our internal controls over financial reporting, and will take further action as appropriate.

PART II – OTHER INFORMATION

Item 1. Legal Proceedings

As a result of the Company’s March 2003 announcement that it was reviewing certain accounting matters and would be restating some of its financial statements, between March 26, 2003 and May 20, 2003, three putative class action lawsuits were filed in the United States District Court for the District of Oregon against ESI and David F. Bolender (former director, CEO and Chairman of the Board), James T. Dooley (former President and CEO), and Joseph L. Reinhart (former Acting CFO). The complaints were filed on behalf of a purported class of persons who purchased ESI’s common stock between September 17, 2002 and at the latest April 15, 2003, and alleged violations of Section 10(b) of the Securities Exchange Act of 1934 (the “Act”) and Rule 10b-5 promulgated thereunder, as well as Section 20(a) of the Act. The complaints have been consolidated under the name In re Electro Scientific Industries, Inc. Securities Litigation, Case No. CV 03-404-HA. Lead plaintiffs and lead counsel for plaintiffs have been appointed. Plaintiffs’ consolidated class action complaint (the “Consolidated Complaint”) was filed on October 10, 2003, shortens the putative class to purchasers between September 17, 2002 and March 20, 2003, and adds Donald R. VanLuvanee (ESI’s President and CEO from 1992 until April 2002), John R. Kurdock (ESI’s former VP Operations), and James Lorenz (ESI’s former Corporate Controller) as additional defendants. The Consolidated Complaint alleges that defendants made false and misleading statements during the putative class period about ESI’s financial condition and performance, business prospects, and operations, artificially inflating ESI’s stock price and leading to the restatement first announced on March 20, 2003. In March 2003, the Company’s Audit Committee commenced an investigation into certain accounting matters. As a result of the investigation, which was completed on July 11, 2003, the Company restated its financial statements for the fiscal year ended June 1, 2002 and for the quarters ended August 31, 2002 and November 30, 2002. The restated financial statements for these periods are set forth in our annual report on Form 10-K/A and quarterly reports on Form 10-Q/A, each filed August 11, 2003. Discovery has not yet commenced. The Company expects that the litigation will be costly and will to some degree divert management’s attention from daily operations.

The Company has entered into indemnification agreements in the ordinary course of business with its officers and directors and may be obligated throughout the class action and the derivative lawsuits to advance payment of legal fees and costs incurred by the defendants pursuant to the indemnification agreements and applicable Oregon law.

On February 14, 2001, Cognex Corporation (Cognex) filed a lawsuit in the United States District Court for the District of Massachusetts (Cognex Corporation v. Electro Scientific Industries, Inc., No. 01-10287 RCL). The lawsuit alleges that our CorrectPlace product and some of its predecessors infringe United States Patent 5,371,690 (the “‘690 patent”), which is owned by Cognex. The ‘690 patent concerns the inspection of surface mount devices that are attached to the surface of an electronic circuit board. Cognex seeks injunctive relief, damages, costs and attorneys’ fees. The Company filed several counterclaims, including one alleging that the ‘690 patent is unenforceable by reason of inequitable conduct and another alleging that Cognex falsely marked certain products with the ‘690 patent. After the close of discovery, on October 8, 2002, the Company filed a motion for summary judgment of non-infringement. Cognex filed motions for summary judgment on the issues of unenforceability and mismarking on the same day. The court denied Cognex’s motion on the issue of unenforceability on April 25, 2003. The court subsequently allowed Cognex to supplement its expert disclosures in certain respects. ESI renewed its motion for summary judgment of non-infringement on March 26, 2004. Cognex’s motion on the issue of false marking is still pending. Additionally, certain of the Company’s customers have notified the Company that, in the event it is subsequently determined that their use of CorrectPlace infringes any patent, they may seek indemnification from the Company for damages or expenses resulting from this matter.

Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits

This list is intended to constitute the exhibit index.

3.1		Restated Articles of Incorporation. Incorporated by reference to Exhibit 3-A of the Company’s Annual Report on Form 10-K for the fiscal year ended May 31, 1991.
3.2		Articles of Amendment of Third Restated Articles of Incorporation. Incorporated by reference to Exhibit 3-B of the Company’s Annual Report on Form 10-K for the fiscal year ended May 31, 1999.
3.3		Articles of Amendment of Third Restated Articles of Incorporation. Incorporated by reference to Exhibit 3 of the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended December 2, 2000.
3.4		2001 Restated Bylaws. Incorporated by reference to Exhibit 3 of the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended March 3, 2001.
4.1		Amended and Restated Rights Agreement, dated as of March 1, 2001, between the Company and Mellon Investor Services, relating to rights issued to all holders of Company common stock. Incorporated by reference to Exhibit 4-A of the Company’s Annual Report on Form 10-K for the fiscal year ended June 2, 2001.
10.1		Employment Agreement between the Company and Nicholas Konidaris, dated January 7, 2004.
31.1		Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2		Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1		Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2		Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

(b) Reports on Form 8-K

• Dated and filed January 7, 2004 pursuant to Item 5, “Other Events,” regarding the appointment of Nicholas Konidaris as our President and Chief Executive Officer; and

• Dated and filed January 8, 2004 pursuant to Item 12, “Results of Operations and Financial Condition,” regarding the announcement of our financial results for our quarter ended November 29, 2003.

SIGNATURES

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

Dated: April 6, 2004	ELECTRO SCIENTIFIC INDUSTRIES, INC.


		By	/s/ Nicholas Konidaris
		Nicholas Konidaris
		President and Chief Executive Officer
		(Principal Executive Officer)

		By	/s/ J. Michael Dodson
		J. Michael Dodson
		Senior Vice President of Administration,
		Chief Financial Officer and Secretary
		(Principal Financial Officer)

		By	/s/ Kerry Mustoe
		Kerry Mustoe
		Corporate Controller and Chief
		Accounting Officer
		(Principal Accounting Officer)

EX-10.1 3 a04-4147_1ex10d1.htm EX-10.1

Exhibit 10.1

ELECTRO SCIENTIFIC INDUSTRIES, INC.

EMPLOYMENT AGREEMENT

Nicholas Konidaris		Executive
5773 Orvieto Ct.
San Jose, CA 95138

Electro Scientific Industries, Inc.,		ESI
an Oregon corporation
13900 N.W. Science Park Dr.
Portland, OR 97229

In consideration of the mutual covenants contained herein, and other good and valuable consideration, the parties hereto agree as follows.

1. Employment. ESI hereby employs Executive as the President and Chief Executive Officer of ESI and Executive accepts such employment with ESI on the terms and conditions set forth in this Employment Agreement (this “Agreement”).

2. Employment At-Will. Executive’s employment shall commence on January 7, 2004, the date of this agreement (the “Effective Date”), and shall continue until terminated in accordance with the provisions of Section 8.

3. Election to Board of Directors. The ESI Board of Directors (the “Board”) shall elect Executive as a member of the Board at the regularly scheduled January 2004 Board meeting, and shall nominate Executive for reelection by ESI’s shareholders as a member of the Board at the 2004 Annual Meeting of Shareholders of ESI (the “2004 Shareholders Meeting”) and thereafter as long as Executive is Chief Executive Officer of ESI. Termination of Executive as Chief Executive Officer of ESI, for any reason, shall constitute the resignation by Executive, effective upon such termination, as a director and officer of ESI and as a director and officer of any affiliate of ESI. Upon request, Executive shall provide ESI with additional written evidence of any such resignation. ESI’s undertaking to elect Executive as a member of the Board and to nominate Executive for reelection to the Board by ESI’s shareholders at the 2004 Shareholders Meeting and thereafter is expressly conditioned on this agreement by Executive regarding his resignation as a director and officer of ESI and as a director and officer of any affiliate of ESI in the event of his termination as Chief Executive Officer of ESI.

4. Executive’s Duties. Executive shall faithfully and diligently perform all such acts and duties, and furnish such services, as the Board shall reasonably direct and are consistent with the positions of President and Chief Executive Officer, including but not limited to strategic planning, implementation of business objectives and supervision of day-to-day business affairs of ESI. Executive shall have authority consistent with his position and such additional authority as may reasonably be required to fulfill his assigned duties. Executive shall devote the time, energy, and skill to ESI’s business as reasonably required for the performance of his duties. Nothing herein, however, shall limit Executive’s ability to serve on the board of directors of Ultratech Inc. Service on the board of directors (or similar governing body) of any other

corporation, other business entity or charitable organization must be approved in advance by the Board.

5. Annual Salary and Bonus.

(a) Base Salary. Beginning with the Effective Date, ESI shall pay Executive a base salary of $395,000 per fiscal year (prorated for any portion of a year), payable in equal periodic installments in accordance with ESI’s customary practices (the “Base Salary”) and not less frequently than in monthly installments. Executive’s performance and the amount of the Base Salary shall be reviewed annually, and the Base Salary may be increased from time to time in the sole discretion of the Board.

(b) Annual Performance Bonus. For fiscal year 2004, Executive shall be eligible to receive an annual bonus, prorated based on the number of days Executive is employed by ESI in fiscal year 2004, calculated in accordance with the provisions of the ESI FY 2004 Executive Team Bonus Plan attached hereto as Exhibit A. For fiscal years subsequent to fiscal year 2004, Executive shall be eligible to receive an annual bonus calculated based upon financial and management objectives reasonably established for ESI and Executive by the Board that will establish an annual bonus “target” of 100% of the Base Salary and opportunities for an annual bonus of up to 200% of the Base Salary.

(c) Stock Options. ESI shall grant Executive an option to purchase 420,000 shares of ESI common stock. The vesting commencement date and grant date of the option shall be the Effective Date. The option shall be evidenced by, and subject to the terms and conditions of, the Stock Option Agreement attached hereto as Exhibit B. Except as otherwise provided herein, Executive’s option shall vest with respect to 105,000 of these shares on each of the dates that are one year, two years, three years and four years, respectively, after the Effective Date. To the maximum extent permitted within the $100,000 annual vesting limitation by Section 422 of the Internal Revenue Code of 1986, as amended (the “Code”), this option shall be an incentive stock option within the meaning of such section. Additional stock options may be granted to Executive from time to time in the sole discretion of the Board.

(d) One-Time Grant of Restricted Stock. ESI shall issue Executive, without requiring the payment of any cash consideration, 20,000 shares of restricted ESI common stock. Subject to acceleration as provided herein, the restrictions on 10,000 of these shares of ESI common stock shall lapse on April 1, 2004, and the restrictions on the remaining 10,000 shares of ESI common stock shall lapse on April 1, 2005. If prior to the date on which the restrictions with respect to any such shares lapse ESI terminates Executive’s employment for Cause or Executive terminates his employment other than for Good Reason and, in either case, other than due to Executive’s death or Disability, the shares shall be forfeited and returned to ESI in accordance with the Restricted Stock Agreement attached as Exhibit C hereto.

6. Benefits and Reimbursement.

(a) Flexible Time Off. Executive shall be entitled to paid annual flexible time off and all paid ESI holidays, each in accordance with ESI’s standard policies, on a basis no less favorable to Executive as to any such policy than as such policy is applied with respect to

any other ESI executive or employee; provided that in no event shall Executive’s paid flexible time off accrual rate be at a rate that is less than 160 hours of paid flexible time off accrued per year of employment. In his first year of employment, Executive shall be entitled to take 160 hours of paid flexible time off regardless of whether Executive has accrued that amount of paid flexible time off as of the relevant time; provided that (i) at no time will Executive take flexible time off during his first year of employment when it exceeds the amount accrued by more than 80 hours and (ii) any paid flexible time off taken by Executive in his first year of employment that exceeds Executive’s accrued paid flexible time off shall be used to offset Executive’s future paid flexible time off accruals until all of such excess hours have been used to so offset future accruals.

(b) Benefit Plans. Executive shall be entitled to participate in all employee benefit plans, perquisite plans, and incentive compensation plans of ESI on a basis no less favorable to Executive as to any such plan than as such plan is applied with respect to any other ESI executive or employee.

(c) Reimbursed Business Expenses. ESI shall reimburse Executive for all expenses and disbursements reasonably incurred by Executive in the course of his duties for ESI, subject to any reasonable documentation of such expenses that ESI may require in accordance with its customary expense reimbursement policies applicable to senior executive officers.

(d) Relocation Expenses. ESI shall pay to relocate Executive and his immediate family from Executive’s home in San Jose, CA to the Portland, OR area in accordance with the terms of the Relocation Policy attached hereto as Exhibit D. It is expected that Executive will relocate and establish his primary residence in Oregon within six months of the Effective Date.

7. Definitions. The following terms shall have the following meanings for purposes of this Agreement:

(a) “Cause” shall mean (i) the willful and continued failure by Executive substantially to perform his reasonably assigned duties with ESI or legitimate directives of the Board, other than a failure resulting from Executive’s incapacity due to physical or mental illness or impairment, after a written demand for performance has been delivered to Executive by the Chairman of the Board which specifically identifies the manner in which the Chairman believes that Executive has not substantially performed his duties and after a reasonable opportunity for Executive to cure of at least sixty days, and other than as a result of a termination without Cause or a resignation for Good Reason (as defined herein), or (ii) the willful engagement by Executive in illegal conduct which is materially and demonstrably injurious to ESI or (iii) the willful failure by Executive to follow material written ESI policies. For purposes of this subsection (a), no act, or failure to act, on Executive’s part shall be considered “willful” unless done, or omitted to be done, by Executive in bad faith. Any act, or failure to act, expressly authorized by a resolution duly adopted by the Board or based upon the advise of counsel for ESI shall be conclusively presumed to be done, or omitted to be done, by Executive in good faith. Notwithstanding the foregoing, Executive shall not be deemed to have been terminated for Cause unless and until (1) Executive shall have been given advance written notice of ESI’s intent to terminate his employment for Cause (which notice shall include the specific provisions of this Agreement

intended to be relied upon by ESI in establishing Cause and a description of the alleged conduct or actions that ESI believes supports a finding of Cause), (2) Executive shall be given a reasonable opportunity to be heard by the Board with respect to such matter, and (3) there shall have been delivered to Executive a copy of a resolution duly adopted by the Board finding, after such appearance by Executive, that in the good faith opinion of the Board, Executive has engaged in the conduct set forth above in (i), (ii) or (iii) of this paragraph (a). Any such determination by the Board shall be subject to de novo review in mediation or in arbitration conducted pursuant to Section 13(d).

(b) “Change of Control” of ESI shall mean the occurrence of any of the following events:

(i) The approval by the shareholders of ESI of any of the following (or the occurrence of any of the following if shareholder approval for such event is not required or otherwise obtained in the circumstances):

(A) any consolidation, merger, plan of share exchange, or other reorganization involving ESI (each, a “Merger”), unless (1) as a result of such Merger at least fifty percent (50%) of the outstanding securities voting generally in the election of directors of the surviving or resulting entity or a parent thereof (the “Successor Entity”) immediately after the Merger are, or will be, owned, directly or indirectly, in substantially the same proportions, by shareholders of ESI immediately before the Merger, and (2) no Person (as defined below) beneficially owns, directly or indirectly, more than fifty percent (50%) of the outstanding shares of the combined voting power or the outstanding voting securities of the Successor Entity, and (3) more than fifty percent (50%) of the members of the board of directors of the Successor Entity were members of the Board at the time the Merger was approved by ESI;

(B) any sale, lease, exchange or other transfer (in one transaction or a series of related transactions) of all, or substantially all, the assets of ESI; or

(ii) At any time during a period of two consecutive years, individuals who at the beginning of such period constituted the Board (“Incumbent Directors”) shall cease for any reason to constitute at least a majority thereof, unless each new director elected during such two-year period was nominated or elected by two-thirds of the Incumbent Directors then in office and voting (with new directors nominated or elected by two-thirds of the Incumbent Directors also being deemed to be Incumbent Directors); or

(iii) Any Person (as hereinafter defined) shall have become the beneficial owner (within the meaning of Rule 13d-3 under the Securities Exchange Act of 1934 (the “Exchange Act”)), directly or indirectly, of securities of ESI ordinarily having the right to vote for the election of directors (“Voting Securities”) representing fifty percent (50%) or more of the combined voting power of the then outstanding Voting Securities.

Notwithstanding anything in the foregoing to the contrary, unless otherwise determined by the board, no change in control shall be deemed to have occurred for purposes of this

Agreement if (1) Executive acquires (other than on the same basis as all other holders of the Company Shares) an equity interest in an entity that acquires the Company in a change in control otherwise described under subparagraph (i) above, or (2) Executive is part of group that constitutes a Person which becomes a beneficial owner of Voting Securities in a transaction that otherwise would have resulted in a change in control under subparagraph (iii) above.

For purposes of this Agreement, the term “Person” shall mean and include any individual, corporation, partnership, group, association or other “person”, as such term is used in Section 14 (d) of the Exchange Act, other than ESI or any employee benefit plan(s) sponsored by ESI.

(c) “Disability” shall mean the absence of Executive from his duties with ESI on a full-time basis for 180 consecutive days as a result of Executive’s incapacity due to physical or mental illness, unless, within 30 days after a Notice of Termination (as defined below) is given to Executive following such absence, Executive shall have returned to the full performance of Executive’s duties.

(d) “Good Reason” shall mean:

(i) a diminution of Executive’s status, title, position(s) or responsibilities as President and Chief Executive Officer of ESI (which diminution shall be deemed to occur, without limiting other events that may constitute a diminution, if Executive is no longer the most senior executive officer of ESI or if Executive no longer reports directly to the Board) or the assignment to Executive of any duties or responsibilities which are inconsistent with such status, title or position(s), or any removal of Executive from such position(s), except in connection with the termination of Executive’s employment for Cause, Disability or as a result of Executive’s death or voluntarily by Executive other than for Good Reason;

(ii) if for any reason Executive is not elected to the Board on or before January 31, 2004, or if thereafter the Board shall fail to nominate Executive for reelection by ESI’s shareholders;

(iii) a reduction by ESI in Executive’s rate of Base Salary (other than as part of any general salary reduction that may be implemented for all of ESI’s senior management);

(iv) the failure by ESI to timely provide any other compensation, reimbursement or benefit required pursuant to this Agreement;

(v) ESI’s requiring Executive to be based anywhere other than the Portland, OR area except for reasonably required travel on ESI’s business; or

(vi) any purported termination by ESI of Executive’s employment which is not effected pursuant to a Notice of Termination satisfying the requirements of Section 8; and for purposes of this Agreement, no such purported termination shall be effective.

8. Termination. This Agreement and Executive’s employment hereunder may be terminated by either party by providing the other party with written notice that indicates the

specific termination provision in this Agreement relied upon and sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of Executive’s employment under the provision so indicated (a “Notice of Termination”). The effective date of any such termination of this Agreement shall be: (i) if Executive’s employment is terminated by ESI for Disability, 30 days after a Notice of Termination is given (provided that Executive shall not have returned to the performance of Executive’s duties on a full-time basis during such 30-day period), (ii) if Executive’s employment is terminated by ESI for Cause, by Executive for Good Reason, or by Executive for Disability, the date on which the Notice of Termination is given, provided the applicable cure period has been provided, and (iii) if Executive’s employment is terminated by Executive (other than for Good Reason or due to Disability) or by ESI for any reason other than Cause, the date specified in the Notice of Termination, which shall be a date no earlier than 90 days after the date on which the Notice of Termination is given, unless an earlier date has been agreed to by the party receiving the Notice of Termination either in advance of, or after, receiving such Notice of Termination.

9. Effect of Termination.

(a) Termination by Executive without Good Reason or by ESI for Cause. If ESI terminates Executive’s employment for Cause, or Executive terminates his employment without Good Reason, Executive shall be entitled to receive only (1) the Base Salary and Annual Bonus earned and payable through the effective date of such termination, together with any other compensation or benefits which have been earned or become payable as of the date of termination but which have not yet been paid to Executive, (2) all paid time off accrued but untaken through the effective date of such termination, (3) reimbursement of expenses incurred through the effective date of such termination pursuant to Section 6(c), and (4) payment in full of all relocation expenses previously unpaid pursuant to Section 6(d). (For purposes of clarity, ESI shall be obligated to pay Executive’s relocation costs pursuant to Section 6(d) once Executive commences his relocation to Oregon if ESI terminates Executive’s employment without Cause or Employee departs for Good Reason before such relocation is completed.) The amounts described in clauses (1) through (4) of the foregoing are referred to as the “Accrued Obligations.”

(b) Termination by ESI Without Cause or by Executive for Good Reason. If ESI terminates Executive’s employment without Cause, or if Executive terminates employment for Good Reason, Executive shall be entitled to receive:

(i) the Accrued Obligations;

(ii) if the termination occurs and there has been no Change of Control, a severance payment (subject to applicable taxes and withholding) in an amount equal to two times Executive’s annualized rate of ESI Base Salary in effect immediately prior to the time of termination paid in equal installments in accordance with ESI’s normal pay practices over the 24-month period following the date of termination; provided, however, that if the effective date of Executive’s termination is after July 23, 2008, the amount payable under this subsection (ii) shall decrease ratably in increments of 1/24^th for each calendar month between the effective date of Executive’s termination and July 23, 2008, such that Executive shall receive no severance payment under this subsection (ii) if the effective date of Executive’s termination is after July 23,

2010; provided further that any payments made pursuant to this subsection (ii) shall be repaid by Executive in the event Executive violates in any material respect the Employee Confidentiality, Non Competition and Assignment Agreement provided for in Section 10(a) hereof;

(iii) if the termination occurs within twenty-four (24) months following a Change of Control, a lump sum severance payment (subject to applicable taxes and withholding) in an amount equal to two times Executive’s annualized rate of ESI Base Salary then in effect and two times Executive’s target bonus in effect immediately prior to the time of termination.

(iv) if the termination occurs and there has been no Change of Control, continued vesting and exercisability for a period of two full years following the date of termination of all option(s) to purchase shares of ESI common stock then held by Executive, all stock appreciation rights and other ESI equity-based awards then held by Executive, and all shares of restricted ESI common stock then held by Executive;

(v) if the termination occurs within twenty-four (24) months following a Change of Control, all options to purchase ESI common stock then held by Executive, all stock appreciation rights and all other equity based awards then held by Executive shall become immediately vested and exercisable;

(vi) an extension of the term for exercise of any vested and unexpired options to purchase shares of ESI common stock, and any vested and unexpired ESI stock appreciation rights, until the date that is three full years after the effective date of Executive’s termination; provided that no such option or right shall be exercisable after the expiration of the term of years provided at the time of the original grant;

(vii) for a twenty-four (24) month period after the date of termination, ESI shall arrange to provide Executive and his dependents with life, accident, medical and dental insurance benefits substantially similar to those which Executive was entitled hereunder to receive immediately prior to the termination of employment; provided that ESI shall not be required to provide a benefit to Executive pursuant to this clause (vii) to the extent that a similar benefit is actually received by Executive from a subsequent employer during such twenty-four (24) month period, and any such benefit actually received by Executive shall be promptly reported by Executive to ESI; and provided further that ESI shall not be required to provide a benefit pursuant to this clause (vii) after the date on which Executive becomes entitled to receive medical benefits under Medicare or July 23, 2010, whichever is sooner; and

(viii) if the termination occurs within twenty-four (24) months following a Change of Control, for a thirty six (36) month period after the date of termination, ESI shall arrange to provide Executive and his dependents with life, accident, medical and dental insurance benefits substantially similar to those which Executive was entitled hereunder to receive immediately prior to the termination of employment; provided that ESI shall not be required to provide a benefit to Executive pursuant to this clause (viii) to the extent that a similar benefit is actually received by Executive from a subsequent employer during such thirty-six (36) month period, and any such benefit actually received by Executive shall be promptly reported by Executive to ESI; and provided further that ESI shall not be required to provide a benefit

pursuant to this clause (viii) after the date on which Executive becomes entitled to receive medical benefits under Medicare or July 23, 2010, whichever is sooner

(c) Death. If Executive’s employment is terminated as a result of Executive’s death, Executive shall be entitled to receive the Accrued Obligations.

(d) Disability. If Executive’s employment is terminated as a result of Executive’s Disability, Executive shall be entitled to receive the Accrued Obligations.

(e) Date of Payment. Except as otherwise provided herein, all cash payments and lump-sum awards required to be made pursuant to the provisions of this Section 9 shall be made no later than the 30th day following the effective date of Executive’s termination.

(f) Release of Claims. ESI shall have the right to require Executive to execute a general release of claims relating to his employment at ESI and termination of employment at ESI that could be brought by Executive hereunder as a condition to Executive’s receipt of any payments pursuant to Section 9(b); provided that ESI and each of its affiliates shall release any and all claims that each of them may have against Executive as a condition of any such release.

(g) Options and Restricted Stock. The options and restricted stock awarded to Executive pursuant to Section 5 shall, in the event of a termination of Executive’s employment and except as provided above in this Section 9, be governed by the provisions of the applicable award agreement; provided that the accelerated vesting and stock option exercise provisions of this Section 9 shall, if triggered, control in the event of any inconsistency with any such agreement and the stock option or stock restriction plan and all related agreements.

(h) No Obligation of Executive to Mitigate. The amount of any payment provided for in this Section 9 shall not be reduced, offset or subject to recovery by ESI by reason of any compensation earned by Executive as the result of employment by another employer after the date of termination, or otherwise (except as expressly provided with respect to Executive’s obligation pursuant to Section 10(a)).

10. Non-Competition and Non-Disclosure; Executive Cooperation.

(a) Prior to the Effective Date, Executive shall execute and deliver to an officer of ESI the Employee Confidentiality, Non Competition and Assignment Agreement (a copy of which is attached hereto as Exhibit E).

(b) Executive agrees to cooperate with ESI, by making himself reasonably available to testify on behalf of ESI or any subsidiary or affiliate of ESI, in any action, suit or proceeding, whether civil, criminal, administrative or investigative, and to reasonably assist ESI, or any subsidiary or affiliate of ESI in any such action, suit or proceeding, by providing reasonable information and making himself reasonably available for meeting and consulting with the Board or its representatives or counsel, or representatives or counsel of ESI, or any subsidiary or affiliate of ESI, as reasonably requested by the Board, representatives or counsel. ESI agrees to reimburse Executive, on an after-tax basis, for all expenses actually incurred in connection with his provision of testimony or assistance.

11. Section 280G Provision.

(a) Notwithstanding anything contained in this Agreement to the contrary, to the extent that any payment, distribution, transfer, benefit or other event with respect to ESI or a successor, direct or indirect subsidiary or affiliate of ESI (or any successor or affiliate of any of them, and including any benefit plan of any of them), and arising in connection with an event described in Section 280G(b)(2)(A)(i) of the Code, occurring after the Effective Date and on or before the first anniversary of the Effective Date, to or for the benefit of Executive or Executive’s dependents, heirs or beneficiaries (whether such payment, distribution, transfer, benefit or other event occurs pursuant to the terms of this Agreement or otherwise, but determined without regard to any additional payments required under this Section 11) (each a “Payment” and collectively the “Payments”) is, was or will be subject to the excise tax imposed by Section 4999 of the Code, and any successor provision or any comparable provision of state or local income tax law (collectively, “Section 4999”), then ESI shall reduce the Payments (but not below zero) so that the maximum amount of the Payments shall be one dollar ($1.00) less than the amount which would cause the Payments to be subject to the excise tax imposed by Section 4999 of the Code; provided that such reduction shall be made if (and only if) such reduction results in a greater after-tax net benefit to Executive than if no such reduction had been made and Executive had paid the excise tax and other taxes due. If a reduction of Payments is required pursuant to the foregoing, then unless Executive shall have given prior written notice to ESI to effectuate a reduction in the Payments in a different manner, ESI shall reduce or eliminate the Payments by first reducing or eliminating any cash severance benefits, then by reducing or eliminating any accelerated vesting of stock options, then by reducing or eliminating any accelerated vesting of restricted stock, then by reducing or eliminating any other remaining Payments. The preceding provisions of this Section 11 shall take precedence over the provisions of any other plan, arrangement or agreement governing Executive’s rights and entitlements to any benefits or compensation. In connection with any termination of Executive’s employment hereunder that occurs in connection with an event described in Section 280G(b)(2)(A)(i) that occurs on or before the first anniversary of the Effective Date.

(b) Notwithstanding anything contained in this Agreement to the contrary, to the extent that any and all Payments with respect to ESI or a successor, direct or indirect subsidiary or affiliate of ESI (or any successor or affiliate of any of them, and including any benefit plan of any of them), and arising in connection with an event described in Section 280G(b)(2)(A)(i) of the Code, occurring after the first anniversary of the Effective Date to or for the benefit of Executive or Executive’s dependents, heirs or beneficiaries is, was or will be subject to the excise tax imposed by Section 4999, then ESI shall pay to Executive (or to the applicable taxing authority on Executive’s behalf) an additional cash payment (hereinafter referred to as the “Gross-Up Payment”) equal to an amount such that after payment by Executive of all taxes, interest, penalties, additions to tax and costs imposed or incurred with respect to the Gross-Up Payment (including, without limitation, any income and excise taxes imposed upon the Gross-Up Payment), Executive retains an amount of the Gross-Up Payment equal to the excise tax imposed upon such Payment or Payments. This provision is intended to put Executive in the same position as Executive would have been had no excise tax been imposed upon or incurred as a result of any Payment.

(c) Except as provided in subsection (d) below, the determination that a Payment is subject to an excise tax (and the amount of such tax), the amount of any Gross-Up Payment required, or a determination that Payments are to be reduced in accordance with the foregoing shall be made in writing by a certified public accounting firm selected by ESI (“ESI’s Accountant”). Such determination shall include the amount of any such excise tax, Gross-Up Payment, or reduction and detailed computations thereof, including any assumptions used in such computations (the written determination of ESI’s Accountant, hereinafter, “ESI’s Determination”). ESI’s Determination may be reviewed on behalf of Executive by a certified public accounting firm selected by Executive (the “Executive’s Accountant”). Executive shall notify ESI within 30 business days after receipt of ESI’s Determination of any disagreement or dispute therewith, and failure to so notify within that period shall be considered an agreement by Executive of ESI’s determination. In the event of an objection by Executive to ESI’s Determination, any amount not in dispute shall be paid within 30 days following the 30 business-day period referred to herein, and with respect to the amount in dispute Executive’s Accountant and ESI’s Accountant shall jointly select a third certified public accounting firm to resolve the dispute and the decision of such third firm shall be final, binding and conclusive upon the Executive and ESI. In such a case, the third accounting firm’s findings shall be deemed the binding determination with respect to the amount or reduction in dispute, obligating ESI to make any payment as a result thereof within 30 days following the receipt of such third accounting firm’s determination. All fees and expenses of each of the accounting firms referred to in this subsection (c) shall be borne solely by ESI.

(d) As a result of uncertainty in the application of Section 4999 that may exist at the time of any determination is made pursuant to paragraph (c) above, it may be possible that in making the calculations required to be made hereunder, the parties or their accountants shall determine that a Gross-Up Payment need not be made (or shall make no determination with respect to such a payment) that properly should be made (“Underpayment”), or that a Gross-Up Payment not properly needed to be made should be made or that no reduction in Payments should be made when such a reduction should be made (“Overpayment”). The determination of any Underpayment shall be made using the procedures set forth in paragraph (c) above and shall be paid to Executive as an additional Gross-Up Payment. ESI or Executive shall be entitled to use procedures similar to those available in paragraph (c) to determine the amount of any Overpayment (provided that ESI shall bear all costs of the accountants as provided in paragraph (c)). In the event of a determination that an Overpayment was made, Executive shall promptly pay to ESI the amount of such Overpayment together with interest at the applicable Federal rate provided for in Section 1274(d) of the Code; provided, however, that the amount to be repaid by Executive to ESI shall be subject to reduction to the extent necessary to put Executive in the same after-tax position as if such Overpayment were never made.

12. Indemnity Agreement and D&O Insurance. Executive and ESI shall enter into for the benefit of Executive ESI’s standard Directors’ and Officers’ indemnification agreement. During the period of Executive’s employment by ESI and for a period of six years thereafter, ESI shall keep in place a directors’ and officers’ liability insurance policy (or policies) providing comprehensive coverage to Executive to the extent that ESI provides such coverage for any other present or former senior executive or director of ESI.

13. Miscellaneous.

(a) Withholding. Payment of all compensation under this Agreement, including but not limited to the Base Salary and Annual Performance Bonus, shall be subject to all applicable federal, state and local tax withholding.

(b) Successors; Assignment; Binding Agreement. This Agreement is personal in its nature and neither of the parties hereto shall, without the consent of the other, assign or transfer this Agreement or any rights or obligations hereunder; provided, however, that in the event of a merger, consolidation, or transfer or sale of all or substantially all of the assets of ESI with or to any other individual(s) or entity, this Agreement shall be binding upon and inure to the benefit of such successor and such successor shall discharge and perform all the promises, covenants, duties, and obligations of ESI hereunder. This Agreement shall inure to the benefit of and be enforceable by Executive’s personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees.

(c) Governing Law. This Agreement shall be construed in accordance with and governed by the laws of the State of Oregon.

(d) Dispute Resolution. Executive agrees that, to the fullest extent permitted by applicable law, any dispute concerning Executive’s employment or this Agreement shall first be submitted to confidential mediation before a mediator selected by the parties. If the dispute is not resolved through mediation, it shall be submitted and settled exclusively by confidential binding arbitration in accordance with the National Rules for the Resolution of Employment Disputes of the American Arbitration Association or such comparable rules as may be agreed upon by the parties.

(e) Attorneys’ Fees. Each party shall bear his or its own costs and attorneys’ fees which have been or may be incurred in connection with any matter herein or in connection with the negotiation and consummation of this Agreement or any attachment or exhibit hereto or in any action to enforce the provisions of this Agreement or any attachment or exhibit hereto. Notwithstanding the foregoing, any arbitrator shall have the right to award attorneys’ fees to the prevailing party in an arbitration proceeding. If this Agreement is executed on or before January 7, 2004, ESI will reimburse Executive for one-half of his legal fees and expenses incurred in connection with the review of this Agreement and all related agreements up to a maximum amount of $5,000. ESI shall pay all legal fees and related expenses incurred by Executive as a result of (i) his termination following a Change of Control of ESI (including all such fees and expenses, if any, incurred in contesting or disputing such termination) or (ii) Executive seeking to obtain or enforce any right or benefit provided by this Agreement following a Change of Control.

(f) Notices. All notices, requests, demands, consents, approvals, declarations and other communications required by this Agreement shall be in writing and shall be deemed delivered (i) if delivered personally; (ii) if given by e-mail or facsimile, when transmitted and evidence of confirmed transmission is received; (iii) if given by first-class air mail (certified and return receipt requested), when delivered; and (iv) when given by a nationally recognized overnight courier, when received or personally delivered, in each case, with all charges prepaid

and addressed to the respective party set forth on the first page of this Agreement (and in the case of deliveries on behalf of Executive, addressed to the Chairman of the Board of ESI), or to such other address as any party shall specify in a notice delivered to all other parties in accordance with this Section 13(f).

(g) Entire Agreement. This Agreement, including the attachments and exhibits hereto, contains the entire agreement between Executive and ESI concerning the subject matters discussed herein. This Agreement supersedes all prior negotiations, agreements and understandings of the parties with respect to Executive’s employment relationship with ESI and the other subject matter herein.

(h) Modification. Modification of this Agreement shall be effective only if in writing and signed by each party or its duly authorized representative

(i) No Waiver. The waiver of any breach of this Agreement by one party shall not constitute waiver by the non-breaching party of any other breach of the Agreement.

(j) Severability. If any of the provisions or terms of this Agreement shall for any reason be held invalid or unenforceable, such invalidity or unenforceability shall not affect any other terms of this Agreement, and this Agreement shall be construed as if such unenforceable term had never been contained in this Agreement.

(k) Surviving Provisions. Not withstanding anything in this Agreement to the contrary, Sections 3, 9, 10, 11, 12 and this Section 13 shall survive the termination of Executive’s employment and this Agreement.

(l) Interpretation. Unless specifically identified as a reference to another document, any reference to a “section” or “subsection” herein shall be deemed to be a reference to a section or subsection of this Agreement. Whenever the terms hereof call for any notice, payment or other action on a day which is not a business day, such payment or action may be taken, or such notice given, as the case may be, on the next succeeding business day.

(m) Counterparts and Facsimile Signatures. This Agreement may be executed in two or more counterparts, each of which shall constitute one and the same instrument. Facsimile signatures may be used in place of original signatures on this Agreement.

(n) Proof of Right to Work. For purposes of federal immigration law, Executive shall provide ESI satisfactory documentary evidence of Executive’s identity and eligibility for employment in the United States. Such documentation must be provided to ESI within three (3) business days of the Effective Date, or ESI may terminate Executive’s employment for Cause.

[SIGNATURE PAGE FOLLOWS]

IN WITNESS WHEREOF, the undersigned has executed this Agreement as of the 7th day of January, 2004.

ELECTRO SCIENTIFIC INDUSTRIES, INC.


By:	s//Nicholas Konidaris
Name: Nicholas Konidaris
Title: President and Chief Executive Officer

Exhibit A:		ESI FY 2004 Executive Team Bonus Plan
Exhibit B:		Stock Option Agreement
Exhibit C:		Restricted Stock Agreement
Exhibit D:		Relocation Policy
Exhibit E:		Employee Confidentiality, Non Competition and Assignment Agreement

EXHIBIT A

FY 2004 EXECUTIVE TEAM BONUS PLAN

Prepared by: MWB Associates		December 2003
		Rev. 2

The ESI Executive Team Bonus Plan provides annual bonuses to Executive Team members for achievement of 2004 Revenue, Profit, and MBO targets.

The Plan is an annual Plan, with bonus payments made after completion of the FY 2004 annual audit.

The following individuals are eligible to participate in the FY 2004 Executive Team Bonus Plan: Harmon, Chamberlain, Dodson, Del Vecchio, Harris, Taft, Vickers, Phillips

The Plan’s parameters will be:

Achievement of FY 2004 Revenue Target – 25%

Achievement of FY 2004 Operating Profit Target – 25%

Achievement of FY 2004 Individual MBOs – 50%

FY 2004 Revenue Target is $166 million.

The Revenue Parameter will trigger as follows:

0% payout at $166 million in revenue

100% payout at $200 million in revenue

200% payout at $250 million in revenue

The Profit Parameter will trigger as follows:

0% payout at 0% Operating Profit

100% payout at 5% Operating Profit

200% payout at 10% Operating Profit

Revenue Parameter

Operating Profit Parameter

MBO Achievement Payout

The MBO payout will be triggered only if the Company achieves a FY 2004 Operating Profit of 5% or better, after deducting profit-sharing and bonus payments.

If the MBO payout is triggered, payments will be based on the participant’s percentage of MBO achievement for FY 2004.

Bonus Targets

The FY 2004 Executive Team bonus targets at 100% achievement of Plan are:

CEO – 100% of base salary

Senior Vice President – 80% of base salary

Vice President – 60% of base salary

General Bonus Plan Rules

All Bonus Plan calculations for achievement of Revenue and Operating Plan parameters are net of all profit-sharing and bonus payments. Payouts are funded with 50% of the Operating Profits in excess of 5% of Revenue and profit-sharing payments are a credit against amounts earned under this Plan. Maximum Bonus for achieving Revenue Target is 200%. Maximum Bonus for achieving Operating Profit Target is 200%. Bonus will be paid within 30 days of completion of the annual audit Bonus payouts are based on the participant’s actual base payroll for the bonus year. Employees eligible to receive bonuses must be employees on the date the bonus is paid to receive a bonus.

General Provisions

The Company reserves the right to change or modify the Bonus Plan at any time with the concurrence of the Board of Directors.

EXHIBIT B

STOCK OPTION AGREEMENT

Notice of Grant of Stock Options and Option Agreement

Nicholas Konidaris		Option Number:
5773 Orvieto Ct.		Plan:
San Jose, CA 95138

Effective January 7, 2004, (the “Grant Date”), you (“Optionee”) have been granted an option to buy 420,000 shares of Common Stock of Electro Scientific Industries, Inc. (the “Company”) at $[ ] per share. This option is intended as an incentive stock option within the meaning of, and to the maximum extent permitted within the $100,000 annual vesting limitation under, Section 422 of the Internal Revenue Code of 1986, as amended.

The total option price of this option is $[ ].

Shares in each period will become fully vested on the date shown.

Shares	Vest Type	Full Vest	Expiration
105,000	On Vest Date	January 7, 2005	January 7, 2014
105,000	On Vest Date	January 7, 2006	January 7, 2014
105,000	On Vest Date	January 7, 2007	January 7, 2014
105,000	On Vest Date	January 7, 2008	January 7, 2014

By your signature and the Company’s signature below, you and the Company agree that this option is granted under and governed by the terms and conditions of the Company’s 2000 Stock Option Incentive Plan, as amended, and the attached Option Terms and Conditions, which are incorporated into and made a part of this agreement.

Notwithstanding paragraphs 1.2, 1.3 and 1.5 of the attached Terms & Conditions, Section 9 of the Employment Agreement between Optionee and the Company (the “Employment Agreement”) shall govern the time of exercise and vesting of the option in the event that the Company terminates Optionee’s employment without Cause (as defined in the Employment Agreement), or in the event that Optionee terminates employment for Good Reason (as defined in the Employment Agreement).

Electro Scientific Industries, Inc.

By	s//Jon D. Tompkins	January 7, 2004
	Jon D. Tompkins
	Chairman of the Board

	s// Nicholas Konidaris	January 7, 2004
Nicholas Konidaris

OPTION TERMS AND CONDITIONS
2000 Stock Option Incentive Plan

Pursuant to the Company’s 2000 Stock Option Incentive Plan (the “Plan”), the Board of Directors has voted in favor of granting to the Optionee an option to purchase Common Stock of the Company (the “Option”) in the amount indicated on the attached notice. This Option is granted in conjunction with the Employment Agreement between Optionee and the Company dated January 7, 2004 (the “Employment Agreement”).

1. The Option is granted upon the following terms:

1.1 Duration of Options. Subject to reductions in the Option period as hereinafter provided in the event of termination of employment or death of the Optionee, the Option shall continue in effect for a period of 10 years from the Grant Date.

1.2 Time of Exercise. Except as provided in paragraph 1.5, the Option may be exercised from time to time in the following amounts: (a) none during the first year following the Grant Date, (b) thereafter not to exceed in any one year 25 percent of the total number of shares covered by the Option, but if the Optionee does not exercise the Option in any one year for the full number of shares to which the Optionee is entitled, the rights shall be cumulative and the Optionee may exercise the Option for such shares in any subsequent year during the term of the Option.

1.3 Limitations on Rights to Exercise. Except as provided in paragraph 1.5, the Option may not be exercised unless at the time of such exercise the Optionee is employed by the Company or any parent or subsidiary of the Company and shall have been so employed continuously since the date such option was granted.

1.4 Nonassignability. The Option is nonassignable and nontransferable by the Optionee except by will or by the laws of descent and distribution of the state or country of the Optionee’s domicile at the time of death, and is exercisable during the Optionee’s lifetime only by the Optionee.

1.5 Termination of Employment.

(a) Except as provided in the Employment Agreement, if Optionee’s employment or service with the Company terminates for any reason other than in the circumstances specified in subsection (b), (c) or (d) below, his option may be exercised at any time before the expiration date of the option or the expiration of three months after the date of termination, whichever is the shorter period, but only if and to the extent Optionee was entitled to exercise the option at the date of termination.

(b) If Optionee’s employment or service with the Company terminates because of total disability, his option may be exercised at any time before the expiration date of the option or before the date 12 months after the date of termination, whichever is the shorter period, but only if and to the extent Optionee was entitled to exercise the option at the date of

termination. The term “total disability” means a medically determinable mental or physical impairment that is expected to result in death or has lasted or is expected to last for a continuous period of 12 months or more and that, in the opinion of the Company and two independent physicians, causes Optionee to be unable to perform his duties as an employee, director, officer or consultant of the Employer and unable to be engaged in any substantial gainful activity. Total disability shall be deemed to have occurred on the first day after the two independent physicians have furnished their written opinion of total disability to the Company and the Company has reached an opinion of total disability.

(c) If Optionee dies while employed by or providing service to the Company, his or her option may be exercised at any time before the expiration date of the option or before the date 12 months after the date of death, whichever is the shorter period, but only if and to the extent Optionee was entitled to exercise the option at the date of death and only by the person or persons to whom Optionee’s rights under the option shall pass by the Optionee’s will or by the laws of descent and distribution of the state or country of domicile at the time of death.

(d) Except as provided in the Employment Agreement, in the event Optionee’s employment is terminated by the Company without Cause or Optionee quits for Good Reason within two years or after a Change of Control of the Company, any option held by such Optionee may be exercised with respect to all remaining shares subject thereto, free of any limitation on the number of shares with respect to which the option may be exercised in any one year, at any time prior to its expiration date or the expiration of three months after the date of such termination of employment (or such longer period as may be provided for in the Employment Agreement), whichever is the shorter period. A “Change of Control”, “Cause” and “Good Reason” shall have the meanings set forth in the Employment Agreement.

(e) To the extent the Option held by any deceased Optionee or by the Optionee whose employment is terminated shall not have been exercised within the limited periods provided above, all further rights to purchase shares pursuant to the Option shall cease and terminate at the expiration of such periods.

(f) Absence or leave approved by the Employer or on account of illness or disability shall not be deemed a termination or interruption of employment or service. Unless otherwise determined by the Board of Directors, vesting of options shall continue during a medical, family, military or other leave of absence, whether paid or unpaid.

1.6 Purchase of Shares. Shares may be purchased or acquired pursuant to the Option only upon receipt by the Company of notice in writing from the Optionee of the Optionee’s intention to exercise, specifying the number of shares as to which the Optionee desires to exercise the Option and the date on which the Optionee desires to complete the transaction, which shall not be more than 30 days after receipt of the notice, and, unless in the opinion of counsel for the Company such representation is not required in order to comply with the Securities Act of 1933, as amended, containing a representation that it is the Optionee’s present intention to acquire the shares for investment and not with a view to distribution. On or before the date specified for completion of the purchase of shares pursuant to the Option, the Optionee must have paid the Company the full purchase price of such shares in cash (including cash which may at the election of the Company be the proceeds of a loan from the Company), or

in shares of Common Stock of the Company previously acquired and held by the Optionee for at least six months and valued at fair market value as defined in the Plan, or in any combination of cash and shares of Common Stock of the Company. No shares shall be issued until full payment therefor has been made, and the Optionee shall have none of the rights of a shareholder until a certificate for shares is issued to the Optionee. The Optionee shall, upon notification of the amount due, if any, and prior to or concurrently with delivery of the certificates representing the shares with respect to which the Option was exercised, pay to the Company amounts necessary to satisfy any applicable federal, state and local withholding tax requirements (which may be settled, in the Optionee’s discretion, by cash payment or by a reduction of the number of shares issuable upon exercise of the option by the number (valued at their fair market value at the time of the exercise) required to satisfy such tax withholding obligations). If additional withholding becomes required beyond any amount deposited before delivery of the certificates, the Optionee shall pay such amount to the Company on demand.

1.7 Changes in Capital Structure. In the event that the outstanding shares of Common Stock of the Company are hereafter increased or decreased or changed into or exchanged for a different number or kind of shares or other securities of the Company or another corporation, by reason of any reorganization, merger, consolidation, recapitalization, reclassification, stock split-up, combination of shares, or dividend payable in shares, appropriate adjustment shall be made by the Board of Directors in the number and kind of shares for purchase pursuant to the Option and the corresponding Option price.

2. The obligations of the Company under this Agreement are subject to the approval of such state or federal authorities or agencies, if any, as may have jurisdiction in the matter. The Company will use its best efforts to take such steps as may be required by state or federal law or applicable regulations, including rules and regulations of the Securities and Exchange Commission and any stock exchange on which the Company’s shares may then be listed, in connection with the issuance or sale of any shares purchased upon the exercise of the Option. The Company has filed a valid and effective Registration Statement on Form S-8 with respect to the shares available under the Plan which are sufficient in number to cover the shares that are subject to the Option and the Company shall use its best efforts to continue the effectiveness of such Registration Statement through the time that the Option is exercised or terminates.

3. Nothing in the Plan or this Agreement shall confer upon the Optionee any right to be continued in the employment of the Company or any subsidiary of the Company, or to interfere in any way with the right of the Company or any subsidiary by whom the Optionee is employed to terminate the Optionee’s employment at any time, with or without cause.

4. This Agreement shall be binding upon and shall inure to the benefit of any successor or successors of the Company but except as hereinabove provided the Option herein granted shall not be assigned or otherwise disposed of by the Optionee. To the extent there is any conflict between the terms of this document and the Employment Agreement, the terms of the Employment Agreement shall control. Notwithstanding anything else herein or in the Plan to the contrary, in the event that the Company proposes to terminate the Option pursuant to Section 7(b) of the Plan in the event of or in connection with a Transaction (as such term is defined in the Plan) or a dissolution of the Company, the Board of Directors shall accelerate the vesting of the otherwise unvested portion of the Option, shall give the Optionee at least thirty (30) days

advance notice of the impending termination, and shall afford Optionee a reasonable opportunity to exercise the Option (including the portion that accelerates pursuant to this clause) before any such termination.

EXHIBIT C

RESTRICTED STOCK AGREEMENT

This Agreement is entered into as of January 7, 2004 between Electro Scientific Industries, Inc., an Oregon corporation (“ESI”), and Nicholas Konidaris (the “Recipient”).

ESI has awarded a restricted stock grant to the Recipient pursuant to paragraph 6 of ESI’s 1996 Stock Incentive Plan and Recipient desires to accept the grant subject to the terms and conditions of this agreement.

NOW, THEREFORE, the parties agree as follows:

1. Grant of Restricted Stock. Subject to the terms and conditions of this Agreement, ESI hereby grants to the Recipient 20,000 shares of ESI Common Stock (the “Restricted Shares”). The Restricted Shares are subject to forfeiture to ESI as set forth in Section 2 below.

2. Forfeiture Restriction. If the Recipient ceases to be employed by ESI because ESI terminates Recipient’s employment for Cause, as defined in the Employment Agreement dated January 7, 2004 between ESI and the Recipient (together with the exhibits attached thereto, the “Employment Agreement”), or the Recipient terminates his employment for any reason other than Good Reason (as defined in the Employment Agreement), death, or Disability (as defined in the Employment Agreement), any unvested Restricted Shares shall be forfeited to ESI. All of the Restricted Shares shall initially be unvested. Subject to acceleration as provided below, fifty percent of the Restricted Shares shall vest on April 1, 2004, and the remaining fifty percent of the Restricted Shares shall vest on April 1, 2005. If the Recipient ceases to be employed by ESI as a result of death, Disability (as defined in the Employment Agreement), a termination of employment by ESI other than for Cause (as defined in the Employment Agreement), or a termination by Recipient for Good Reason (as defined in the Employment Agreement), all of the Restricted Shares shall immediately vest as of such termination. Nothing contained in this Agreement shall confer upon Recipient any right to be employed by ESI or to continue to provide services to ESI or to interfere in any way with the right of ESI to terminate Recipient’s services at any time for any reason, with or without cause.

3. Restriction on Transfer. The Recipient shall not sell, assign, pledge, or in any manner transfer unvested Restricted Shares, or any right or interest in unvested Restricted Shares, whether voluntarily or by operation of law, or by gift, bequest or otherwise. Any sale or transfer, or purported sale or transfer, of unvested Restricted Shares, or any right or interest in unvested Restricted Shares, in violation of this Section 3 shall be null and void.

4. Tax Withholding and Section 83(b) Election. Recipient acknowledges that any income recognized as a result of receiving the Restricted Shares will be treated as ordinary compensation income subject to federal, state and local income, employment and other tax withholding. Recipient understands that if he makes an election under Section 83(b) of the Internal Revenue Code of 1986, as amended (a “Section 83(b) Election”), with respect to some

or all of the Restricted Shares, Recipient will recognize ordinary compensation income at the time such Restricted Shares are received, in an amount equal to the fair market value of the Restricted Shares on that date. If Recipient does not make a Section 83(b) Election with respect to some or all of the Restricted Shares, Recipient will recognize ordinary compensation income at the time any portion of such Restricted Shares vest in accordance with Section 2 of this Agreement, in an amount equal to the fair market value of those Restricted Shares on the vesting date. Within 10 days after notification by ESI, and prior to or concurrently with the delivery of the certificates representing the Restricted Shares, Recipient shall pay to ESI the amount necessary to satisfy any applicable federal, state and local tax withholding requirements arising in connection with Recipient’s receipt of the Restricted Shares, including any amounts required to be withheld at the time any portion of the Restricted Shares vest in accordance with Section 2 of this Agreement. Recipient shall pay such amounts in cash or, at the election of the Recipient, by surrendering to ESI for cancellation Restricted Shares or other shares of ESI Common Stock valued at the closing market price for the ESI Common Stock on the last trading day preceding the date of Recipient’s election to surrender such shares. If additional withholding becomes required beyond any amount paid before delivery of the certificates representing the Restricted Shares, Recipient shall pay such amount to ESI upon demand. If shareholder fails to pay any amount demanded, ESI shall have the right to withhold such amount from other amounts payable by ESI to the Recipient, including salary, subject to applicable law. RECIPIENT UNDERSTANDS THAT TO BE VALID, A SECTION 83(b) ELECTION MUST BE FILED WITH THE INTERNAL REVENUE SERVICE WITHIN 30 DAYS OF THE DATE THE OWNERSHIP OF THE RESTRICTED SHARES IS TRANSFERRED TO RECIPIENT, A COPY OF THE ELECTION MUST BE PROVIDED TO ESI, AND A COPY OF THE ELECTION MUST BE ATTACHED TO THE RECIPIENT’S FEDERAL (AND POSSIBLY STATE) INCOME TAX RETURN FOR THE YEAR OF THE ELECTION. RECIPIENT ACKNOWLEDGES THAT IF HE CHOOSES TO FILE A SECTION 83(b) ELECTION, IT IS RECIPIENT’S SOLE RESPONSIBILITY, AND NOT ESI’S, TO MAKE A VALID AND TIMELY ELECTION. RECIPIENT IS ENCOURAGED TO CONSULT HIS TAX ADVISOR REGARDING THE ADVISABILITY OF, AND PROCEDURE FOR, MAKING A SECTION 83(b) ELECTION WITH RESPECT TO SOME OR ALL OF THE RESTRICTED SHARES.

5. Stock Certificate. Upon the execution and delivery of this Agreement, the award of the Restricted Shares shall be completed and the Recipient shall be the owner of the Restricted Shares with all voting, dividend and other rights of a shareholder, except as limited by this Agreement. To secure the rights of ESI under Sections 2 and 4, ESI will retain the certificate or certificates representing the Restricted Shares. Upon any forfeiture of the Restricted Shares covered by this Agreement, ESI shall have the right to cancel the Restricted Shares in accordance with this Agreement without any further action by the Recipient. Upon any failure of the Recipient to pay required withholding under Section 4, ESI shall have the right to cancel vested Restricted Shares with a value equal to the required withholding amount without any further action by the Recipient. After Restricted Shares have vested and all required withholding has been paid to ESI in connection with such vesting, ESI shall promptly deliver a certificate for the vested Restricted Shares to the Recipient.

6. Additional ESI Shares. If, prior to vesting of Restricted Shares, the outstanding ESI Common Stock is increased as a result of a stock dividend or stock split, the restrictions and

other provisions of this Agreement shall apply to any such additional shares of ESI Common Stock which are issued in respect of the Restricted Shares to the same extent as such restrictions and other provisions apply to the Restricted Shares.

7. Restrictive Legends. Stock certificates for shares issued under this Agreement may bear the following legends:

The shares represented by this certificate are subject to a Restricted Stock Agreement between the registered owner and Electro Scientific Industries, Inc. which restricts the transferability of the shares. A copy of the agreement is on file with the Secretary of Electro Scientific Industries, Inc.

ESI shall promptly remove such legend as to any Restricted Shares that vest pursuant to this Agreement and the share certificate delivered by ESI to Recipient with respect to such vested Restricted Shares shall be free of any such restrictive legend. ESI represents that it has filed a valid and effective Registration Statement on Form S-8 with the Securities and Exchange Commission to register a sufficient number of shares with respect to ESI’s 1996 Stock Incentive Plan to cover the Restricted Shares subject to this award.

8. Miscellaneous.

8.1 Entire Agreement; Amendment. This Agreement and the Employment Agreement collectively constitute the entire agreement of the parties with regard to the subjects hereof, and this Agreement may be amended only by written agreement between ESI and the Recipient.

8.2 Notices. Any notice required or permitted under this Agreement shall be in writing and shall be deemed sufficient when delivered personally to the party to whom it is addressed or when deposited into the United States Mail as registered or certified mail, return receipt requested, postage prepaid, addressed to ESI, Attention: Corporate Secretary, at its principal executive offices or to the Recipient at the address of Recipient in ESI’s records, or at such other address as such party may designate by ten (10) days’ advance written notice to the other party.

8.3 Rights and Benefits. The rights and benefits of this Agreement shall inure to the benefit of and be enforceable by ESI’s successors and assigns and, subject to the restrictions on transfer of this Agreement, be binding upon the Recipient’s heirs, executors, administrators, successors and assigns.

8.4 Further Action. The parties agree to execute such further instruments and to take such further action as may reasonably be necessary to carry out the intent of this Agreement.

8.5 Applicable Law; Attorneys’ Fees. The terms and conditions of this Agreement shall be governed by the laws of the State of Oregon. In the event either party

institutes litigation hereunder, the prevailing party shall be entitled to reasonable attorneys’ fees to be set by the trial court and, upon any appeal, the appellate court.

8.6 Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original.

IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written.

	ELECTRO SCIENTIFIC INDUSTRIES, INC.


	By RECIPIENT



	s//Nicholas Konidaris
	Nicholas Konidaris

EXHIBIT D

RELOCATION POLICY

ESI shall reimburse Executive for the following:

• The documented Realtor Fee for the sale of Executive’s primary residence up to a maximum of 6%.

• Up to 1% closing costs on the sale of Executive’s primary residence.

• Up to 2% to cover all closing cost appraisals and normal transition costs of purchasing a new residence in Oregon (must be complete by June 30, 2004).

• Relocation of household goods and up to two (2) automobiles from San Jose, CA to the Portland, OR area. ESI will ask for 3 bids and will work with Executive to choose the right vendor. These bids shall include catastrophic loss insurance for Executive’s household goods while in transit and storage.

• Up to 180 days temporary storage of Executive’s household goods and delivery to Executive’s Portland area residence of choice.

• Up to 180 days temporary living assistance while Executive closes on his new primary residence up to a maximum of $3,000 per month.

• Two house hunting trips for Executive and his spouse (including airfare, hotel and meals) for a duration of up to 7 days.

• Final transportation for Executive and his family (coach airfare or mileage reimbursement, hotel and per diem if driving) to Oregon.

All reimbursable expenses require receipts. ESI shall gross up all reimbursable expenses to make ESI’s payment of these expenses a tax-neutral event for Executive.

The maximum relocation expenditure for all items will be $200,000. Relocation assistance must be repaid to ESI on a pro-rated basis if Executive voluntarily terminates his position with ESI other than for Good Reason (and other than due to Executive’s death or Disability) within 24 months of the Effective Date.

EXHIBIT E

EMPLOYEE CONFIDENTIALITY, NON COMPETITION

AND ASSIGNMENT AGREEMENT

In consideration of my employment by Electro Scientific Industries, Inc. or by one of its subsidiaries and affiliates (herein collectively called “ESI”), I agree to the following:

1. Confidentiality. I acknowledge that my employment gives me access to manufacturing processes, business plans, customer lists, drawings, documents, reports, facilities, formulas, computer data, computer programs (including algorithms, flowcharts, source code, object code and firmware), and other information all of which ESI regards as confidential and treats as trade secrets. I recognize that my employment creates a relationship of confidence and trust which requires me to protect the secrecy of such confidential information.

2. Nondisclosure and Nonuse. Except as the duties of my employment may require, I will not use, publish or disclose any confidential information to which I am given access. This obligation will continue even if I cease to be employed by ESI. On termination of my employment, I shall deliver to ESI all files, notes, records, data and documents which are under my control and which relate to confidential information of ESI.

3. Assignment of Inventions. I shall promptly disclose and I hereby assign to ESI all proprietary rights, including any patents or copyrights which may be obtained, in all inventions, processes, ideas, improvements, computer programs embodied in any medium and at any stage of development (including but not limited to algorithms, flowcharts, source code, object code and firmware), and any other discoveries which are conceived by me, alone or with others, while I am employed by ESI and for one year thereafter, and which relate to the business of ESI (herein collectively called “the Inventions”). This obligation shall apply even if the Inventions are not patentable and even if they were not conceived during regular working hours.

4. Patents and Copyrights. I shall cooperate fully with ESI during and subsequent to my employment if ESI decides, at its expense, to obtain U.S. or worldwide patents or copyrights covering my Inventions. If ESI elects not to file patent or copyright applications within one year after I have submitted a written disclosure on an Invention, and if ESI determines that the Invention does not constitute a trade secret of ESI, the Invention will be released to me with the retention by ESI of a transferable, nonexclusive and royalty-free license under any patents or copyrights which may subsequently be issued.

5. Bonus. If ESI elects to seek patent or copyright protection on any Invention disclosed by me, it will pay me a bonus of $100.00 for each Invention of which I am the sole inventor or my pro rata share of $100.00 if there are multiple inventors.

6. Prior Inventions. I have set out below a complete list of all Inventions, if any,

patented or unpatented, including the number of all patents and patent applications filed thereon, and a brief description of all unpatented Inventions, which I made prior to my employment by the Company, and which are to be excluded from the scope of this Agreement. I agree that any patentable improvements made upon the listed Inventions subsequent to my employment by the Company are to be the property of ESI if within the scope of Paragraph 3 hereof.

7. I hereby irrevocably consent to and authorize the use and reproduction by Electro Scientific Industries, Inc. (ESI), or anyone authorized by ESI, of any and all photographs which are taken of me, during my employment by ESI, negative or positive, proofs of which will be retained in ESI files, for any purpose whatsoever, without further compensation to me. All negatives and positives, together with the prints shall constitute ESI property, solely and completely.

8. Covenant Not To Compete. If I leave the employment of ESI for any reason, I agree that for a period of two years after termination of employment I will not be an employee of, consultant to or member of the board of directors of any business which is in competition with ESI’s then principal businesses (currently semiconductor memory repair, laser trimming and tuning of electronic circuits, passive component manufacturing equipment and laser drilling systems for electronic equipment); provided, however, that this covenant shall not apply to the high volume, semiconductor automated test equipment (ATE) business; and provided further that this covenant shall terminate after one year if I am terminated with Cause or quit without Good Reason.

9. LITIGATION. I recognize that ESI will not have an adequate monetary remedy to compensate it if I violate the terms of this Agreement. Accordingly, if I fail to honor my obligations, I hereby consent to the immediate entry of a temporary restraining order and preliminary injunction against me by a court of competent jurisdiction. If any litigation is commenced to enforce this Agreement, the prevailing party at trial and on appeal shall be entitled to an award of reasonable attorney’s fees.

10. Binding Effect. The provisions of this Agreement shall inure to the benefit of and be binding upon the heirs, legal representatives, successors and assigns of the parties.

11. Employee certifies that there is no other contract or duty on Employee’s part that would interfere with Employee’s ability to provide services to ESI.

Reserved Inventions (drawings, photographs, etc. attached).

[SIGNATURE PAGE FOLLOWS]

Employee Name (print):		Nicholas Konidaris

Employee Signature	s//Nicholas Konidaris

Date January 7, 2004


Accepted:

Electro Scientific Industries, Inc.

By

Date

EX-31.1 4 a04-4147_1ex31d1.htm EX-31.1

EXHIBIT 31.1

CERTIFICATION PURSUANT TO

SECTION 302(a) OF THE SARBANES-OXLEY ACT OF 2002

I, Nicholas Konidaris, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Electro Scientific Industries, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(c) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: April 6, 2004

/s/ Nicholas Konidaris
Nicholas Konidaris
President and Chief Executive Officer

EX-31.2 5 a04-4147_1ex31d2.htm EX-31.2

EXHIBIT 31.2

CERTIFICATION PURSUANT TO

SECTION 302(a) OF THE SARBANES-OXLEY ACT OF 2002

I, J. Michael Dodson, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Electro Scientific Industries, Inc.;

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: April 6, 2004

/s/ J. Michael Dodson
J. Michael Dodson
Senior Vice President of Administration,
Chief Financial Officer and Secretary

EX-32.1 6 a04-4147_1ex32d1.htm EX-32.1

EXHIBIT 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with this quarterly report on Form 10-Q of Electro Scientific Industries, Inc. (the “Company”) for the quarterly period ended February 28, 2004 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Nicholas Konidaris, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ Nicholas Konidaris
Nicholas Konidaris
President and Chief Executive Officer
April 6, 2004

EX-32.2 7 a04-4147_1ex32d2.htm EX-32.2

EXHIBIT 32.2

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with this quarterly report on Form 10-Q of Electro Scientific Industries, Inc. (the “Company”) for the quarterly period ended February 28, 2004 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, J. Michael Dodson, Vice President of Administration, Chief Financial Officer and Secretary of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ J. Michael Dodson
J. Michael Dodson
Senior Vice President of Administration,
Chief Financial Officer and Secretary
April 6, 2004

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ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES

TABLE OF CONTENTS

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

Note 8 – Comprehensive Income (Loss)

Note 9 – Stock Based Compensation Plans

Electro Scientific Industries, Inc.

By

s//Jon D. Tompkins

OPTION TERMS AND CONDITIONS 2000 Stock Option Incentive Plan

OPTION TERMS AND CONDITIONS
2000 Stock Option Incentive Plan