Dear Fellow Shareholders:

It is my pleasure to report continued improvements in operating performance,
strategic accomplishments and preview the future direction of our company.

Operating Performance

We completed our third consecutive year of growth with excellent performance
in every category compared to 2003:

• Revenues increased by 78% to $330 million, compared with $186 million;
• Gross margins improved to 40% from 37%;
• Operating income reached $45 million from a loss of $4.1 million;
• Earnings per share diluted was $0.98 versus a loss of $0.05;
• Cash generated from operations was $35.4 million, compared to $21.8 million and,
• Shareholder equity was $306 million versus $261 million.

Improved operating efficiencies reduced working capital, excluding cash and short-term investments, to 27% of revenues for 2004. The average of quarterly inventory turns were 3.4 compared to 2.9 for 2003, while the average of quarterly day's sales outstanding receivables in 2004 improved to 68 days compared with 86 days in the prior year. We maintained a solid debt-free balance sheet and strong cash flow, which are important to support our ongoing acquisitions program.

Our Systems business, which supplies critical laser based production tools to the semiconductor industry, showed strong organic growth with sales of $147 million, compared with $83 million in 2003. Gross margins improved to 44% from 35%, while operating income grew to $40 million from $8 million. This strong performance was based on continued growth in the semiconductor market through the third quarter, combined with the restructuring accomplished during the prior two years which focused on outsourcing, efficient use of personnel and materials cost reductions. These changes provided the flexibility to meet sharp increases in demand with short lead times from order to delivery. Market conditions changed continually through the year for each of the major product lines, with visibility seldom more than one quarter. Demand from the mixed signal sector was strong early in the year, but declined sharply in the second half. Mitigating some of this decline, sales of memory repair systems, critical for DRAM production, grew through the year resulting in solid market share. Transition to the larger size 300 millimeter silicon wafer created steady demand for our marking systems, used for wafer identification. Beginning of transition to packageless chips (CSP) generated demand for our new CSP-200 product, used to mark individual chips, or die, on the wafer. Shipments went to the world's premier semiconductor companies in Asia. Overall, the Systems business obtained 51 new semiconductor accounts during the year, compared with 25 in the prior year.

Our Laser business continued to improve in both product performance and profitability as revenues grew to $47 million from $33 million, and operating income doubled to $2 million from the prior year, respectively. We benefited from a full year performance of Spectron lasers, acquired in May 2003, adding $5 million in revenues. Our emphasis on increasing sales across several key vertical markets was successful as opportunities were developed in medical, light industrial and electronics. We achieved geographic growth in both Asia and North America, while sales in Europe remained slow due to the poor economic conditions in that region. Performance improvements are directly attributable to the management team of highly experienced personnel put in place. Combined outsourcing and engineering activities are seen as avenues for more efficient operations in the coming year. Prior to acquisition, Spectron experienced problems from defective parts supplied from a vendor, which may have negatively impacted sales.

Sales of the Precision Motion Components segment more than doubled to $153 million from $74 million with operating profits increasing to $28 million from $16 million compared to prior year. Most of this was due to the strong performance of two acquisitions: Westwind, December 2003; and, MicroE Systems, May 2004. Higher production of printed circuit boards (PCBs) combined with superior product technology drove Westwind's sales to record high levels with increased market share. Increased PCB production was primarily due to the rapid expansion in mobile devices such as digital cameras, cell phones, PDA's, digital music players and other portable entertainment units. Most of these devices required smaller dimensionality that was satisfied with new technology developed by Westwind. During the second quarter, we continued our strategic acquisition program by purchasing MicroE Systems, a leader in ultrahigh precision positioning and motion control. This acquisition contributed significantly to our growth. Medical printers continued to deliver steady performance. However, the year was not without problems. A temporary loss of quality control in our scanner product line caused a loss of confidence by several key customers, negatively impacting revenues and profits. Swift corrective actions arrested the impact and turned the situation around late in the year. One significant consolation has been the cooperative effort by our customers to assist us in identifying and correcting the problems. In so doing, they expressed their sincere wishes to reestablish the former solid working relationships. We believe the actions taken are now having a positive regenerative effect. This experience has led to strong focus on customer satisfaction and on-time delivery of quality product.

No doubt, you have read and heard much about compliance with the Sarbanes-Oxley Act. We fully support this initiative and worked hard to comply with every aspect of this legislation. During the past year we expended significant resources in people, money and consultants to achieve certification under Section 404, which was awarded in a timely manner following the close of the year. This achievement attests to the solid credibility of our financial controls and reporting systems, and the integrity of our people. We continually strive to work to the highest standards of integrity, ethics and legality, not just because law requires it, but because it is right.

Strategic Performance

Three years ago, we created the strategy that has been driving our growth. After divesting non-performing, commodity businesses in favor of better margin opportunities, we focused on developing and acquiring enabling technologies to serve niche markets. Enabling technology allows our customer either to make a product that was not possible otherwise, or to achieve superior performance. Niche markets are applications of our technology in relatively small spaces. Concentrating enabling technology in niche markets creates higher value for our customers, leverages technology development and often attracts less competition.

There were several significant strategic achievements last year. The restructured company responded promptly and efficiently to rapidly changing market conditions with improved margins. The success of our acquisition program was validated by the performance of Spectron, Westwind and MicroE. Integration of MicroE with the Components organization is in progress and should yield operational efficiencies in the latter part of 2005. Successful growth in Asia-Pacific and, particularly China, is important to our future. These developing regions are large potential markets for lasers and precision motion components used in the production tools required to build the infrastructure. During the year we initiated expansion of our production and distribution in China to better serve these markets and reduce manufacturing costs.

Our core strength has always been and is our technology development, which provides a continuum of market opportunities. Investment in R&D of $24 million increased 73% from the prior year. New products are in development across all three business segments to meet future market needs. Systems, where spending increased by 53% over prior year, is working closely with key customers to develop the next generation tools with improved performance. Specifically, a new Wafer Trim system will be available by mid-year. Our Wafer Repair system, for production of memory chips, will have higher throughput and accuracy to meet the demanding requirements for both the larger 300 millimeter wafers and reduced circuitry dimensions. In the developing market for die marking, we have improved performance of our CSP 200, introduced last year. Four new lasers are being introduced in the first half of 2005 to offer more cost-effective solutions at improved margins. Additionally, several new precision motion component products are in development with timely introductions slated through 2005.

A significant achievement was the initiation of cross-divisional teams in product development. These teams of engineers from different technologies and divisions are jointly developing products that integrate more than one technology. The goal is to create unique new products, which offer better value to our customers as well as a competitive advantage for us.

Looking Ahead

Last year ended in the midst of a slowdown in the semiconductor business sector of our business. With visibility, we expect to experience continued weak sales in the mixed signal sector and slightly lower sales of systems for memory production and wafer marking. Therefore, our emphasis is continued diligence in margin improvement through reductions in overhead and cost of goods. Lasers appear to have good opportunities to proceed at the same rate as last year with focus on increased sales geographically into the United States and China. Slower sales of PCB production equipment by our customers will negatively impact our Precision Motion Components segment. Data storage will be slow initially as well. We look for improvement late in the year based on increased production of flat panel television, automotive electronics, mobile communications and entertainment devices such as games and digital music players, which require large quantities of PCBs and storage. We are confident our restructured company will continue with positive cash flow in this slower business environment.

During the coming year we will continue to execute our strategy of providing enabling technologies to niche markets. We look for complementary technologies that integrate well with our current products and markets. As in the past, acquisitions will be purchased with cash and are expected to be accretive in the first full quarter. We are excited about the opportunities that could result from the efforts of our cross-divisional development teams to create unique new products.

We will expand our production and distribution operations in China to participate more aggressively in the developing infrastructure, which we believe requires our technology. By the end of 2005, we will manufacture a greater content of our products at our expanded facilities in Suzhou, near Shanghai. The goals are to be closer to the developing markets and significantly reduce the cost of goods for these markets.

In summary, we are pleased with the improved operational performance of our company and our progress in building the solid foundation for strategic growth. Critical building blocks of technology and market niches are now in place. As always, we endeavor to justify your investment with improving performance and developing opportunities for growth.

Sincerely,
Charles D. Winston
President and CEO