Prepared by MERRILL CORPORATION

Delaware
(State or other jurisdiction of
incorporation or organization)

94-1622541
(I.R.S. Employer
Identification No.)

5100 Patrick Henry Drive, Santa Clara, California 95054
(Address of principal executive offices) (Zip Code)

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. /x/

As of November 26, 2001, 28,532,453 shares of common stock were outstanding. The aggregate market value of the voting shares (based on the closing price reported by the NASDAQ National Market System on November 26, 2001) of Coherent, Inc., held by nonaffiliates was $625,617,722. For purposes of this disclosure, shares of common stock held by persons who own 5% or more of the outstanding common stock and shares of common stock held by each officer and director have been excluded in that such persons may be deemed to be "affiliates" as that term is defined under the Rules and Regulations of the Act. This determination of affiliate status is not necessarily conclusive.

Portions of the definitive proxy statement to be filed prior to February 22, 2002, pursuant to Regulation 14A of the Securities Exchange Act of 1934 are incorporated by reference into Part III of this Form 10-K.

Coherent, Inc. is one of the world's leading suppliers of photonics-based solutions in a broad range of commercial and scientific applications. We design, manufacture and market lasers, laser-based systems, precision optics and related accessories for a diverse group of customers. Since inception in 1966, we have grown through a combination of internal expansion and strategic acquisitions of companies with related technologies and products.

We have two reportable business segments: Electro-Optics and Lambda Physik. The Electro-Optics segment focuses on markets such as semiconductor and related manufacturing, materials processing, optical telecommunications, scientific research, printing and reprographics and advanced packaging. Lambda Physik AG, our 60% owned subsidiary with headquarters located in Göttingen, Germany, focuses on markets including lasers for lithography, the production of flat panel displays, ink jet printers, fiber bragg gratings, refractive surgery, scientific research, materials processing and micro-machining applications.

During the year, we took the steps that we considered necessary to strategically focus on those markets, technologies and opportunities that are best complemented by our core competencies. On April 30, 2001, we completed the sale of our Medical segment to Lumenis, Inc. (formerly ESC Medical Systems Ltd.) for a combination of cash, notes and Lumenis common stock with an estimated value of $236.0 million plus a potential earnout of an additional $25 million. The sale resulted in a one-time after-tax gain of $71.8 million, which is reflected in our results for the year ended September 30, 2001; the discontinued operations contributed an additional $1.4 million after-tax income for fiscal 2001.

As a result, our consolidated financial statements have been restated to reflect the Medical segment for all periods presented as discontinued operations. Unless otherwise indicated, the following discussion relates to our continuing operations.

During fiscal 2001, we made three strategic acquisitions, all of which were accounted for as purchases. The results of operations of each acquisition are included in our consolidated financial statements from the dates of acquisition.

In November 2000, we acquired Crystal Associates, Inc. of East Hanover, New Jersey for $7.1 million in cash. Crystal Associates manufactures exotic crystals, which are utilized in a variety of photonics applications. We recorded the $5.9 million excess of the purchase price over the fair value of net assets acquired as goodwill and other intangibles, which are primarily amortized over 10 years.

In April 2001, we acquired DeMaria Electro-Optics Systems, Inc. (DEOS) for $22.5 million in cash. DEOS, located in Bloomfield, Connecticut, designs and manufactures carbon dioxide lasers used in electronics packaging, materials processing and research applications. Upon consummation of the DEOS acquisition, we immediately charged to expense $2.4 million representing purchased in-process research and development related to a development project that had not yet reached technological feasibility and had no alternative future use. We recorded the remaining $16.5 million excess of the purchase price over the fair value of net assets acquired as goodwill and other intangibles, including existing technology, work force and customer list. The goodwill is being amortized over its estimated useful life of 15 years. The existing technology, work force and customer list are being amortized over their estimated useful lives of 15, 3 and 3 years, respectively.

lasers in production of the TFT flat-panel displays and inkjet printers. Upon consummation of the MicroLas acquisition, we immediately charged to expense $0.1 million representing purchased in-process research and development related to a development project that had not yet reached technological feasibility and had no alternative future use. We recorded the remaining $25.9 million excess of the purchase price, including $3.0 million of deferred tax liabilities, over the fair value of net assets acquired as goodwill and other intangibles, including patents, drawings and existing processes and acquired order backlog. The goodwill is being amortized over its estimated useful life of 10 years. The patents, drawings and existing processes are being amortized over their estimated useful lives of 10 and 5 years, respectively. The acquired order backlog is being amortized as the orders are recognized as revenue.

On July 26, 2000, we completed a public offering of 1,500,000 shares of common stock at an offering price of $65 per share. The net proceeds to us, after deducting underwriting discounts and offering expenses was $91,852,000. These net proceeds will be used for acquisitions of or investments in businesses, technologies and products, continued internal development of new technologies and general corporate purposes. We spent $54.0 million for the three aforementioned acquisitions in fiscal 2001.

On September 21, 2000, our Lambda Physik AG subsidiary issued 3,250,000 shares of its common stock in an initial public offering on Germany's Neuer Markt. Proceeds from the offering of shares, based on the offering price of approximately $31 per share, net of offering expenses, was approximately $92,715,000. The remaining part of net proceeds will be used to finance Lambda's internal and external growth, including research and development activities aiming at the development of new laser applications, of extreme UV light sources, and the next generation of laser solutions and for strategic acquisitions.

Some of the statements in this Annual Report on Form 10-K, including but not limited to the "Risk Factors," "Management's discussion and analysis of financial condition and results of operations," "Business" and elsewhere in this document constitute forward-looking statements within the meaning of the Private Securities Litigation Act of 1995. These statements relate to future events or our future financial performance and involve known and unknown risks, uncertainties and other factors that may cause our industry's actual results, levels of activity, performance or achievements to be materially different from those expressed or implied by any forward-looking statements. Some of these factors are listed under "Risk Factors" and elsewhere in this document. In some cases, you can identify forward-looking statements by terminology such as "may," "will," "could," "would," "should," "expect," "plan," "anticipate," "intend," "believe," "estimate," "predict," "potential" or "continue" or the negative of these terms or other comparable terminology. These statements are only predictions. Actual events or results may differ materially. Moreover, neither we nor any other person assumes responsibility for the accuracy and completeness of those statements. We are under no duty to update any of the forward-looking statements after the date of this document to reflect the occurrence of unanticipated events.

We may experience quarterly and annual fluctuations in our net sales and operating results in the future, which may result in volatility in our stock price.

Our net sales and operating results may vary significantly from quarter to quarter and from year to year in the future. A number of factors, many of which are outside of our control, may cause these variations, including:

In addition, we often recognize a substantial portion of our sales in the last month of the quarter. Our expenses for any given quarter are typically based on expected sales and if sales are below expectations in any given quarter, the adverse impact of the shortfall on our operating results may be magnified by our inability to adjust spending quickly to compensate for the shortfall. We also base our manufacturing on our forecasted product mix for the quarter. If the actual product mix varies significantly from our forecast, we may not be able to fill some orders during that quarter, which would result in delays in the shipment of our products. Accordingly, variations in timing of sales, particularly for our higher priced, higher margin products, can cause significant fluctuations in quarterly operating results.

Due to these and other factors, we believe that quarter-to-quarter and year-to-year comparisons of our past operating results may not be meaningful. You should not rely on our results for any quarter or

year as an indication of our future performance. Our operating results in future quarters and years may be below public market analysts' or investors' expectations, which would likely cause the price of our common stock to fall.

Our business has been adversely impacted by the worldwide economic slowdown and related uncertainties.

Weaker economic conditions worldwide, particularly in the U.S. and Europe, have contributed to the current technology industry slowdown and impacted our business resulting in:

Additionally, these economic conditions are making it very difficult for us, our customers and our vendors to forecast and plan future business activities. This level of uncertainty severely challenges our ability to operate profitably or to grow our business. In particular, it is difficult to develop and implement strategy, sustainable business models, efficient operations and effectively manage supply chain relationships. For example, the recent slowdown in the Lithography market has resulted in postponed delivery dates and cancelled orders. During the year ended September 30, 2001, we recorded a charge of $13.9 million for excess inventory and open purchase order commitments, which was reflected in postponed delivery dates, cancelled orders and further expected order cancellations from customers. If the economic or market conditions continue or further deteriorate, this may have a material adverse impact on our financial position, results of operations and cash flow.

We depend on sole source or limited source suppliers for some of the key components and materials, including exotic materials and crystals, in our products, which makes us susceptible to supply shortages or price fluctuations that could adversely affect our business.

We currently purchase several key components and materials used in the manufacture of our products from sole source or limited source suppliers. Some of these suppliers are relatively small private companies that may discontinue their operations at any time. We typically purchase our components and materials through purchase orders and we have no guaranteed supply arrangement with any of these suppliers. We may fail to obtain these supplies in a timely manner in the future. We may experience difficulty identifying alternative sources of supply for certain components used in our products. Once identified, we would experience further delays from evaluating and testing the products of these potential alternative suppliers. Furthermore, financial or other difficulties faced by these suppliers or significant changes in demand for these components or materials could limit their availability. Any interruption or delay in the supply of any of these components or materials, or the inability to obtain these components and materials from alternate sources at acceptable prices and within a reasonable amount of time, would impair our ability to meet scheduled product deliveries to our customers and could cause customers to cancel orders.

We rely exclusively on our own production capability to manufacture certain strategic components, optics and optical systems, crystals, semiconductor lasers, lasers and laser-based systems. Because we manufacture, package and test these components, products and systems at our own facilities, and such components, products and systems are not readily available from other sources, any interruption in manufacturing would adversely affect our business. In addition, our failure to achieve adequate

manufacturing yields at our manufacturing facilities may materially and adversely affect our operating results and financial condition.

Our future success depends on our ability to increase our sales volumes and decrease our costs to offset anticipated declines in the average selling prices of our products and, if we are unable to realize greater sales volumes and lower costs, our operating results may suffer.

Our future success depends on the continued growth of the markets for lasers, laser systems, precision optics and related accessories, as well as our ability to identify in advance emerging markets for laser-based systems. We cannot assure you that we will be able to successfully identify, on a timely basis, new high-growth markets in the future. Moreover, we cannot assure you that new markets will develop for our products or our customers' products, or that our technology or pricing will enable such markets to develop. Future demand for our products is uncertain and will depend to a great degree on the continued technological development and the introduction of new or enhanced products. If this does not continue, sales of our products may decline and our business will be harmed.

We have historically been the industry's high quality, high priced supplier of laser systems. We have in the past experienced decreases in the average selling prices of some of our products. We anticipate that as competing products become more widely available, the average selling price of our products may decrease. If we are unable to offset the anticipated decrease in our average selling prices by increasing our sales volumes, our net sales will decline. In addition, to maintain our gross margins, we must continue to reduce the cost of our products. Further, as average selling prices of our current products decline, we must develop and introduce new products and product enhancements with higher margins. If we cannot maintain our gross margins, our operating results could be seriously harmed, particularly if the average selling prices of our products decrease significantly.

Our future success depends on our ability to develop and successfully introduce new and enhanced products that meet the needs of our customers.

Our current products address a broad range of commercial and scientific applications in the photonics markets. We cannot assure you that the market for these applications will continue to generate significant or consistent demand for our products. Demand for our products could be significantly diminished by new technologies or products that replace them or render them obsolete.

Over the last three fiscal years, our research and development expenses have been in the range of 10% to 11% of net sales. Our future success depends on our ability to anticipate our customers' needs and develop products that address those needs. Introduction of new products and product enhancements will require that we effectively transfer production processes from research and development to manufacturing and coordinate our efforts with those of our suppliers to achieve volume production rapidly. If we fail to effectively transfer production processes, develop product enhancements or introduce new products in sufficient quantities to meet the needs of our customers as scheduled, our net sales may be reduced and our business may be harmed.

We face risks associated with our international sales that could harm our financial condition and results of operations.

For fiscal years 2001, 2000 and 1999, 55%, 59% and 59%, respectively, of our net sales were derived from international sales. We anticipate that international sales will continue to account for a significant portion of our revenues in the foreseeable future. A portion of our international sales occurs through our international sales subsidiaries and the remainder of our international sales result from exports to foreign distributors and resellers. Our international operations and sales are subject to a number of risks, including:

We are also subject to the risks of fluctuating foreign exchange rates, which could materially adversely affect the sales price of our products in foreign markets as well as the costs and expenses of our international sales subsidiaries. While we use forward exchange contracts, currency swap contracts, currency options and other risk management techniques to hedge our foreign currency exposure, we remain exposed to the economic risks of foreign currency fluctuations. For additional discussion about our foreign currency risks, see "Item 7A—Quantitative and Qualitative Disclosures About Market Risk."

We may not be able to protect our proprietary technology, which could adversely affect our competitive advantage.

We rely on a combination of patent, copyright, trademark and trade secret laws and restrictions on disclosure to protect our intellectual property rights. We cannot assure you that our patent applications will be approved, that any patents that may be issued will protect our intellectual property or that any issued patents will not be challenged by third parties. Other parties may independently develop similar or competing technology or design around any patents that may be issued to us. We cannot be certain that the steps we have taken will prevent the misappropriation of our intellectual property, particularly in foreign countries where the laws may not protect our proprietary rights as fully as in the United States. See "Business—Intellectual Property."

We could become subject to litigation regarding intellectual property rights, which could seriously harm our business.

The laser industry is characterized by a very large number of patents, many of which are of questionable validity and some of which appear to overlap with other issued patents. As a result, there is a significant amount of uncertainty in the industry regarding patent protection and infringement. In recent years, there has been significant litigation in the United States involving patents and other intellectual property rights. In the future, we may be a party to litigation to protect our intellectual property or as a result of an alleged infringement of others' intellectual property. These claims and any resulting lawsuit, if successful, could subject us to significant liability for damages or invalidation of our proprietary rights. These lawsuits, regardless of their success, would likely be time-consuming and expensive to resolve and would divert management time and attention. Any potential intellectual property litigation also could force us to do one or more of the following:

If we are forced to take any of these actions, our business may be seriously harmed. We do not have insurance to cover potential claims of this type.

We may in the future initiate claims or litigation against third parties for infringement of our proprietary rights to protect these rights or to determine the scope and validity of our proprietary rights or the proprietary rights of competitors. These claims could result in costly litigation and the diversion of our technical and management personnel.

We depend on skilled personnel to operate our business effectively in a rapidly changing market, and if we are unable to retain existing or hire additional personnel, our ability to develop and sell our products could be harmed.

Our future success depends upon the continued services of our executive officers and other key engineering, sales, marketing, manufacturing and support personnel. None of our officers or key employees in the United States is bound by an employment agreement for any specific term and these personnel may terminate their employment at any time. In addition, we do not have "key person" life insurance policies covering any of our employees.

Our ability to continue to attract and retain highly skilled personnel will be a critical factor in determining whether we will be successful in the future. Competition for highly skilled personnel is intense, especially in the Silicon Valley, where one of our major operating facilities is located. We may not be successful in attracting, assimilating or retaining qualified personnel to fulfill our current or future needs. Our failure to attract additional employees and retain our existing employees could adversely affect our growth and our business.

We may experience volatility in our stock price, which could negatively affect your investment.

The market price of our common stock has fluctuated, and may continue to fluctuate, significantly in response to a number of factors, some of which are beyond our control, including:

Your investment may also be affected by any fluctuations in the stock price of Lumenis, Inc., which we received in 2001 as consideration for the sale of our Medical segment. At April 30, 2001, we estimated the value of the Lumenis stock at $124.4 million. At September 30, 2001, we estimated the value of the stock at $109.1 million. Currently, we do not hedge our investment in Lumenis stock. The Lumenis stock received is unregistered and its trading is subject to restrictions under the Securities and Exchange Commission Rule 144 and other restrictions. Any major reduction in the stock price of Lumenis could decrease our total assets, which could negatively impact our stock price.

In addition, the stock market has recently experienced extreme volatility that has often been unrelated to the performance of particular companies. These market fluctuations may cause our stock price to fall regardless of our performance.

The long sales cycles for our products may cause us to incur significant expenses without offsetting revenues.

Customers often view the purchase of our products as a significant and strategic decision. As a result, customers typically expend significant effort in evaluating, testing and qualifying our products before making a decision to purchase them, resulting in a lengthy initial sales cycle. While our customers are evaluating our products and before they place an order with us, we may incur substantial sales and marketing and research and development expenses to customize our products to the customer's needs. We may also expend significant management efforts, increase manufacturing capacity and order long- lead-time components or materials prior to receiving an order. Even after this evaluation process, a potential customer may not purchase our products. As a result, these long sales cycles may cause us to incur significant expenses without ever receiving revenue to offset those expenses.

The markets in which we sell our products are intensely competitive and increased competition could cause reduced sales levels, reduced gross margins or the loss of market share.

Competition in the various photonics markets in which we provide products is very intense. We compete against a number of companies, including Spectra-Physics Lasers, Inc., JDS Uniphase, Inc., Cymer, Inc., Gigaphoton, Rofin-Sinar and Excel Technology. Some of our competitors are large companies that have significant financial, technical, marketing and other resources. These competitors may be able to devote greater resources than we can to the development, promotion, sale and support of their products. Several of our competitors that have large market capitalizations or strong cash reserves are much better positioned than we are to acquire other companies in order to gain new technologies or products that may displace our product lines. Any of these acquisitions could give our competitors a strategic advantage. Any business combinations or mergers among our competitors, forming larger competitors with greater resources, could result in increased competition, price reductions, reduced margins or loss of market share, any of which could materially and adversely affect our business, results of operations and financial condition.

Additional competitors may enter the market and we are likely to compete with new companies in the future. We expect to encounter potential customers that, due to existing relationships with our competitors, are committed to the products offered by these competitors. As a result of the foregoing factors, we expect that competitive pressures may result in price reductions, reduced margins and loss of market share. For a more detailed discussion of our competition, see "Business—Competition."

Some of our laser systems are complex in design and may contain defects that are not detected until deployed by our customers, which could increase our costs and reduce our revenues.

Laser systems are inherently complex in design and require ongoing regular maintenance. The manufacture of our lasers, laser products and systems involves a highly complex and precise process. As a result of the technical complexity of our products, changes in our or our suppliers' manufacturing processes or the inadvertent use of defective or contaminated materials by us or our suppliers could result in a material adverse effect on our ability to achieve acceptable manufacturing yields and product reliability. To the extent that we do not achieve such yields or product reliability, our business, operating results, financial condition and customer relationships would be adversely affected.

Our customers may discover defects in our products after the products have been fully deployed and operated under peak stress conditions. In addition, some of our products are combined with products from other vendors, which may contain defects. As a result, should problems occur, it may be difficult to identify the source of the problem. If we are unable to fix defects or other problems, we could experience, among other things:

The occurrence of any one or more of the foregoing factors could seriously harm our business, financial condition and results of operations.

If we fail to accurately forecast component and material requirements for our products, we could incur additional costs and incur significant delays in shipments, which could result in loss of customers.

We use rolling forecasts based on anticipated product orders and material requirements planning systems to determine our product requirements. It is very important that we accurately predict both the demand for our products and the lead times required to obtain the necessary components and materials. We depend on our suppliers for most of our product components and materials. Lead times for components and materials that we order vary significantly and depend on factors including the specific supplier requirements, the size of the order, contract terms and current market demand for components. For substantial increases in our sales levels, some of our suppliers may need at least six months lead-time. If we overestimate our component and material requirements, we may have excess inventory, which would increase our costs. If we underestimate our component and material requirements, we may have inadequate inventory, which could interrupt and delay delivery of our products to our customers. Any of these occurrences would negatively impact our net sales, business and operating results.

If we fail to manage our growth effectively, our business could be disrupted, which could harm our operating results.

Our ability to successfully offer our products and implement our business plan in evolving markets requires an effective planning and management process. We continue to expand the scope of our operations domestically and internationally. The growth in employee headcount and in sales, combined with the challenges of managing geographically-dispersed operations, has placed, and our anticipated growth in future operations will continue to place, a significant strain on our management systems and resources, particularly our information technology systems. We expect that we will need to continue to improve our information technology systems, financial and managerial controls, reporting systems and procedures and continue to expand, train and manage our work force worldwide. The failure to effectively manage our growth could disrupt our business and harm our operating results.

Any acquisitions we make could disrupt our business and harm our financial condition.

We have in the past made strategic acquisitions of other corporations, and we continue to evaluate potential strategic acquisitions of complementary companies, products and technologies. In the event of any future acquisitions, we could:

We cannot assure you that we will be able to successfully integrate any businesses, products, technologies or personnel that we might acquire in the future, which may harm our business.

We use standard laboratory and manufacturing materials that could be considered hazardous; and we could be liable for any damage or liability resulting from accidental environmental contamination or injury.

Although most of our products do not incorporate hazardous or toxic materials and chemicals, some of the gases used in our excimer lasers and some of the liquid dyes used in some of our scientific laser products are highly toxic. In addition, our operations involve the use of standard laboratory and manufacturing materials that could be considered hazardous. Also, a facility fire at the Tampere, Finland site, that spreads to a reactor used to grow semiconductor wafers, could release highly toxic emissions. We believe that our safety procedures for handling and disposing of such materials comply with all federal, state and off-shore regulations and standards; however, the risk of accidental environmental contamination or injury from such materials cannot be entirely eliminated. In the event of such an accident involving such materials, we could be liable for any damage and such liability could exceed the amount of our liability insurance coverage and the resources of our business.

If our facilities were to experience catastrophic loss, our operations would be seriously harmed.

Our facilities could be subject to a catastrophic loss from fire, flood, earthquake or terrorist activity. A substantial portion of our research and development activities, manufacturing, our corporate headquarters and other critical business operations are located near major earthquake faults in Santa Clara, California, an area with a history of seismic events. Any such loss at any of our facilities could disrupt our operations, delay production, shipments and revenue and result in large expenses to repair or replace the facility. While we have obtained insurance to cover most potential losses, other than those caused by earthquakes, at our facilities, we cannot assure you that our existing insurance coverage will be adequate against all possible losses.

Provisions of our charter documents, Delaware law, our Common Shares Rights Plan and our Change-of-Control Severance Plan may have anti-takeover effects that could prevent or delay a change in control.

Provisions of our certificate of incorporation and bylaws may discourage, delay or prevent a merger or acquisition or make removal of incumbent directors or officers more difficult. These provisions may discourage takeover attempts and bids for our common stock at a premium over the market price. These provisions include:

We are subject to Section 203 of the Delaware General Corporation Law, which prohibits a publicly held Delaware corporation from engaging in a merger, asset or stock sale or other transaction with an interested stockholder for a period of three years following the date such person became an interested stockholder, unless prior approval of our board of directors is obtained or as otherwise provided. These provisions of Delaware law also may discourage, delay or prevent someone from acquiring or merging with us without obtaining the prior approval of our board of directors, which may cause the market price of our common stock to decline. In addition, we have adopted a change of control severance plan, which provides for the payment of a cash severance benefit to each eligible employee based on the employee's position and years of service to us. If a change of control occurs, our successor or acquiror will be required to assume and agree to perform all of our obligations under the change of control severance plan.

Our common shares rights agreement permits the holders of rights to purchase shares of our common stock to exercise the stock purchase rights following an acquisition of or merger by us with another corporation or entity, following a sale of 50% or more of our consolidated assets or earning power, or the acquisition by an individual or entity of 20% or more of our common stock. Our successor or acquiror is required to assume all of our obligations and duties under the common shares rights agreement, including in certain circumstances the issuance of shares of its capital stock upon exercise of the stock purchase rights. The existence of our common shares rights agreement may have the effect of delaying, deferring or preventing a change of control and, as a consequence, may discourage potential acquirors from making tender offers for our shares.

Our market is unpredictable and characterized by rapid technological changes and evolving standards, and, if we fail to address changing market conditions, our business and operating results will be harmed.

The photonics industry is characterized by extensive research and development, rapid technological change, frequent new product introductions, changes in customer requirements and evolving industry standards. Because this market is subject to rapid change, it is difficult to predict its potential size or future growth rate. Our success in generating revenues in this market will depend on, among other things:

For our fiscal years ended September 30, 2001, 2000 and 1999, our research and development costs were $53.0 million, or 11%, $40.7 million, or 11% of net sales and $32.1 million, or 10%, of net sales, respectively. We cannot assure you that our expenditures for research and development will result in the introduction of new products or, if such products are introduced, that those products will achieve sufficient market acceptance. Our failure to address rapid technological changes in our markets could adversely affect our business and results of operations. See "Business—Research and Development."

The downturn in the semiconductor manufacturing industry could adversely affect our business, financial condition and results of operations.

Our net sales depend in part on the demand for our products by semiconductor equipment companies. The semiconductor industry is highly cyclical and has historically experienced periodic and significant downturns, which have often severely affected the demand for semiconductor manufacturing equipment, including laser-based tools and systems. We are currently experiencing such a downturn, which is resulting in decreased demand for semiconductor manufacturing equipment and consequently a decreased demand for our products. Although such a downturn would reduce our sales, we would not be able to reduce expenses commensurately, due in part to the need for continual spending in research and development and the need to maintain extensive ongoing customer service and support capability. Accordingly, any sustained downturn in the semiconductor industry could have a material adverse effect on our financial condition and results of operations.

Our reported results may be adversely affected by changes in accounting principles generally accepted in the United States of America.

We prepare our financial statements in conformity with accounting principles generally accepted in the United States of America (GAAP). GAAP is subject to interpretation by the American Institute of Certified Public Accountants, the Securities and Exchange Commission and various bodies formed to interpret and create appropriate accounting policies. A change in these policies or interpretations can have a significant effect on our reported results, and may even affect the reporting of transactions completed prior to the announcement of a change.

The word "laser" is an acronym for "light amplification by stimulated emission of radiation." A laser works by causing an energy source to excite, or pump, an optical gain medium, converting the energy from the source into an emission of photons, the fundamental particles of light. These photons stimulate the release of more photons in the gain medium as they are reflected back and forth between the mirrors that make up the laser's resonator. The resulting build-up in the number of photons is usually emitted in the form of a light beam, the laser beam, through a partially reflective mirror at the output end of the laser.

The four types of lasers, commonly available today, are gas, liquid, semiconductor and solid-state, each of which derives its classification from the lasing material it uses. Laser beams can be emitted in either continuous waves or in pulses with varying repetition rates, can have different operating wavelengths and emission bandwidths, and can emit light in a wide range of energies and powers. Depending on the application, lasers can be designed for a specific power, pulse width, repetition rate and wavelength. In addition, the laser's cost of ownership can dictate its suitability for a particular application.

As lasers become less expensive, smaller and more reliable, they are increasingly replacing conventional tools and enabling technological advances in a variety of applications and industries, including semiconductor inspection, measurement, test and repair, optical telecommunications, medical, biotechnology, consumer electronics, industrial process control, materials processing, printing, and research and development.

We strive to develop innovative and proprietary products and solutions that meet the needs of our customers and that are based on our core expertise in lasers and optical technologies. In pursuit of our strategy, we intend to:

Our products address a broad range of applications. Both of our business segments are focused on several areas of the photonics market: semiconductor and related manufacturing, optical telecommunications, printing and reprographics, materials processing, and scientific instrumentation.

The use of semiconductors has expanded beyond computer systems to a wide array of applications such as telecommunications and data communication systems, automotive products, consumer goods, medical products, household appliances, industrial automation and control systems.

Semiconductor manufacturers are continually seeking to improve their process and design technologies to manufacture smaller, more powerful and more reliable devices at a lower cost per function. A major factor in fabricating such devices is the ability to reduce circuit geometries, measured in microns, a millionth of a meter, and defined in terms of critical, or smallest, feature size. Reduced circuit geometries permit semiconductor manufacturers to increase the number of integrated components per area of silicon.

Lasers are particularly useful in manufacturing products that require fine precision and small feature sizes, such as semiconductor and microelectronic devices, because they can produce extremely small beam size and deliver energy in pulses of very short duration. We provide lasers to semiconductor equipment manufacturers for use in lithography, mask writing, wafer inspection, mask repair and packaging processes for their semiconductor manufacturing systems.

Sales of our products for semiconductor and related manufacturing applications accounted for approximately 31% ($149.3 million) of our total net sales in fiscal 2001 and approximately 30% ($114.5 million) of our total net sales in fiscal 2000.

Lithography is one of the most critical and expensive steps in the manufacturing process of complex semiconductor devices fabricated on silicon wafers. This process requires a system that projects light through a photomask containing the master image of a particular circuit layer onto a light sensitive material coated on the wafer. The critical feature size of a semiconductor device depends upon the resolution capability of the lithography system. Resolution capability is a function of the projected wavelength of the light source and the numerical aperture of the lens. A shorter wavelength or higher numerical aperture enables smaller feature sizes.

Lithography tools have physical resolution limits approximating the wavelength of their light source. Mercury arc lamps, which have been the primary illumination source used for the last decade, can produce critical feature sizes down to only 0.25 microns. Currently, the only known method capable of reducing semiconductor geometries below 0.25 microns is with DUV lasers.

We currently provide lasers, through our 60.4% owned Lambda Physik AG subsidiary, for the lithography tools that support critical feature sizes down to 0.13 microns using DUV light with wavelengths at 248 nanometers, or nm. One nanometer equals one billionth of a meter. We are also working with stepper and semiconductor manufacturers to provide the next two generations of lithography tools to reduce feature sizes to below 0.10 microns using DUV light with wavelengths at 193nm and 157nm.

The photomask used in the lithography process is made by a laser beam that directly "writes" a circuit pattern of a semiconductor chip onto a piece of chrome-coated quartz glass. The mask, which is conceptually similar to a negative in photography, is used in lithography systems to make numerous copies of the pattern image on semiconductor wafers. The direct write process is also used to write circuit patterns directly on printed circuit boards. Our Innova Sabre and Innova SabreFreD ion lasers are used in laser systems for these applications.

As semiconductor device geometries decrease in size, devices become increasingly susceptible to smaller defects during each phase of their manufacturing process. One of the semiconductor industry's responses to the increasing vulnerability of semiconductor devices to smaller defects has been to employ defect detection and inspection that is closely linked to the manufacturing process. Automated inspection systems are used on-line to detect and locate defects as small as 0.1 microns, which may not be observable by conventional optical microscopes. These detection systems use advanced image processing and innovative laser scanning technologies to achieve high sensitivity and speed.

Detecting the presence of defects is only the first step in preventing their recurrence. After detection, the defects must be examined in order to identify their size and shape and the process step in which the defect occurred. This examination is called defect classification. Identification of the sources of defects in the lengthy and complex semiconductor manufacturing process has become essential for maintaining high yield production. Semiconductor manufacturing has become a round-the-clock operation and it is important for inspection, measurement and testing products to be reliable and have long lifetimes.

Our Compass 315M and Verdi diode-pumped solid-state, or DPSS, lasers are used to detect defects in photomasks, semiconductor chips and printed circuit boards. The Innova iLine argon ion laser is used to inspect the photomasks and patterned wafers. Our Compass 501Q laser is used to repair defects that may occur in the photomask or semiconductor device.

The fabrication process typically creates numerous patterned layers on each wafer. Laser-based systems have been developed to measure the characteristics of metal or opaque layers in order to determine the functionality and conformance of these devices. Our Vitesse laser generates an ultrafast laser light pulse that produces a localized temperature rise in the materials, which generates a sound wave, a portion of which is reflected back to the surface. By measuring the returning echos, the laser system can detect layer thickness, adhesion and composition.

Lasers are now being used in hole drilling of printed circuit boards and other advanced component materials like flexible circuits, polyester and polymide. Historically, holes in printed circuit boards have been made using mechanical drilling techniques. However, mechanical drills cannot produce holes less than 50 microns, forcing manufacturers to use laser-based solutions. Solid-state lasers are increasingly being utilized for this application.

We have developed the Avia DPSS laser, Diamond carbon dioxide, or CO₂, and GEM QS CO₂ family of lasers for this application. The ability of our pulsed lasers to operate at very high repetition rates translates into faster drilling speeds and increased throughput in materials processing applications. Lasers also produce smaller, cleaner holes than conventional cutting tools, and laser beams do not wear down from use as do conventional drills.

Lasers are also increasingly being used in scribing, machining and drilling microelectronic components and in microelectronics manufacturing to adjust electronic components. Our Compass 501Q, Avia, Diamond and GEM QS lasers are used for these applications.

The high volume consumer market is driving the production of flat panel displays in applications such as camera viewfinders, car navigation systems, laptops and television monitors. The most common type of flat panel display is the active-matrix crystal display, which uses a matrix of thin film transistor, or TFT, switches to control each pixel of the screen.

The crystallization of amorphous silicon to polycrystalline silicon induced by excimer lasers, commonly referred to as excimer laser annealing, or ELA, is a pivotal technology for the next generation of TFT devices. In the ELA process, the excimer laser light is absorbed into the amorphous silicon without heating the underlying substrate. As a result, it is possible to use inexpensive glass substrates, instead of quartz, which makes the ELA process more economical than previous techniques. Because the ELA technique leaves the substrate virtually unaffected, there are many potential applications for the ELA process, including the use of plastic as a substrate material, which would enable electronics to be integrated directly into plastic housings. The Lambda STEEL, developed and marketed by Lambda Physik, is a high-powered 200 watt excimer laser designed for industrial TFT annealing.

Our Avia and Diamond lasers are also used in the production of flat panel displays for cutting and yield improvement.

Innovative technological developments in optical transmission technology have made it possible to transmit greater amounts of data over telecommunications networks. In optical transmission, voice,

video or data input is converted into an optical bit stream and transmitted over a fiber. The generation of the optical signal is done through the use of lasers, which produce light waves in a very narrow optical wavelength range. The two main obstacles in transmitting optical signals through fiber are attenuation, or loss, and dispersion, or spreading, of the signal.

Optical components are the pieces that enable the transmission of high-speed data across fiber optic systems. They are used to create, isolate, split and channel the light that carries the information across the network. The market penetration of optical components will be predicated on their ability to provide system manufacturers and service providers with solutions allowing the carriers lower cost per transmitted bit. The technologies that we are developing intend to address this need.

Active components used in optical telecommunications networks generate, amplify and detect light. Some examples of active components include: transmitters, which use a source laser with a wavelength of 1550nm and 1310nm and a modulator; pump lasers for erbium-doped fiber amplifiers (EDFAs); and receivers. Transmitters generate the encoded light, pump lasers are used to boost or amplify light and receivers convert the optical signal to an electronic signal for further processing.

We have developed a new type of laser, a vertical emitting Optically Pumped Semiconductor (OPS) laser, which can provide two to three times the power of commercial available edge emitting pump lasers. Currently, the power levels provided by conventional edge-emitting lasers is sufficient for field applications. Therefore, we have directed the development of the OPS laser towards specific markets where higher power levels are required, such as the telecom instrumentation and research and development markets. We are also working with customers that are exploring the use of higher power for next generation networks. The same general technological platform can be extended to the field of laser transmitters.

Passive optical components route, process and guide beams of light in a dense wavelength-division multiplexing (DWDM) environment without the use of active electronics. Examples of passive components include: filters used to allow wavelength selection; attenuators used to control signal amplitude; couplers used to split or combine light; optical isolators used to eliminate back reflections; and optical switches used to direct light to fiber.

Fiber bragg gratings and etalons are used to provide dispersion compensation for individual wavelengths in the DWDM network. The necessary combination of beam characteristics and power for fiber bragg grating production can only be delivered by a frequency-doubled argon ion laser or an excimer laser. We serve the fiber bragg grating market with a number of lasers, including our Innova SabreFreD ion laser and the L1-FBG and Fibex excimer lasers produced by Lambda Physik.

ComEts, our etalon for telecommunications applications, enhances the frequency stability of laser transmitters when integrated into DWDM network components, resulting in tighter frequency packing and increased network density. ComEts is also used to compensate for dispersion inherent in optical networks. This technology can be adapted to other DWDM applications including signal multiplexing and de-multiplexing.

Sales of our products for optical telecommunications applications accounted for 5% ($22.5 million) of our total net sales in fiscal 2001 and 3% ($11.3 million) of our total net sales in fiscal 2000. While this market is currently in the midst of a significant downturn, we continue to pursue this large potential market. However, we also acknowledge that this commitment will be re-examined on a continual basis.

The printing industry has traditionally depended upon silver-halide films and chemicals to engrave printing plates. This chemical engraving process is accomplished in several time consuming steps.

Working with professionals in the printing industry, we design semiconductor and diode-pumped lasers that are used in complex computer-to-plate printing systems that simplify the engraving process.

Our Compass 315m DPSS and semiconductor lasers are widely used for computer-to-plate printing, an environmentally-friendly process that saves production time by writing directly to plates.

Our Innova ion lasers are used to write data on master disks that are used to mass produce compact disks and digital video disks for consumer use.

Our ScanMate dye laser is widely used in research fields which rely on high spectral brightness at any desired wavelength of light. It offers a narrow linewidth and exact wavelength calibration. Examples of its applications are linear and nonlinear spectroscopy, physical chemistry, photo chemistry and photobiology.

Our LPX excimer laser models are high working cycle excimer lasers, offering high repetition rates for scientific and industrial applications. They are used for marking surface mounts and medical devices, stripping thin wires in disk drives, cleaning bare semiconductor wafers and writing fiber braggs on optical telecommunications.

Our Sapphire 460 laser is 90% smaller, consumes 98% less power and dissipates 98% less heat than a comparable air-cooled argon-ion laser. It is used for graphic arts applications, including photo finishing and film writing.

Sales of our products for printing and reprographics applications accounted for and approximately 5% ($22.8 million) of our total net sales in fiscal 2001 and approximately 9% ($33.5 million) of our total net sales in fiscal 2000.

Lasers are widely accepted today as part of many important manufacturing applications. While many laser companies have developed high power lasers for the increasingly competitive area of metal processing, we have chosen to concentrate our efforts on developing compact low to medium power lasers specifically for the growing area for the processing of nonmetals and micromachining. This includes such applications as the cutting and joining of plastics using both our CO2 and semiconductor lasers, and the cutting, perforating and scoring of paper and packaging materials.

The acquisition this year of DEOS has also enabled us to play a leading role as an OEM supplier to the laser marking and coding industry. This area is growing as laser marking is starting to seriously compete with ink jet coding as a result of both aesthetic and environmental pressures.

At the end of the size and wavelength spectrum the AVIA ultra violet lasers are now being used extensively in the processing and micromachining of a wide range of materials (and industries) including both Silicon and glass. These technically important materials are being laser processed to produce medical devices, MEMS and in Flat Panel display manufacturing.

Sales of our products for materials processing applications accounted for approximately 16% ($77.1 million) of our total net sales in fiscal 2001 and approximately 15% ($57.3 million) of our total net sales in fiscal 2000.

The scientific market historically has provided an ideal test market for leading-edge laser technology, including water-cooled gas lasers, high energy flash lamp-pumped Yttrium Aluminum Garnet, or YAG, lasers and ultrafast systems with an installed base of tens of thousands of lasers. Current applications for lasers in the research and development market include pump lasers for ultrafast systems, confocal microscopy systems and seed lasers in amplifier systems.

Our Mira Titanium Sapphire laser and RegA regenerative amplifier is an example of an ultrafast laser system used for these applications.

Our Innova ion lasers are also sold to instrument manufacturers, the largest component of which is bio-instrumentation, for applications such as cell sorting, DNA and protein sequencing as well as drug and clinical screening.

Our new OPS laser, the Sapphire, is sold for several bioinstrumentation applications.

Sales of our products for scientific and instrumentation applications accounted for approximately 43% ($206.2 million) of our total net sales in fiscal 2001 and approximately 43% ($167.4 million) of our total net sales in fiscal 2000.

We design, manufacture and market lasers, laser-based systems, precision optics and related accessories for a diverse group of customers. The following table shows selected products together with their applications, the markets they serve and the technologies upon which they are based.

We design, manufacture and market a wide variety of lasers, laser-based systems and optical components and instruments, some of which are described below.

Semiconductor lasers use the same principles as more conventional types of lasers but miniaturize the entire assembly into a monolithic structure using semiconductor wafer fabrication processes. The advantages of this type of laser include smaller size, longer life, enhanced reliability and greater efficiency. We manufacture a wide range of semiconductor laser products with wavelengths ranging from 650nm to 1000nm and output powers ranging from 60 watts for individual bars, to several hundred watts for stacked bars. These products are available in various forms of complexity, including the following: bare diodes on heat sinks; fiber-coupled single emitters and bars; stacked bars; and fully integrated modules and microprocessor-controlled units that contain power supplies and active coolers. Our infrared semiconductor lasers, which are manufactured from proprietary materials grown in our facility in Tutcore, Finland, differ from most other lasers in that they contain no aluminum in the active region. This provides our lasers with longer lifetimes and the ability to operate at broader temperature ranges.

Our recently announced OPS laser is a semiconductor chip that is pumped by a semiconductor laser. A wide range of wavelengths can be achieved by varying the materials used in this device and doubling the frequency of the laser beam. The OPS is a compact, rugged, high power, single-mode laser that has promise in the optical telecommunications industry. Our frequency doubled OPS lasers

are all solid-state devices operating continuously in the blue region of the optical spectrum, and are particularly well-suited to the bio instrumentation and graphic art markets.

Another primary application for our semiconductor lasers is for use in computer-to-plate printing machines. These machines contain a series of semiconductor lasers that are used to direct the printing of computer images directly to paper, without the need for film or developing chemicals.

Our semiconductor lasers are also used in machine-processing applications, such as soldering connections on printed circuit boards and welding flat panel displays, and in medical applications for the treatment of the wet "classical" form of AMD and hair removal. They are also used as the pump laser in DPSS laser systems that are manufactured by us and several of our competitors.

DPSS lasers use semiconductor lasers to pump a crystal to produce a laser beam. By changing the energy, optical components and the types of crystals used in the laser, different wavelengths and types of laser light can be produced.

The efficiency, reliability, longevity and relatively low cost of DPSS lasers make them ideally suited for a wide range of OEM and end-user applications, particularly those requiring 24-hour operations. Our DPSS systems are compact, self-contained, sealed units. Unlike conventional tools and other lasers, our DPSS lasers require minimal maintenance since they do not have internal controls or components that require adjusting and cleaning to maintain consistency. They are also less affected by environmental changes in temperature and humidity, which can alter alignment and inhibit performance in many systems.

We manufacture a variety of types of DPSS lasers for different applications, including semiconductor inspection, repair, test and measurement, printing and reprographics, micro-machining, rapid prototyping, holography, DNA sequencing, flow cytometry, interferometry, laser pumping, light scattering, non-destructive testing, particle counting and spectroscopy.

We market our products domestically through a direct sales force. Our foreign sales are made principally to customers in Europe, Japan and other Asia-Pacific countries. We sell internationally through direct sales personnel located in Japan, the United Kingdom, Germany, Italy, Austria, France, Belgium, the Netherlands, Finland and the People's Republic of China, as well as through independent representatives in other parts of the world. Foreign sales accounted for 55% of our total net sales in fiscal 2001 and 59% of our total net sales in fiscal 2000. Sales made to independent representatives and distributors are generally priced in US dollars. Foreign sales that we make directly are generally priced in local currencies and are therefore subject to currency exchange fluctuations. Foreign sales are also subject to other normal risks of foreign operations, such as protective tariffs, export and import controls and political instability. Our products are broadly distributed, and no one customer accounted for more than 10% of total net sales during fiscal 2001 or fiscal 2000.

We maintain a customer support and field service staff in major markets in the United States, Europe, Japan and other Asia-Pacific countries. This organization works closely with customers, customer groups and independent representatives in servicing equipment, training customers to use our products and exploring additional applications of our technologies. We have also implemented a 24-hour-a-day service station, where customers can call a number at any time and receive service on their particular products.

We typically provide one year parts and service warranties on our lasers, laser systems, optical and laser components, precision optics, and related accessories and services. Warranties on some of our

products and services may be longer than one year. To date, warranty reserves, as reflected on our balance sheet, have been sufficient to cover product warranty repair and replacement costs.

We are committed to the development of new products as well as the improvement and refinement of existing products. We are primarily focusing our research and development efforts on the development of excimer lasers for DUV lithography, component products for the optical telecommunications and lasers for semiconductor-related markets. Expenditures for fiscal 2001 were $53.0 million, or 11% of net sales, compared to $40.7 million, also 11% of net sales, for fiscal 2000. We maintain separate research and development staffs for both of our reportable business segments. We work closely with customers, both individually and through our sponsored seminars, to develop products to meet customer application and performance needs. In addition, we are working with leading research and educational institutions to develop new photonics-based solutions.

One of our core strategies is to tightly control our supply of key parts, components and assemblies. We believe this is essential to maintain high quality and enable rapid development and deployment of new products and technologies.

Committed to quality and customer satisfaction, we design and produce many of our own components and sub-assemblies to retain quality control. We provide customers with 24-hour technical expertise and quality that is ISO 9000 certified at our principal manufacturing sites.

We have designed and implemented proprietary manufacturing tools, equipment and techniques in an effort to provide products that are differentiable from our competitors' products. These proprietary manufacturing techniques are utilized in a number of our product lines, including both ion and CO₂ laser production, optics fabrication, coating and assembly operations, as well as the wafer growth for our semiconductor laser product family.

Raw materials or sub-components required in the manufacturing process are generally available from several sources. However, we currently purchase several key components and materials, including exotic materials and crystals, used in the manufacture of our products from sole source or limited source suppliers. Some of these suppliers are relatively small private companies that may discontinue their operations at any time. We typically purchase our components and materials through purchase orders and we have no guaranteed supply arrangement with any of these suppliers. We may fail to obtain these supplies in a timely manner in the future. We may experience difficulty identifying alternative sources of supply for certain components used in our products. Once identified, we would experience further delays from evaluating and testing the products of these potential alternative suppliers. Furthermore, financial or other difficulties faced by these suppliers or significant changes in demand for these components or materials could limit their availability. Any interruption or delay in the supply of any of these components or materials, or the inability to obtain these components and materials from alternate sources at acceptable prices and within a reasonable amount of time, would impair our ability to meet scheduled product deliveries to our customers and could cause customers to cancel orders.

We rely exclusively on our own production capability to manufacture certain strategic components, optics and optical systems, semiconductor lasers, lasers and laser-based systems. Because we manufacture, package and test these components, products and systems at our own facilities, and such components, products and systems are not readily available from other sources, any interruption in our manufacturing would adversely affect our business. In addition, our failure to achieve adequate

manufacturing yields at our manufacturing facilities may materially and adversely affect our operating results and financial condition.

Our electro-optical products are manufactured at sites in Santa Clara, San Jose and Auburn California; East Hanover, New Jersey; Bloomfield, Connecticut; Lübeck, Germany; Leicester, England; Glasgow, Scotland; Barendrecht, the Netherlands and Tampere, Finland. Our ion and CO₂ lasers, some of our DPSS lasers, such as Verdi, Avia and Vitesse, semiconductor lasers and ultrafast scientific lasers are manufactured in Santa Clara, California and Bloomfield, Connecticut. Our optical component products and laser instrumentation products are manufactured at our facilities in Auburn, California. We manufacture exotic crystals in East Hanover, New Jersey.

Our excimer laser products, including the lasers used in DUV lithography systems, are manufactured at Lambda Physik's and MicroLas' facilities in Göttingen, Germany. Lambda Physik's DPSS product is manufactured in Fort Lauderdale, Florida.

We make DPSS lasers at our facility in Lübeck, Germany, including the 315M and 501Q lasers. Our facility in Tampere, Finland grows the aluminum-free materials that are incorporated into our semiconductor lasers. Additional optical fabrication, coatings and electro-optical assemblies are processed and manufactured at our site in Leicester, England. We make a range of advanced solid-state lasers used in developing applications, including scientific research and semiconductor test equipment, in Glasgow, Scotland. In Barendrecht, the Netherlands, we manufacture micro-machining systems that incorporate lasers manufactured in Santa Clara, California.

We rely on a combination of patent, copyright, trademark and trade secret laws and restrictions on disclosure to protect our intellectual property rights. We currently hold approximately 244 US and foreign patents, and we have approximately 240 additional pending patent applications that have been filed. The issued patents cover various products in all of the major markets that we serve.

We cannot assure you that our patent applications will be approved, that any patents that may be issued will protect our intellectual property or that any issued patents will not be challenged by third parties. Other parties may independently develop similar or competing technology or design around any patents that may be issued to us. We cannot be certain that the steps we have taken will prevent the misappropriation of our intellectual property, particularly in foreign countries where the laws may not protect our proprietary rights as fully as in the United States.

We believe that we own or have the right to use the basic patents covering our products. However, the laser industry is characterized by a very large number of patents, many of which are of questionable validity and some of which appear to overlap with other issued patents. As a result, there is a significant amount of uncertainty in the industry regarding patent protection and infringement. Because patent applications are maintained in secrecy in the United States until such patents are issued and are maintained in secrecy for a period of time outside the United States, we can conduct only limited searches to determine whether our technology infringes any patents or patent applications of others.

In recent years, there has been a significant amount of litigation in the United States involving patents and other intellectual property rights. In the future, we may be a party to litigation to protect our intellectual property or as a result of an alleged infringement of others' intellectual property. These claims and any resulting lawsuit, if successful, could subject us to significant liability for damages and invalidation of our proprietary rights. These lawsuits, regardless of their success, would likely be

time-consuming and expensive to resolve and would divert management time and attention. Any potential intellectual property litigation also could force us to do one or more of the following:

If we are forced to take any of these actions, our business may be seriously harmed. Although we carry general liability insurance, our insurance may not cover potential claims of this type or may not be adequate to indemnify us for all liability that may be imposed.

Competition in the various laser markets in which we provide products is very intense. In the semiconductor and related manufacturing, materials processing, scientific research and printing markets, we compete against a number of companies, including Spectra-Physics Lasers, Inc., Cymer, Inc., Gigaphoton, Rofin-Sinar and Excel Technology. In the optical telecommunications market, we compete, or expect to compete, against JDS Uniphase Corporation and Spectra-Physics Lasers, Inc., among others. Some of our competitors are large companies that have significant financial, technical, marketing and other resources. These competitors may be able to devote greater resources than we can to the development, promotion, sale and support of their products. Several of our competitors that have large market capitalizations or cash reserves are much better positioned than we are to acquire other companies in order to gain new technologies or products that may displace our product lines. Any of these acquisitions could give our competitors a strategic advantage. Any business combinations or mergers among our competitors, forming larger competitors with greater resources, could result in increased competition, price reductions, reduced margins or loss of market share, any of which could materially and adversely affect our business, results of operations and financial condition.

Additional competitors may enter the market, and we are likely to compete with new companies in the future. We expect to encounter potential customers that, due to existing relationships with our competitors, are committed to the products offered by these competitors. As a result of the foregoing factors, we expect that competitive pressures may result in price reductions, reduced margins and loss of market share.

At September 30, 2001, our backlog of orders scheduled for shipment was approximately $134.8 million, compared to $162.9 million at September 30, 2000 and $89.0 million at September 30, 1999. Orders used to compute backlog are generally cancelable without substantial penalties. Historically, the rate of cancellation experienced by us had not been significant. However, in fiscal 2001, a significant global economic downturn in most of the markets in which we participate resulted in a number of order cancellations and postponements. Therefore, since orders are cancelable, the backlog of orders, at any one time, is not necessarily indicative of future revenues. We anticipate filling the present backlog within the next 12 months. Backlog at September 30, 2001 was lower than backlog at September 30, 2000 in both the Electro-Optics and Lambda Physik reportable business segments. Backlog at September 30, 2000 and September 30, 1999 was higher than at September 30, 1999 and September 30, 1998, respectively, in both operating segments.

As of September 30, 2001, we had 2,372 full-time employees. Approximately 371 are involved in research and development, 1,392 in operations, manufacturing and quality assurance, and 609 in sales, marketing, finance, legal and other administrative functions. Our success will depend in large part upon our ability to attract and retain employees. We face competition in this regard from other companies, research and academic institutions, government entities and other organizations.

Our operations are also subject to various federal, state and local environmental protection regulations governing the use, storage, handling and disposal of hazardous materials, chemicals, various radioactive materials and certain waste products. In the United States, we are subject to the federal regulation and control of the Environmental Protection Agency. Comparable authorities are involved in other countries. We believe that compliance with federal, state and local environmental protection regulations will not have a material adverse effect on our capital expenditures, earnings and competitive and financial position.

Although we believe that our safety procedures for using, handling, storing and disposing of such materials comply with the standards required by state and federal laws and regulations, we cannot completely eliminate the risk of accidental contamination or injury from these materials.

FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES

Financial information relating to foreign and domestic operations for the three years ended September 30, 2001, is set forth in Note 14, "Segment Information", of the Notes to Consolidated Financial Statements.

Our corporate headquarters and major Electro-Optics facility is located in Santa Clara, California, consisting of approximately 8.5 acres of land and a 200,000-square-foot building that we own.

Additional Electro-Optics facilities are located in Auburn, California, Lincoln, California and San Jose, California. The Auburn facilities consist of four buildings totaling 250,091 square feet, all of which we own, as well as a 1,500-square-foot building leased under a short-term lease. In Lincoln, we own 40 acres of land and two buildings totaling 137,000 square feet. The San Jose facility consists of a 28,800-square-foot building leased through February 2007 with a 5 year renewal option.

During fiscal 1993, we sold the net assets of Coherent General, Inc. The sale did not include land consisting of approximately 36 acres (11 developed acres) and facilities consisting of an approximately 65,000-square-foot building owned by us in Sturbridge, Massachusetts. This building is currently leased (through December 2002) to Convergent Prima, Inc.

Coherent GmbH's facility in Dieburg, Germany consists of a 33,598-square-foot building leased until February 2003 with a five year renewal option.

Coherent Lübeck's facility in Lübeck, Germany consists of a 32,411-square-foot building leased through September 2003.

Coherent Optics Europe Ltd.'s facilities consist of two leased buildings (four units) in Leicester, England totaling 34,537 square feet leased until December 2007.

During fiscal 2001, we closed the operations at Coherent Ealing Electro-Optics Ltd. in Watford, England. The 8.7 acres of land and 37,900-square-foot building are owned by us and leased to Davin Optronics, Ltd. through April 2011.

Coherent Tutcore's facility in Tampere, Finland where they manufacture semiconductor wafers consists of approximately 5 acres of land and a 42,198-square-foot building that we own.

Coherent Japan's facilities include a 17,550-square-foot building in Tokyo leased through April 2003 and a 2,156-square-foot building in Osaka leased through March 2002.

Coherent Scotland's facility in Glasgow, Scotland consists of a 5,000-square-foot building that we own and two leased buildings totaling 3,500 square feet with one lease expiring September 2002 and the other on an open ended basis with a three month termination notice.

Lasertec BV's facility in Barendrecht, Netherlands consists of a 3,211-square-foot building leased until April 2006.

During fiscal 2001, we acquired Crystal Associates in East Hanover, New Jersey and DEOS in Bloomfield, Connecticut. Crystal Associates' facility consists of a 30,000-square-foot building leased through February 2005. Coherent DEOS' facility consists of a 16,249-square-foot building leased through December 2002 with a 2 year renewal option.

Lambda Physik AG's facility in Göttingen, Germany consists of four owned buildings totaling 119,500 square feet on 7.6 acres of owned land.

Lambda Physik's domestic facility is located in Fort Lauderdale, Florida, consisting of a 28,312-square-foot building leased until August 2002.

Lambda Physik Japan's facilities in Yokohama, Japan, consist of a 7,081-square-foot building leased through October 2002 and three buildings totaling 3,320 square feet under varying leases expiring from April 2002 through November 2004.

We also acquired MicroLas Laser System GmbH in Göttingen, Germany, which consists of a 31,203-square-foot building leased until November 2005.

We maintain sales and service offices under varying leases expiring from 2002 through 2014 in Korea, China, France, Italy, the United Kingdom and the Netherlands.

As of September 30, 2001, buildings and improvements included costs of $9.9 million related to facilities in Lincoln, California which are not ready for their intended use and are not being depreciated. During fiscal 2001, construction on these facilities has been suspended. Timing for completion of the Lincoln facility is dependent upon market conditions including, but not limited to, worldwide market supply of and demand for optical telecommunications and semiconductor-related products and our operations, cash flows and alternative uses of capital. We intend to utilize this facility in our operations subsequent to September 30, 2002.

In general, our facilities are considered both suitable and adequate to provide for current and near term requirements.

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Our common stock is quoted on the NASDAQ National Market under the symbol "COHR". The following table sets forth the high and low closing prices for each quarterly period during the past two fiscal years as reported on the NASDAQ National Market.

The number of stockholders of record as of November 26, 2001 was 1,733. No cash dividends have been declared or paid since Coherent was founded and we have no present intention to declare or pay cash dividends. Our agreements with the banks restrict the payment of dividends on its Common Stock. See Note 6, "Short-term Borrowings", of Notes to Consolidated Financial Statements.

On July 26, 2000, we completed a public offering of 1,500,000 shares of common stock at an offering price of $65.00 per share. The net proceeds to us, after deducting underwriting discounts and offering expenses was $91,852,000. These net proceeds will be used for acquisitions of or investments in businesses, technologies and products, continued development of new technologies and general corporate purposes.

The following selected consolidated financial data has been restated to account for the discontinued Medical segment. See Note 2 of Notes to Consolidated Financial Statements.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION

We are one of the world's leading suppliers of photonics-based solutions in a broad range of commercial, scientific and telecommunications markets. We design, manufacture and market lasers, laser-based systems, precision optics and related accessories for a diverse group of customers. Since inception in 1966, we have grown through a combination of internal expansion and strategic acquisitions of companies with related technologies and products.

We have two reportable business segments: Electro-Optics and Lambda Physik, which work with customers to provide cost-effective photonics-based solutions. In addition to the semiconductor and related manufacturing and optical telecommunications markets, the Electro-Optics segment focuses on markets such as materials processing, micromachining, scientific research, graphic arts and advanced packaging. Lambda Physik focuses on markets including lasers for lithography, the production of flat panel displays, inkjet printers, fiber bragg gratings, refractive surgery, scientific research, materials processing and micro-machining applications.

We operate in a technologically advanced, dynamic and highly competitive environment. Our future operating results are, and will continue to be, subject to quarterly variations based on a variety of factors, many of which are beyond our control. While we attempt to identify and respond to these conditions in a timely manner, such conditions represent significant risks to our performance and financial condition.

We conduct a significant portion of our business internationally. International sales accounted for 55%, 59% and 59% of our net sales for fiscal 2001, fiscal 2000 and fiscal 1999, respectively. We anticipate that international sales will continue to account for a significant portion of our net sales in the foreseeable future. A large portion of our international sales occurs through our international sales subsidiaries and the remainder of our international sales results from exports to foreign distributors and resellers. In some cases, local labor rules and regulations limit our flexibility for modifying our short-term strategies. As a result, our international sales and operations are subject to the risks of conducting business internationally. See "Risk factors—We face risks associated with our international sales that could harm our financial condition and results of operations." We are also subject to the risks of fluctuating foreign exchange rates, which could materially adversely affect the sales price of our products in foreign markets as well as the costs and expenses of our international subsidiaries. While we use forward exchange contracts, currency swap contracts, currency options and other risk management techniques to hedge our currency exposure, we remain exposed to the economic risks of foreign currency fluctuations. There can be no assurance that such factors will not adversely impact our operations in the future or require us to modify current business practices.

During the year, we took the steps that we considered necessary to strategically focus on those markets, technologies and opportunities that are best complemented by our core competencies. On April 30, 2001, we completed the sale of our Medical segment to Lumenis, Inc. (formerly ESC Medical Systems Ltd.) for a combination of cash, notes and Lumenis common stock with an estimated value of $236.0 million plus a potential earnout of an additional $25.0 million. The sale resulted in a one-time after-tax gain of $71.8 million, which is reflected in our results for the year ended September 30, 2001; the discontinued operations contributed an additional $1.4 million after-tax income for fiscal 2001.

In April 2001, our Lambda Physik AG subsidiary acquired a 44% interest in the joint venture MicroLas Laser System GmbH (MicroLas) for $24.4 million in cash. Lambda Physik previously held 46% of MicroLas and is now the majority owner with 90% ownership. MicroLas manufactures optical components such as lenses and beam guidance systems that are used in connection with Lambda Physik lasers in production of the TFT flat-panel displays and inkjet printers. Upon consummation of the MicroLas acquisition, we immediately charged to expense $0.1 million representing purchased in-process research and development related to a development project that had not yet reached technological feasibility and had no alternative future use. We recorded the remaining $25.9 million excess of the purchase price, including $3.0 million of deferred tax liabilities, over the fair value of net assets acquired as goodwill and other intangibles, including patents, drawings and existing processes and acquired order backlog. The goodwill is being amortized over its estimated useful life of 10 years. The patents, drawings and existing processes are being amortized over their estimated useful lives of 10 and 5 years, respectively. The acquired order backlog is being amortized as the orders are recognized as revenue.

The following table sets forth the pro forma income from continuing operations data for the three years ended September 30, 2001 and a reconciliation to actual income from continuing operations and net income:

Income from continuing operations for fiscal 2001 was $27.5 million, or $0.95 per diluted share, including an after-tax $5.8 million, or $0.20 per diluted share, unusual charge for excess inventory and open purchase order commitments at Lambda Physik (unusual charge) and a $1.6 million, or $0.06 per diluted share, after-tax write-off of purchased in-process research and development (IPR&D). Pro forma income from continuing operations before the unusual charge and IPR&D was $34.9 million, or $1.21 per diluted share, for fiscal 2001. During fiscal 2000, our income from continuing operations was $61.2 million, or $2.24 per diluted share, which includes the fourth quarter $33.5 million, or $1.23 per diluted share, after-tax gain (the Lambda gain) as a result of an increase in the value of our 60.4% ownership interest in Lambda Physik following its initial public offering. Pro forma income from continuing operations, exclusive of the Lambda gain, for fiscal 2000 was $27.7 million, or $1.01 per diluted share. During fiscal 1999, our income from continuing operations was $16.2 million, or $0.66 per diluted share, including a $2.7 million, or $0.11 per diluted share, after-tax write-off of a portion of IPR&D resulting from the purchase of Star Medical. Pro forma income from continuing operations, exclusive of the IPR&D, for fiscal 1999 was $18.9 million, or $0.77 per diluted share.

Pro forma income from continuing operations before income taxes and minority interest, excluding the unusual charge and IPR&D, for fiscal 2001 increased by $15.8 million, or 36%, to $59.5 million compared to pro forma income from continuing operations before income taxes and minority interest, excluding the Lambda gain, of $43.7 million in fiscal 2000, which increased by $14.9 million, or 52%, compared to pro forma income from continuing operations before income taxes and minority interest, excluding the IPR&D, of $28.8 million in fiscal 1999. The fiscal 2001 increase was primarily attributable to increases in sales volumes, lower selling, general and administrative expenses as a percentage of net sales and higher interest income. The fiscal 2000 increase was primarily attributable to increases in international sales volumes and higher gross profit as a percentage of net sales.

The following table sets forth for the periods indicated the amount of net sales for our operating segments and net sales as a percentage of total net sales.

During fiscal 2001, net sales increased by $93.9 million, or 24%, to $477.9 million from $384.0 million in fiscal 2000, primarily as a result of increased sales volumes in both reportable segments. Domestic sales increased at a higher rate than international sales for a total increase of $57.7 million, or 37%. International sales were 55% of net sales in fiscal 2001 and 59% in fiscal 2000.

During fiscal 2000, net sales increased by $63.5 million, or 20%, to $384.0 million from $320.5 million in fiscal 1999, primarily as a result of higher sales volumes in both reportable segments. International sales grew at a slightly higher rate than domestic sales for a total increase of $38.3 million, or 20%. International sales were 59% of net sales in both fiscal 2000 and fiscal 1999.

Electro-Optics net sales increased by $66.6 million, or 23%, in fiscal 2001 to $356.8 million from $290.2 million in fiscal 2000. Domestic sales increased by $37.7 million, or 28%, and international sales increased by $28.9 million, or 19%, in fiscal 2001. Sales increased primarily due to higher sales volumes in commercial solid state products, including semiconductor lasers to the non-metal printed circuit board or PCB, hole drilling, materials processing, optical telecommunications and computer-to-plate markets. Fiscal 2001 optical telecommunications market sales increased 87% to $20.5 million from the prior year.

Electro-Optics net sales increased by $42.8 million, or 17%, in fiscal 2000 to $290.2 million from $247.4 million in fiscal 1999. Domestic sales increased by $25.4 million, or 23%, and international sales increased by $17.4 million, or 13%, in fiscal 2000. Sales increased primarily due to higher sales volumes in commercial solid state products, including semiconductor lasers to the non-metal printed circuit board or PCB, hole drilling, optical telecommunications and computer-to-plate markets. Fiscal 2000 optical telecommunications market sales increased 174% to $11.0 million from the prior year.

Lambda Physik net sales increased by $27.4 million, or 29%, in fiscal 2001 to $121.1 million from $93.7 million in fiscal 2000. Domestic sales increased by $20.0 million, or 97%, and international sales increased by $7.4 million, or 10%. The increase in sales was primarily due to increased shipments of commercial products, especially lasers used in the manufacture of flat-panel display systems and lithography.

Lambda Physik net sales increased by $20.6 million, or 28%, in fiscal 2000 to $93.7 million from $73.1 million in fiscal 1999. International sales increased by $20.9 million, or 40%, while domestic sales decreased by $0.3 million, or 1%. The increase in sales was primarily due to increased shipments of commercial products, primarily lasers used in lithography systems.

The consolidated gross profit rate decreased by 4.1% to 41.8% in fiscal 2001 from 45.9% in fiscal 2000. The gross profit rate was negatively impacted by 2.9% due to an unusual charge of $13.9 million for excess inventory and open purchase order commitments in the Lambda Physik segment. The pro forma consolidated gross profit rate, excluding the unusual charge, decreased 1.2% to 44.7% in fiscal 2001 from 45.9% in fiscal 2000. The decrease in the pro forma gross profit rate was primarily due to under utilization of capacity due to the ramp-up of new optics and telecommunications manufacturing facilities and unfavorable manufacturing variances in the Electro-Optics segment and higher inventory provisions and under utilization of capacity due to the ramp-up of lithography manufacturing facilities in the Lambda Physik segment as well as the weakening of the US dollar against foreign currencies in both segments.

The consolidated gross profit rate increased by 2.2% to 45.9% in fiscal 2000 from 43.7% in fiscal 1999. The increase in the gross profit resulted primarily from higher sales volumes, lower warranty expenses and lower inventory provisions in the Electro-Optics segment.

The gross profit rate decreased by 1.5% to 45.6% in fiscal 2001 from 47.1% in fiscal 2000. The decrease was primarily due to under utilization of capacity due to the ramp-up of new optics and telecommunications manufacturing facilities, unfavorable manufacturing variances and the weakening of the US dollar against foreign currencies, as an increasing portion of our sales denominated in US dollars are built at our European manufacturing facilities.

The gross profit rate increased by 2.9% to 47.1% in fiscal 2000 from 44.2% in fiscal 1999. The increase was primarily due to increased sales of higher gross profit commercial solid-state products, higher sales volumes relative to fixed overhead costs and higher sales volumes without corresponding increases in warranty expense and inventory provisions.

The gross profit rate decreased by 11.8% to 30.1% in fiscal 2001 from 41.9% in fiscal 2000. The gross profit rate was negatively impacted by 11.4% due to an unusual charge of $13.9 million for excess inventory and open purchase order commitments. The pro forma gross profit rate, excluding the unusual charge, decreased 0.4% to 41.5% in fiscal 2001 from 41.9% in fiscal 2000. The decrease in the pro forma gross profit rate was primarily due to higher inventory provisions and under utilization of capacity due to the ramp-up of lithography manufacturing facilities as well as the weakening of the US dollar.

The gross profit rate was flat in fiscal 2000, decreasing 0.1% to 41.9% in fiscal 2000 from 42.0% in fiscal 1999.

Fiscal 2001 operating expenses increased by $32.4 million, or 24%, from fiscal 2000. As a percentage of net sales, operating expenses decreased to 34.6% in fiscal 2001 from 34.7% in fiscal 2000. Exclusive of the fiscal 2001 write-off of purchased in-process research and development, operating expenses increased by $29.9 million, or 22%, but as a percentage of net sales decreased to 34.1% from 34.7%.

Fiscal 2000 operating expenses increased by $18.9 million, or 17%, from fiscal 1999. As a percentage of net sales, operating expenses decreased to 34.7% in fiscal 2000 from 35.6% in fiscal 1999. Exclusive of the fiscal 1999 write-off of purchased in-process research and development, operating expenses increased by $22.9 million, or 21%, and as a percentage of net sales increased to 34.7% from 34.4%.

Fiscal 2001 IPR&D expenses increased by $12.3 million, or 30%, from fiscal 2000 and increased to 11.1% from 10.6% of net sales. The increase was primarily due to increased spending for headcount and supplies on optical telecommunications and lithography projects.

Fiscal 2000 research and development expenses increased by $8.6 million, or 27%, from fiscal 1999 and increased to 10.6% from 10.0% of net sales. The increase was primarily due to increased spending, including headcount, on lithography, optical telecommunication and other projects.

Fiscal 2001 IPR&D expenses of $2.5 million resulted from our acquisitions of DEOS and MicroLas. See Note 3 of Notes to Consolidated Financial Statements.

Fiscal 1999 IPR&D expenses of $4.0 million represents a portion of IPR&D which resulted from our acquisition of Star Medical. See Note 3 of Notes to Consolidated Financial Statements.

Fiscal 2001 selling, general and administrative expenses increased by $15.3 million, or 17%, from fiscal 2000, but decreased as a percentage of net sales from 23.3% to 21.9%. The dollar increase was primarily due to higher commissions as a result of higher sales, increased investments in information technology, higher costs for the Lambda Physik segment to comply with legal and stock exchange requirements and higher payroll-related expenses.

Fiscal 2000 selling, general and administrative expenses increased by $13.4 million, or 18%, from fiscal 2000, but decreased as a percentage of net sales from 23.7% to 23.3%. The dollar increase was

primarily due to higher commissions as a result of higher sales, increased investments in information technology and higher payroll-related expenses.

Fiscal 2001 intangibles amortization expenses increased by $2.2 million, or 74%, primarily due to the acquisitions of MicroLas and DEOS in April 2001, Crystal Associates in November 2000 and LaserTec in May 2000.

Fiscal 2000 intangibles amortization expenses increased by $0.9 million, or 41%, primarily due to the acquisition of a portion of Star and LaserTec.

Other income, net of other expenses, decreased by $46.8 million during fiscal 2001 compared to fiscal 2000. The decrease was primarily due to the fiscal 2000 $55.1 million gain as a result of an increase in the value of our ownership interest in Lambda Physik AG following its initial public offering, partially offset by increased interest income, dividends and gains on increased investments as a result of our fiscal 2000 public offering, our subsidiary Lambda Physik's fiscal 2000 initial public offering and the fiscal 2001 sale of our medical segment.

Other income, net of other expenses, increased by $56.6 million during fiscal 2000 compared to fiscal 1999. The increase was primarily due to our $55.1 million gain as a result of an increase in the value of our ownership interest in Lambda Physik AG following its initial public offering as well as increased interest income on increased investments and non-recurrence of other miscellaneous expenses, partially offset by increased interest expense on the Star acquisition debt. Our ownership interest in Lambda Physik decreased from 80.0% to 60.4% as a result of the initial public offering.

Minority interest in subsidiaries earnings decreased by $1.4 million during fiscal 2001 compared to fiscal 2000 primarily due to lower profitability in our Lambda Physik segment.

Minority interest in subsidiaries earnings increased by $0.8 million during fiscal 2000 compared to fiscal 1999. The increase was primarily due to the increased profitability of our Lambda Physik subsidiaries and our Tutcore subsidiary.

The effective tax rate on income from continuing operations (before minority interest) for fiscal 2001 was 35.1% compared to 36.1% for fiscal 2000. The pro forma tax rate for fiscal 2001, excluding the $5.8 million after-tax unusual charge for excess inventory and open purchase order commitments at Lambda Physik, and the $1.6 million after-tax write-off of IPR&D was 35.1%. The pro forma effective tax rate for fiscal 2000, excluding the $33.5 million after-tax gain on the issuance of Lambda Physik subsidiary stock, was 32.2%. The pro forma effective tax rate increased as a result of increased profit before income taxes in fiscal 2001, changes in the distribution of taxable income among jurisdictions with varying rates offset by increased foreign tax credits.

The effective tax rate on income from continuing operations (before minority interest) for fiscal 2000 was 36.1% compared to 30.1% for fiscal 1999. The pro forma tax rate on income from continuing operations (before minority interest) for fiscal 2000, excluding the $33.5 million after-tax gain on the issuance of Lambda Physik subsidiary stock, was 32.2%. The pro forma effective tax rate for fiscal 1999, excluding the $2.7 million after-tax write-off of purchased in-process research and development, was 30.5%. The pro forma effective tax rate increased as a result of higher profit before income taxes in

fiscal 2000, changes in the distribution of taxable income among jurisdictions with varying rates offset by higher foreign tax credits.

At September 30, 2001, our primary sources of liquidity were cash, cash equivalents, short-term investments and available-for-sale securities of $226.7 million. In addition, we held $109.1 million of restricted Lumenis common stock. The Lumenis common stock is unregistered and its trading is subject to restrictions under Securities and Exchange Commission Rule 144 and other restrictions as defined in the definitive agreement. Additional sources of liquidity were a multi-currency line of credit and bank credit facilities totaling $71.9 million as of September 30, 2001, of which $59.8 million was unused and available. During fiscal 2001, these credit facilities were used in the United States, Japan and Europe. Because of our low debt to equity ratio, we believe that additional cash could be borrowed if necessary; however, cash flow from operations, cash and cash equivalents, short-term investments and available lines of credit are expected to be sufficient to fund operations for at least the next 12 months. We are subject to certain financial covenants related to our lines of credit. At September 30, 2001, we were in compliance with these covenants.

During the first quarter of fiscal 1997, we signed a lease for 216,000 square feet of office, research and development and manufacturing space in Santa Clara, California, which we are subleasing to our former Medical segment, doing business as Lumenis. The lease expires in December 2001. We have an option to purchase the property for $24.0 million, renew the lease for an additional five years or at the end of the lease arrange for the sale of the property to a third party while retaining an obligation to the owner for the difference between the sale price, if less than $20.8 million, and $20.8 million, subject to certain provisions of the lease. If we do not purchase the property or arrange for its sale as discussed above, we would be obligated for an additional lease payment of approximately $20.8 million. We occupied the building in July 1998 and commenced lease payments at that time. The lease requires that we maintain specified financial covenants. At September 30, 2001, we were in compliance with these covenants.

We have committed approximately $10.0 million to provide coating equipment in our Electro-Optics facility in Auburn, California as well as an additional $2.2 million in building improvements to expand our manufacturing capacity at this facility. We have committed approximately $2.3 million for equipment for the growth and development of telecommunications products in our Electro-Optics facility in Tampere, Finland. We have also committed $2.0 million for equipment and building improvements in our Lincoln, California Electro-Optics facilities as well as $1.7 million for building improvements, including a cleanroom, in our Electro-Optics facility in San Jose, California.

Cash, cash equivalents and short-term investments increased $79.6 million, or 31%, in fiscal 2001.

Cash and cash equivalents, at September 30, 2001, decreased by $79.1 million, or 51%, from September 30, 2000. Operations and changes in exchange rates used $54.1 million, including $49.7 million, net, used to purchase short-term investments and $51.1 million used by operating assets and liabilities (primarily inventories, accounts receivable and taxes payable), partially offset by income from continuing operations after accounting change of $27.5 million and depreciation and amortization of $25.6 million. Investing activities used $50.3 million, including $86.8 million used to acquire property and equipment, net, $52.8 million used to acquire businesses and $0.4 million, net, used for other investing activities, partially offset by $89.7 million cash proceeds from the sale of our Medical segment. Financing activities provided $26.6 million with $21.5 million from the sale of shares under our

employee stock plans, net debt borrowings of $4.3 million and other $0.8 million. Net cash used for discontinued operations was $1.3 million.

Net accounts receivable increased $17.3 million, or 24%, from September 30, 2000 to September 30, 2001 primarily as a result of increased sales volumes and slower customer payments due to current economic conditions.

Net inventories increased $23.0 million, or 27%, from September 30, 2000 to September 30, 2001 primarily due to increases in the Lambda Physik segment to support the lithography business and the purchase of MicroLas and due in part to increases in the Electro-Optics segment to support increased sales and the acquisitions of Crystal and DEOS.

Net property, plant and equipment increased $72.1 million, or 75%, from September 30, 2000 to September 30, 2001 primarily due to expansion of our facilities and equipment purchases for the production of optical telecommunications and lithography products, increased investments in information technology and the acquisitions of Crystal, MicroLas and DEOS.

Goodwill increased $18.4 million, or 143%, primarily due to the acquisitions of MicroLas, Crystal and DEOS.

Other assets increased $62.8 million, or 229%, primarily due to increased deferred tax assets, other intangible assets from the purchase of DEOS, MicroLas and Crystal and a note received as consideration for the sale of our Medical segment.

Short-term borrowings increased $17.3 million, or 412%, from September 30, 2000 to September 30, 2001 primarily due to borrowings in our Lambda Physik segment to pay off intercompany loans and finance capital investments.

Long-term obligations decreased $10.5 million, or 15%, from September 30, 2000 to September 30, 2001 primarily due to principal payments on the debt used to finance our acquisition of Star Medical.

Other long-term liabilities increased $21.0 million, or 65%, from September 30, 2000 to September 30, 2001 primarily due to increased deferred income tax liabilities.

A portion of our investment portfolio is composed of income securities. These securities are subject to interest rate risk and will fall in value if market interest rates increase. If market interest rates were to increase immediately and uniformly by 10 percent from levels at September 30, 2001, the fair value of the portfolio would decline by an immaterial amount. We have the ability to generally hold our fixed income investments until maturity and therefore we would not expect our operating results or cash flows to be affected to any significant degree by the effect of a sudden change in market interest rates on our securities portfolio.

At September 30, 2001, the fair value of the trading debt securities was $129.0 million.

At September 30, 2001, we had fixed rate long-term debt of approximately $64.2 million, and a hypothetical 10% decrease in interest rates would not have a material impact on the fair market value of this debt. We do not hedge any interest rate exposures.

We maintain operations in various countries outside of the United States and foreign subsidiaries that manufacture and sell our products in various global markets. As a result, our earnings and cash flows are exposed to fluctuations in foreign currency exchange rates. We attempt to limit these exposures through operational strategies and financial market instruments. We utilize hedge instruments, primarily forward contracts with maturities of twelve months or less, to manage our exposure associated with anticipated cash flows and net asset and liability positions denominated in non-functional currencies. We do not use derivative financial instruments for trading purposes.

Looking forward, we do not anticipate any material adverse effect on our consolidated financial position, results of operations or cash flows resulting from the use of these instruments. There can be no assurance that these strategies will be effective or that transaction losses can be minimized or forecasted accurately.

Excluding Lambda Physik, a hypothetical 10 percent appreciation of the forward adjusted US dollar to September 30, 2001 and September 30, 2000 market rates would decrease the unrealized value of our forward contracts by $1.6 million and $2.2 million, respectively. Conversely, a hypothetical 10 percent depreciation of the forward adjusted US dollar to September 30, 2001 and September 30, 2000 market rates would increase the unrealized value of our forward contracts by $1.9 million and $2.7 million, respectively.

The following table provides information about our foreign exchange forward contracts at September 30, 2001. The table presents the value of the contracts in US dollars at the contract exchange rate as of the contract maturity date, the weighted average contractual foreign currency exchange rates and fair value. The U.S. notional fair value represents the contracted amount valued at September 30, 2001 rates.

Forward contracts to sell (buy) foreign currencies for U.S. dollars (in thousands, except contract rates):

	Average Contract Rate	US Notional Contract Value			US Notional Fair Value
Remeasurement:
Euro	0.8695	$	10,777		$	11,257
British Pound Sterling	1.4289		5,837			5,993
Japanese Yen	120.4141		(6,344	)		(6,442	)
Cash Flow:
Euro	0.9115	$	3,464		$	3,440
British Pound Sterling	1.4581		933			933
Japanese Yen	117.8566		2,304			2,303

At Lambda Physik, a hypothetical 10 percent appreciation of the German Mark to September 30, 2001 and September 30, 2000 market rates would decrease the unrealized value of our forward contracts by 3.5 million and 1.8 million DEM, respectively. Conversely, a hypothetical 10 percent depreciation of the German Mark to September 30, 2001 and September 30, 2000 market rates would increase the unrealized value of our forward contracts by 4.2 million and 7.7 million DEM, respectively.

The following table provides information about Lambda Physik's foreign exchange forward contracts at September 30, 2001. The table presents the value of the contracts in German Marks at the contract exchange rate as of the contract maturity date, the weighted average contractual foreign currency exchange rates and fair value. The DEM notional fair value represents the contracted amount valued at September 30, 2001 rates.

Forward contracts to sell foreign currencies for German Marks (in thousands, except contract rates):

	Average Contract Rate	DEM Notional Contract Value	DEM Notional Fair Value
Remeasurement:
Japanese Yen	0.0178	6,825	6,937
US Dollars	2.2244	12,902	12,464
Cash Flow:
Japanese Yen	0.0180	14,725	14,952
US Dollar	2.1264	3,615	3,655

In addition to forward contracts, we have a variable interest loan to hedge our firm commitment to one Euro customer through June 2004. As of September 30, 2001 the fair value of the loan is $476,000 at 5.75%. A hypothetical 10% fluctuation in interest rates and currency exchange rates would not have a material impact on the financial statements.

We have investments in publicly-traded equity securities. As we account for these securities as available-for-sale, unrealized gains and losses resulting from changes in the fair value of these securities are reflected in stockholders' equity, and not reflected in earnings until the securities are sold. As of September 30, 2001, the fair market value of these securities was $109.2 million and unrealized loss on these securities was $10.1 million (net of $5.2 million in income tax). $109.1 million of these securities

represents an investment in Lumenis common stock. The Lumenis common stock received is unregistered and its trading is subject to restrictions under Securities and Exchange Commission Rule 144 and other restrictions as defined in the definitive agreement. Currently, we do not hedge our investment in Lumenis stock. Due to the nature and terms of this security, we may have a material change in the value of our investment related to future price fluctuations of the security.

Effective October 1, 2000, we adopted Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements," (SAB 101). SAB 101 summarizes certain of the SEC's views in applying GAAP to revenue recognition in financial statements. The Company's previous policy was to recognize product installation revenue upon shipment and to accrue product installation costs at the time revenue was recognized. Upon adoption of SAB 101, the Company defers installation revenue until installation has been completed and recognizes installation costs as incurred.

The cumulative effect of the change, totaling $112,000 (net of income taxes of $58,000), is shown as a one-time charge to income in the consolidated statements of income. If SAB 101 had been adopted at the beginning of fiscal 1999, the effect on the results of operations for the years ended September 30, 2000 and 1999, would not have been material.

Effective October 1, 2000, we adopted SFAS No.133, "Accounting for Derivative Instruments and Hedging Activities," (SFAS 133) as amended. The statement requires that all derivatives, whether designated in hedging relationships or not, be recorded on the balance sheet at fair value. If the derivative is designated as a fair value hedge, the changes in the fair value of the derivative and of the hedged item attributable to the hedged risk are recognized in earnings. If the derivative is designated as a cash flow hedge, the effective portions of the changes in the fair value of the derivative are recorded in other comprehensive income (OCI) and are recognized in the income statement when the hedged item affects earnings. Ineffective portions of changes in the fair value of cash flow hedges are recognized in other income (expense).

The transition adjustment to implement SFAS 133 on October 1, 2000, which is presented as a cumulative effect of change in accounting principle, increased earnings by $166,000 (net of income taxes of $94,000) and decreased OCI by $275,000 (net of income taxes of $150,000). The net derivative losses included in OCI as of October 1, 2000 were comprised of hedges on backlog which were reclassified into earnings during the twelve months ended September 30, 2001 and a hedge related to a building purchase option which will be amortized into earnings through December 2020.

In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard (SFAS) No. 141, "Business Combinations". SFAS No. 141 requires that all business combinations initiated after June 30, 2001 be accounted for under the purchase method and addresses the initial recognition and measurement of goodwill and other intangible assets acquired in a business combination. The adoption of SFAS 141 did not have a material impact on our financial position, results of operations or cash flows.

In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard (SFAS) No. 142, "Goodwill and Other Intangible Assets". SFAS 142 addresses the initial recognition and measurement of intangible assets acquired outside of a business combination and the accounting for goodwill and other intangible assets subsequent to their acquisition. SFAS No. 142 provides that intangible assets with finite useful lives be amortized and that goodwill and intangible assets with indefinite lives will not be amortized, but will rather be tested at least annually for impairment. SFAS 142 is effective for fiscal years beginning after December 15, 2001, with early adoption allowed for companies with fiscal years beginning after March 15, 2001. We expect to adopt

the pronouncement as of October 1, 2001. Upon adoption of SFAS 142, we will stop the amortization of goodwill with a net carrying value of $32.1 million at September 30, 2001 and annual amortization of $4.1 million, including amortization resulting from the acquisitions of Crystal in November 2000 and DEOS and MicroLas in April 2001, that resulted from business combinations initiated prior to the adoption of SFAS 141, "Business Combinations". We have not yet determined the impact of the adoption of SFAS 142 on our consolidated financial statements.

In August 2001, the Financial Accounting Standards Board issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," which addresses financial accounting and reporting for the impairment or disposal of long-lived assets. While SFAS No. 144 supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," it retains many of the fundamental provisions of SFAS No. 121. SFAS No. 144 also supersedes the accounting and reporting provisions of APB No. 30, "Reporting the Results of Operations—Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions," for the disposal of a segment of a business. However, it retains the requirement in APB No. 30 to report separately discontinued operations and extends that reporting to a component of an entity that either has been disposed of (by sale, abandonment, or in a distribution to owners) or is classified as held for sale. Companies are required to adopt SFAS No. 144 for fiscal years beginning after December 15, 2001, but early adoption is permitted. We expect to adopt SFAS 144 as October 1, 2002. We have not yet determined the impact this standard will have on our operating results and financial position.

See Item 14 (a) for an index to the Consolidated Financial Statements and Supplementary Financial Information, which are attached hereto.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.

On March 7, 2001, Lambda Physik AG (Lambda Physik), a majority-owned subsidiary of Coherent, Inc. (Coherent), dismissed Deloitte & Touche LLP, which had previously served as Lambda's independent accountants, and engaged Arthur Andersen Wirtschaftsprüfungsgesellschaft Steuerberatungsgesellschaft mbH as its new independent accountants.

Deloitte & Touche LLP still serves as Coherent's independent public accountants.

The report of Deloitte & Touche on Lambda Physik's consolidated financial statements for the two most recent fiscal years contained no adverse opinion or disclaimer of opinion and was not qualified or modified as to uncertainty, audit scope or accounting principle. In connection with Deloitte & Touche's audit of Lambda Physik's financial statements for the years ended September 30, 1999 and 2000, and through March 7, 2001, Deloitte & Touche had no disagreements with the company or Lambda Physik on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of Deloitte & Touche, would have caused them to make reference to those disagreements in their report on Lambda Physik's consolidated financial statements for the years ended September 30, 1999 and 2000. At Coherent's request, Deloitte & Touche furnished a letter addressed to the Securities and Exchange Commission stating that it agrees with the previous statements.

Information regarding our directors will be set forth under the caption "Election of Directors—Nominees" in our proxy statement for use in connection with the Annual Meeting of Stockholders to be held in March 2002, (the "2001 Proxy Statement") and is incorporated herein by reference. The 2001 Proxy Statement will be filed with the Securities and Exchange Commission within 120 days after the end of our fiscal year.

Set forth below is the name, age, position and a brief account of the business experience of each of our executive officers:

Name	Age	Office Held
Bernard J. Couillaud, PhD	57	President and Chief Executive Officer
Robert J. Quillinan	54	Executive Vice President and Chief Financial Officer
John R. Ambroseo, PhD	40	Executive Vice President and Chief Operating Officer
Vittorio Fossati-Bellani, PhD	54	Executive Vice President, President and General Manager, Coherent Telecom-Actives Group
Kevin McCarthy	45	Executive Vice President and Chief Information Officer
Ron Victor	56	Executive Vice President, Human Resources
Dennis C. Bucek	56	Senior Vice President, Treasurer and Assistant Secretary
Scott H. Miller	47	Senior Vice President and General Counsel

There are no family relationships between any of the executive officers and directors.

Dr. Couillaud has served as our President and Chief Executive Officer as well as a member of our Board of Directors since July 1996. Dr. Couillaud served as Vice President and General Manager of Coherent Laser Group from March 1992 to July 1996. From July 1990 to March 1992, Dr. Couillaud served as Manager of our Advanced Systems Business Unit, and from September 1987 to July 1990, he served as Director of Research & Development for the Coherent Laser Group. From November 1983, when he joined us, to September 1987, Dr. Couillaud held various managerial position with us. Dr. Couillaud received his PhD in Chemistry from Bordeaux University, Bordeaux, France.

Mr. Quillinan has served as our Executive Vice President and Chief Financial Officer since July 1984 and as a member of our Board of Directors since June 2001. Mr. Quillinan served as Vice President and Treasurer from March 1982 to July 1984 and as Corporate Controller from May 1980 to March 1982. Mr. Quillinan received his MS degree in Accounting from Clarkson University and is a CPA.

Dr. Ambroseo was appointed Chief Operating Officer on June 11, 2001. Dr. Ambroseo has served as our Executive Vice President and as President and General Manager of the Coherent Photonics Group since September 2000. From September 1997 to September 2000, Dr. Ambroseo served as our Executive Vice President and as President and General Manager of the Coherent Laser Group. From March 1997 to September 1997, Dr. Ambroseo served as our Scientific Business Unit Manager. From August 1988, when Dr. Ambroseo joined us, until March 1997, he served as a Sales Engineer, Product Marketing Manager, National Sales Manager and Director of European Operations. Dr. Ambroseo received his PhD in Chemistry from the University of Pennsylvania.

Dr. Fossati-Bellani has served as our Executive Vice President and as President and General Manager of the Coherent Telecom-Actives Group since September 2000. From September 1997 to

September 2000, Dr. Fossati-Bellani served as our Executive Vice President and as President and General Manager of the Coherent Semiconductor Group. From May 1992 to September 1997, Dr. Fossati-Bellani served as our Diode Laser Business Unit Manager. From December 1979, when he joined our Italian office, to May 1992, Dr. Fossati-Bellani served in the capacity of Scientific Sales Engineer, Product Manager, Director of Marketing, Director of Business Development, Scientific Business Unit Manager and Diode Laser Business Unit Manager for the Coherent Laser Group. Dr. Fossati-Bellani received his PhD degree in Physics from the University of Milano, Italy.

Mr. McCarthy has served as Executive Vice President and Chief Information Officer since May 2000. From August 1999 to May 2000, he was Chief Information Officer for Unisphere Solutions, Inc., a subsidiary of Siemens AG, a large diversified industrial company. From September 1993 to July 1999, he was Vice President Information Technology for General Instrument, Inc., a company that develops and sells interactive video, voice and data products. Mr. McCarthy received a BS degree from Lafayette College and an MBA from the Wharton School of Business.

Mr. Victor has served as Executive Vice President of Human Resources since May 2000. From August 1999 to May 2000, he was our Corporate Vice President of Human Resources. He was Vice President of Human Resources for the Coherent Medical Group from September 1997 to August 1999. Between November 1996 and September 1997, he was Vice President Human Resources for Netsource Communication, Inc., an internet advertisement and communication company. From November 1995 to November 1996, Mr. Victor served as Vice President of Human Resources for Micronics Computers, Inc., a manufacturer of computer components. Between January 1982 and September 1995 he was Vice President of Human Resources of Syntex, a pharmaceutical company. Mr. Victor received a BA degree from American International College and a MA degree from Springfield College.

Mr. Bucek has served as our Senior Vice President, Treasurer and Assistant Secretary since August 1985. He received his BA degree from Mankato State University and is a CPA.

Mr. Miller has served as our General Counsel since October 1988 and as our Senior Vice President since March 1994. Mr. Miller received a BA degree in Economics from UCLA and a JD from Stanford Law School.

Information regarding remuneration of our directors and executive officers will be set forth under the caption "Election of Directors—Executive Compensation" in our 2001 Proxy Statement and is incorporated herein by reference.

Information regarding security ownership of certain beneficial owners and management will be set forth under the captions "Information Concerning Solicitation and Voting—Record Date and Share Ownership" and "Election of Directors—Security Ownership of Management" in our 2001 Proxy Statement and is incorporated herein by reference.

Information regarding certain relationships and related transactions will be set forth under the caption "Election of Directors—Certain Transactions" in our 2001 Proxy Statement and is incorporated herein by reference.

Exhibit Numbers
2.1	*	Agreement and Plan of Merger. (Previously filed as Exhibit 2.1 to Form 10-K for the fiscal year ended September 29, 1990.)
3.1	*	Restated and Amended Certificate of Incorporation. (Previously filed as Exhibit 3.1 to Form 10-K for the fiscal year ended September 29, 1990.)
3.2	*	Bylaws, as amended. (Previously filed as Exhibit 3.2 to Form 10-K for the fiscal year ended September 29, 1990.)
4.1	*	Amended and Restated Common Shares Rights Agreement dated November 2, 1989 between Coherent and the Bank of Boston. (Previously filed as Exhibit 4.1 to Form 8-K filed on November 3, 1989.)
10.1	*	1987 Incentive Stock Option Plan and forms of agreement. (Previously filed as Exhibit 10.18 to Form 10-K for the fiscal year ended September 30, 1989.)
10.2	*	Productivity Incentive Plan, as amended. (Previously filed as Exhibit 10.19 to Form 10-K for the fiscal year ended October 1, 1988.)

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized on December 18, 2001.

KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Bernard J. Couillaud and Robert J. Quillinan, jointly and severally, his attorneys-in-fact, each with the power of substitution for him in any and all capacities, to sign any amendments to this report, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming that each of said attorneys-in-fact, or his substitute or substitutes, may do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated:

Management is responsible for the preparation and integrity of the financial statements included in this report. The financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America and include amounts based on management's best judgment where necessary. Financial information included elsewhere in this report is consistent with these financial statements.

Management maintains a system of internal controls and procedures designed to provide reasonable assurance that transactions are executed in accordance with proper authorization, that transactions are properly recorded in our records, that assets are safeguarded and that accountability for assets is maintained. The concept of reasonable assurance is based on the recognition that the cost of maintaining our system of internal accounting controls should not exceed benefits expected to be derived from the system. Internal controls and procedures are periodically reviewed and revised, when appropriate, due to changing circumstances and requirements. Independent auditors are appointed by our Board of Directors and ratified by our shareholders to audit the financial statements in accordance with auditing standards generally accepted in the United States of America and to independently assess the fair presentation of our financial position, results of operations and cash flows. Their reports follow this report.

The Audit Committee, all of whose members are outside directors, provides oversight to our financial accounting and reporting processes. The Audit Committee meets periodically with management and the independent auditors to ensure that each is properly discharging its responsibilities. The independent auditors have full and free access to the Committee without the presence of management to discuss the results of their audits, the adequacy of internal accounting controls and the quality of financial reporting.

We have audited the accompanying consolidated balance sheets of Coherent, Inc. and subsidiaries as of September 30, 2001 and 2000, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the three years in the period ended September 30, 2001. Our audits also included the consolidated financial statement schedule listed in Item 14.(a)2. These financial statements and the financial statement schedule are the responsibility of Coherent's management. Our responsibility is to express an opinion on these financial statements and the financial statement schedule based on our audits. We did not audit the consolidated financial statements of Lambda Physik AG and subsidiaries (Lambda Physik) for the year ended September 30, 2001, which statements reflect total assets and total revenues constituting 19% and 26%, respectively, of the related consolidated totals for that year. Those statements were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to the amounts included for Lambda Physik for the year ended September 30, 2001, is based solely on the report of such other auditors.

We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits and the report of the other auditors provide a reasonable basis for our opinion.

In our opinion, based on our audits and the report of the other auditors, such consolidated financial statements present fairly, in all material respects, the financial position of Coherent, Inc. and subsidiaries as of September 30, 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended September 30, 2001 in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, based on our audits and the report of the other auditors, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set therein.

We have audited the consolidated financial statements of Lambda Physik AG and subsidiaries as of September 30, 2001, including the consolidated balance sheet and the related consolidated statements of income, cash flows, changes in shareholders' equity and notes for the year then ended (not presented separately herein).

The legal representatives of the company are responsible for the preparation and content of the consolidated financial statements. Our responsibility is to express an opinion, based on our audit, whether these consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles (US GAAP).

We conducted our audit in accordance with the German Auditing Rules and in compliance with the generally accepted standards of auditing prescribed by the German Institute of Certified Public Accountants (Institut der Wirtschaftsprüfer) and in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatements. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by the legal representatives, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above (not presented separately herein) present fairly, in all material respects, the consolidated financial position of Lambda Physik AG and subsidiaries as of September 30, 2001, and the results of their operations and their cash flows in accordance with United States generally accepted accounting principles.

Arthur Andersen
Wirtschaftsprüfungsgesellschaft
Steuerberatungsgesellschaft mbH

COHERENT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except par value)

COHERENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)

COHERENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years ended September 30, 2001, 2000 and 1999
(In thousands)

COHERENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)

COHERENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(In thousands)

The consolidated financial statements include the accounts of Coherent, Inc. and its majority owned subsidiaries (collectively, the Company, we, our, or Coherent). All significant intercompany balances and transactions have been eliminated. Investments in business entities in which we do not have control, but have the ability to exercise significant influence over operating and financial policies (generally 20-50% ownership), are accounted for by the equity method.

Our fiscal year ends on the Saturday closest to September 30. Fiscal years 2001, 2000 and 1999 ended on September 29, September 30 and October 2, respectively. For convenience, the accompanying consolidated financial statements have been shown as ending on September 30 for each fiscal year. Fiscal years 2001 and 2000 included 52 weeks while fiscal 1999 included 53 weeks. The fiscal year end of our majority-owned subsidiary Lambda Physik AG (Lambda Physik) ends on September 30. Accordingly, Lambda Physik's financial statements as of that date and for the years then ended have been used for our consolidated financial statements. Management believes that the impact of the use of different year-ends is immaterial to our consolidated financial statements taken as a whole.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Such estimates include, but are not limited to, allowances for uncollectible accounts receivable and sales returns reserves, inventory reserves, warranty costs, depreciation and amortization, taxes and contingencies. Actual results could differ from those estimates.

On April 30, 2001, we completed the sale of the assets of our Medical segment. The disposal of the Medical segment represents the disposal of a business segment under Accounting Principles Board Opinion No. 30 "Reporting the Results of Operations—Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions." Accordingly, results of the operations of the Medical segment have been classified as discontinued and prior periods have been reclassified on this basis.

The functional currencies of our foreign subsidiaries are their respective local currencies. Accordingly, gains and losses from the translation of the financial statements of the foreign subsidiaries are reported as a separate component of accumulated other comprehensive income. Foreign currency transaction gains and losses are included in earnings.

All highly liquid debt instruments purchased with a remaining maturity of three months or less are classified as cash equivalents.

The carrying amounts of certain of our financial instruments including cash and cash equivalents, accounts receivable, short-term borrowings, accounts payable and accrued liabilities approximate fair value due to their short maturities. Short-term investments comprise trading securities and available-for-sale securities which are carried at fair value. The recorded carrying amount of our long-term obligations approximates fair value. Foreign exchange contracts are stated at fair value based on prevailing financial market information.

Inventories are stated at the lower of cost (first-in, first-out) or market. Inventories are as follows (in thousands):

During the year ended September 30, 2001, we recorded a charge of $13.9 million for excess inventory and open purchase commitments due to decreased marketability resulting from the slowdown in the Lithography business at Lambda Physik, which was reflected in postponed delivery dates, cancelled orders and further expected order cancellations from customers.

Property and equipment are stated at cost and are generally depreciated or amortized using the straight-line method. Cost and estimated useful lives are as follows (in thousands):

We evaluate our long-lived assets, including property and equipment, for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. Due to uncertainties with respect to their marketability resulting from a slowdown in lithography business leading to postponed delivery dates, cancelled orders and further expected order cancellations from customers, equipment utilized in the production of lithography lasers at Lambda Physik was reviewed for impairment. Following the slowdown in lithography business it was decided to close down testing facilities. In addition, the impairment review revealed that it is probable that equipment related

to production and testing of some lithography products will no longer be relevant for future sales. The estimated fair value of assets classified as held for use are based on cash flows estimated for these assets. Impairment tests resulted in recognition of impairment losses of $966,000 in the year ended September 30, 2001.

Goodwill relates to acquired subsidiaries and is being amortized on a straight-line basis over estimated useful lives of three to forty years. We evaluate our long-lived assets, including goodwill, for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable.

Intangible assets, recorded as other assets, include distribution rights, acquired existing technology, licenses and patents and are amortized on a straight-line basis over estimated useful lives of two to seventeen years. We evaluate our long-lived assets, including intangible assets, for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable.

We recognize revenue when persuasive evidence of an arrangement exists, delivery has occurred, the price is fixed or determinable and collectibility is reasonably assured. Revenue from service contracts is recognized ratably over the contract period and revenue from installation and training is recognized when service is performed.

We warrant certain of our products and provide for estimated product warranty costs at the time of sale.

Financial instruments which may potentially subject us to concentrations of credit risk consist principally of cash equivalents, short-term investments and accounts receivable. At September 30, 2001, the majority of our short-term investments are in corporate obligations, repurchase agreements, bank certificates of deposit and federal agency obligations. As of September 30, 2001, short-term investments also included 5,432,099 shares of Lumenis common stock valued at $109.1 million which we acquired as a result of the disposal of the Medical segment. The majority of our accounts receivable are derived from sales to customers for commercial and scientific research applications. We perform ongoing credit evaluations of our customers' financial condition and limit the amount of credit extended when deemed necessary but generally require no collateral. We maintain reserves for potential credit losses.

We account for income taxes using the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences of temporary differences between the financial statement carrying amounts and the tax bases of assets and liabilities. A valuation allowance is established to reduce the deferred tax asset if it is "more likely than not" that the related tax benefits will not be realized in the future.

Federal income taxes have not been provided on a portion of the unremitted earnings of foreign subsidiaries either because such earnings are intended to be permanently reinvested or because foreign tax credits are available to offset any planned distributions of such earnings. The total amount of unremitted earnings of foreign subsidiaries was approximately $52.4 million at September 30, 2001. Withholding taxes of approximately $3.2 million would be payable upon repatriation of such earnings which would result in additional foreign tax credits.

Our objectives of holding derivatives are to minimize the risks of foreign currency fluctuation by using the most effective methods to eliminate or reduce the impact of these exposures. Principal currencies hedged include the Euro, Yen and British Pounds. Forwards used to hedge a portion of forecasted international revenue for up to 15 months in the future are designated as cash flow hedging instruments.

For foreign currency forward contracts under SFAS 133, hedge effectiveness is measured by comparing the cumulative change in the hedged contract with the cumulative change in the hedged item, both of which are based on forward rates. For foreign currency option contracts under SFAS 133, only the intrinsic value of the option based on spot rates is used in assessing hedge effectiveness. The time value of the option is excluded in calculating effectiveness and reported in earnings immediately. This amount was not significant for the year ended September 30, 2001.

The net derivative gain of $47,000 included in OCI as of September 30, 2001 will be reclassified into earnings during the following twelve months for backlog hedges and amortized through December 2020 for a hedge related to a building purchase option which was exercised in December 2000.

We entered into a loan to hedge our firm commitment to one Euro customer through June 2004. For this fair value hedge, effectiveness is measured by comparing the principal balance of the loan against the firm commitment balance. As of September 30, 2001, the loan balance of $476,000 did not

exceed the firm commitment. The effect on earnings is recorded to other income (expense) and was not significant for the year ended September 30, 2001.

Forwards not designated as hedging instruments under SFAS 133 are also used to hedge the impact of the variability in exchange rates on accounts receivable and collections denominated in certain foreign currencies. Changes in fair value of these derivatives are recognized in other income (expense).

Earnings per share (EPS) are computed as basic EPS using the weighted average number of common shares outstanding and diluted EPS using the weighted average number of common and dilutive common shares outstanding.

Comprehensive income is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources and is presented in our Statements of Stockholders' Equity.

As permitted under SFAS 123, "Accounting for Stock-Based Compensation" we account for stock-based awards to employees using the intrinsic value method in accordance with Accounting Principles Board Opinion No. 25 (APB 25), "Accounting for Stock Issued to Employees". (See Note 10).

Gains and losses on the issuance of subsidiary stock are recognized directly in the Company's Consolidated Statements of Income.

Certain prior year amounts have been reclassified to conform with the current year presentation. Such reclassifications had no impact on net income or stockholders' equity for any year presented.

In June 2001, the Financial Accounting Standards Board issued SFAS No. 142, "Goodwill and Other Intangible Assets". SFAS 142 addresses the initial recognition and measurement of intangible assets acquired outside of a business combination and the accounting for goodwill and other intangible assets subsequent to their acquisition. SFAS No. 142 provides that intangible assets with finite useful lives be amortized and that goodwill and intangible assets with indefinite lives will not be amortized, but will rather be tested at least annually for impairment. SFAS 142 is effective for fiscal years beginning after December 15, 2001, with early adoption allowed for companies with fiscal years beginning after March 15, 2001. We expect to adopt the pronouncement as of October 1, 2001. Upon adoption of SFAS 142, we will stop the amortization of goodwill with a net carrying value of $32.1 million at September 30, 2001 and annual amortization of $4.1 million, including amortization

resulting from the acquisitions of Crystal in November 2000 and DEOS and MicroLas in April 2001, that resulted from business combinations initiated prior to the adoption of SFAS 141, "Business Combinations". We have not yet determined the impact of the adoption of SFAS 142 on our consolidated financial statements.

In August 2001, the Financial Accounting Standards Board issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," which addresses financial accounting and reporting for the impairment or disposal of long-lived assets. While SFAS No. 144 supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," it retains many of the fundamental provisions of SFAS No. 121. SFAS No. 144 also supersedes the accounting and reporting provisions of APB No. 30, "Reporting the Results of Operations—Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions," for the disposal of a segment of a business. However, it retains the requirement in APB No. 30 to report separately discontinued operations and extends that reporting to a component of an entity that either has been disposed of (by sale, abandonment, or in a distribution to owners) or is classified as held for sale. Companies are required to adopt SFAS 144 for fiscal years beginning after December 15, 2001, but early adoption is permitted. We expect to adopt SFAS 144 as of October 1, 2002. We have not yet determined the impact this standard will have on our operating results and financial position.

On February 25, 2001, we entered into a definitive agreement to sell our Medical segment to Lumenis, Inc. (formerly ESC Medical Systems Ltd.) and on April 30, 2001, we completed the sale of the Medical segment assets for cash of $100.0 million, notes receivable of $12.9 million and 5,432,099 shares of Lumenis common stock. We have estimated the total value of this consideration as $236.0 million. The agreement provides additional cash consideration up to $6.0 million if the actual net tangible assets sold are more than a predetermined amount and a note receivable reduction if the actual net tangible assets sold are less than a predetermined amount. In addition, the agreement provides a future earnout payment of up to $25.0 million based on the future sales of certain Medical laser and light-based products through December 31, 2004.

The face value of the note received is $12.9 million, bearing interest of 5% payable semi-annually over its 18 month term. At April 30, 2001, we recorded the note at its fair value of $11.6 million and are amortizing the discount to interest income over the term of the note. The Lumenis common stock received is unregistered and its trading is subject to restrictions under Securities and Exchange Commission Rule 144 and other restrictions as defined in the definitive agreement. At April 30, 2001, we estimated the value of the Lumenis stock at $124.4 million.

During the year ended September 30, 2001, we recognized a gain of $71.8 million (net of taxes of $44.7 million) on our sale of the Medical segment. The calculation of the gain is summarized as follows (in thousands):

Cash proceeds		$	99,999
Estimated fair value of noncash assets received:
	Lumenis common stock		124,390
	Note receivable from Lumenis		11,610

Total proceeds			235,999
Transaction fees and expenses (including $12,576 of stock compensation charge due to acceleration of option vesting)			24,343
Net assets sold			95,080

Gain on sale before income taxes			116,576
Income taxes (including deferred tax expense of $24,445)			44,729

Gain, net of income taxes		$	71,847

The disposal of the Medical segment represents the disposal of a business segment under Accounting Principles Board Opinion No. 30 "Reporting the Results of Operations—Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions." Accordingly, results of the operations of the Medical segment have been classified as discontinued and prior periods have been reclassified on this basis.

Net current assets and net non-current assets of discontinued operations consisted of the following as of September 30, 2000 (in thousands):

Net current assets of discontinued operations includes $2.0 million of cash at September 30, 2000, that was not sold to Lumenis, Inc.

During the three years ended September 30, 2001, we made the acquisitions described in the following paragraphs, each of which has been accounted for as a purchase. The consolidated financial statements include the operating results of each business from the date of acquisition. Pro forma results of operations have not been presented because the effects of these acquisitions were not material on either an individual or an aggregate basis. The amounts allocated to purchased in-process research and development were determined through established valuation techniques in the high technology industry and were expensed upon acquisition, because technological feasibility had not been established and no future alternative uses existed. Research and development costs to complete development of the research and development from these acquired companies to technological feasibility are not expected to have a material impact on o

Market Segment	Application	Products	Technology
Semiconductor and related manufacturing	DUV lithography	NovaLine series	Excimer

	Mask writing	SabreFreD	Frequency doubled ion

	Semiconductor inspection	Vitesse Compass series Enterprise Azure	Ultrafast DPSS Ion DPSS

	Marking	Avia	DPSS

	Flat panel display (TFT annealing)	Lambda STEEL series	Excimer

	Advanced packaging and interconnects	Avia Diamond FAP family	DPSS CO₂ Semiconductor

Optical telecommunications	Fiber bragg gratings	SabreFreD FBG family	Frequency doubled ion Excimer

	DWDM etalons	ComEts	Optical fabrication and coating

	Pump sources	OPS	Semiconductor

Printing and reprographics	Computer-to-plate printing	DCP Diode bars Compass series	Semiconductor Semiconductor DPSS

	Writing data to master disks	Innova family Azure	Ion DPSS

	Entertainment	Innova family	Ion

	Photo finishing	Sapphire	OPS

Materials processing	Marking, welding, cutting and drilling	FAP family Diamond Gator family	Semiconductor CO₂ DPSS

Scientific and instrumentation	Pump source for solid-state lasers	FAP family Diode bars	Semiconductor Semiconductor

	Confocal microscopy	Mira Vitesse	Ultrafast Ultrafast

	Cell sorting	Innova family	Ion

	DNA and protein sequencing	Innova family	Ion

	Pollution Analysis	COMpex	Excimer

	Metrology (Measuring Technology)	OPTex, COMPex NovaTech	Excimer Excimer

	Spectroscopy	ScanMate, COMPex, Gator family	Dye, Excimer, Diode pumped solid-state

	Physical chemistry	ScanMate, COMPex	Dye, Excimer

	Photochemistry	ScanMate, COMPex	Dye, Excimer

	Medical (OEM)	OPTex, COMPex	Excimer

	Laser diagnostics and measurement	Modemaster Fieldmaster Labmaster	Electronics Electronics Electronics

	Thermal imaging	Infrared optics	Optical fabrication and coating

	Laser components	Optics for lasers	Optical fabrication and coating

	Bio instrumentation	Sapphire	OPS

	Quarters Ended
	Year ended September 30, 2001								Year ended September 30, 2000
	Dec. 30		Mar. 31		June 30		Sept. 30		Jan. 1		Apr. 1		July 1		Sept. 30
Closing Price:
High	$	61.25	$	53.06	$	45.50	$	38.75	$	29.88	$	106.00	$	83.88	$	89.19
Low	$	26.44	$	29.69	$	30.57	$	25.75	$	18.38	$	25.69	$	46.63	$	57.38

		Years ended September 30,
Consolidated financial data		Years ended September 30,
Consolidated financial data		2001(5)		2000(4)		1999(3)		1998(2)		1997(1)
		(In thousands, except per share data)
Net sales		$	477,945	$	383,983	$	320,480	$	273,425	$	239,568
Gross profit			199,773		176,284		140,057		121,034		112,296
Income from continuing operations		$	27,485	$	61,224	$	16,229	$	17,231	$	2,800
Income from continuing operations per share(6):
	Basic	$	0.99	$	2.42	$	0.68	$	0.74	$	0.12
	Diluted	$	0.95	$	2.24	$	0.66	$	0.73	$	0.12
Shares used in computation(6):
	Basic		27,709		25,252		23,957		23,374		22,664
	Diluted		28,817		27,319		24,633		23,749		23,480
Total assets (excluding discontinued operations)		$	874,517	$	591,313	$	352,376	$	281,733	$	255,037
Long-term obligations			58,159		68,647		74,745		12,828		9,665
Other long-term liabilities			53,097		32,143		15,626		12,976		14,133
Minority interest in subsidiaries			49,367		48,855		3,945		3,664		4,348
Stockholders' equity		$	598,295	$	461,769	$	277,098	$	262,511	$	230,991

	Years ended September 30,
	2001						2000				1999
	Amount			Earnings Per Diluted Share			Amount		Earnings Per Diluted Share		Amount			Earnings Per Diluted Share
	(Dollars in thousands, except for earnings per share)
Pro forma income from continuing operations	$	34,916		$	1.21		$	27,673	$	1.01	$	18,913		$	0.77
In-process research and development		(1,614	)		(0.06	)						(2,684	)		(0.11	)
Lambda Physik unusual charges		(5,817	)		(0.20	)
Gain on issuance of stock by subsidiary								33,551		1.23

Income from continuing operations		27,485			0.95			61,224		2.24		16,229			0.66
Income (loss) from discontinued operations		73,211			2.55			8,713		0.32		(4,388	)		(0.18	)
Cumulative effect of accounting change		54

Net Income	$	100,750		$	3.50		$	69,937	$	2.56	$	11,841		$	0.48

Title of each class		Name of each exchange on which registered
None		None

		Page
(a)	1. Index to Consolidated Financial Statements
	The following Consolidated Financial Statements of Coherent, Inc. and its subsidiaries are filed as part of this report on Form 10-K:
	Management's Responsibility for Financial Reporting	50
	Independent Auditors' Report—Deloitte and Touche LLP	51
	Report of Independent Auditors—Arthur Andersen Wirtschaftsprüfungsgesellschaft Steuerberatungsgesellschaft mbH	52
	Consolidated Balance Sheets—September 30, 2001 and 2000	53
	Consolidated Statements of Income—Years ended September 30, 2001, 2000 and 1999	54
	Consolidated Statements of Stockholders' Equity—Years ended September 30, 2001, 2000 and 1999	55
	Consolidated Statements of Cash Flows—Years ended September 30, 2001, 2000 and 1999	56
	Notes to Consolidated Financial Statements	58
	2. Consolidated Financial Statement Schedules
	Schedule II—Valuation and Qualifying Accounts	85
	Schedules not listed above have been omitted because the matter or conditions are not present or the information required to be set forth therein is included in the Consolidated Financial Statements hereto.
	3. Exhibits

10.3	*	Employee Stock Purchase Plan and form of Subscription Agreement, as amended. (Previously filed as Exhibit 10.20 to Form 10-K for the fiscal year ended October 1, 1988.)
10.4	*	Coherent Employee Retirement and Investment Plan. (Previously filed as Exhibit 10.23 to Form 8, Amendment No. 1 to Annual Report on Form 10-K for the fiscal year ended September 25, 1982.)
10.5	*	1995 Stock Plan and forms of agreement. (Previously filed as Exhibit 10.34 to Form 10-K for the fiscal year ended September 28, 1996.)
10.6	*	Note Purchase Agreement by and between Coherent, Inc. and the purchasers of $70 million series notes dated May 18, 1999. (Previously filed as Exhibit 10.36 to Form 10-K for the fiscal year ended October 2, 1999.)
10.7	*	1998 Director Option Plan. (Previously filed as Exhibit 10.37 to Form 10-K for the fiscal year ended September 30, 2000.)
10.8	*	Asset Purchase Agreement by and among ESC Medical Systems, Ltd., Energy Systems Holdings, Inc., and Coherent, Inc., dated as of February 25, 2001. (Previously filed as Exhibit 2.1 to Form 8-K filed on March 5, 2001.)
10.9	*	First amendment to Asset Purchase Agreement by and between ESC Medical Systems, Ltd., Energy Systems Holdings, Inc., and Coherent, Inc., dated as of April 30, 2001. (Previously filed as Exhibit 4 to Schedule 13 D/A filed on May 10, 2001.)
10.10	*	Registration Rights Agreement by and between ESC Medical Systems, Ltd. and Coherent, Inc., dated as of April 30, 2001. (Previously filed as Exhibit 10.3 to Form 10-Q for the quarter ended March 31, 2001.)
10.11		Employee Stock Purchase Plan, as amended.
21.1		Subsidiaries.
23.1		Consent of Deloitte & Touche LLP
23.2		Independent Auditors' Consent—Arthur Andersen Wirtschaftsprüfungsgesellschaft Steuerberatungsgesellschaft mbH

		COHERENT, INC.
		/s/ BERNARD COUILLAUD By: Bernard Couillaud President and Chief Executive Officer

/s/ BERNARD J. COUILLAUD Bernard J. Couillaud (Director, President & Chief Executive Officer)		December 18, 2001 Date
/s/ ROBERT J. QUILLINAN Robert J. Quillinan (Director, Executive Vice President & Chief Financial Officer)		December 18, 2001 Date
/s/ HENRY E. GAUTHIER Henry E. Gauthier (Director, Chairman of the Board)		December 18, 2001 Date
/s/ CHARLES W. CANTONI Charles W. Cantoni (Director)		December 18, 2001 Date
/s/ FRANK CARRUBBA Frank Carrubba (Director)		December 18, 2001 Date
/s/ JERRY E. ROBERTSON Jerry E. Robertson (Director)		December 18, 2001 Date
/s/ JOHN H. HART John H. Hart (Director)		December 18, 2001 Date

			September 30, 2001			September 30, 2000
*ASSETS*
CURRENT ASSETS:
	Cash and cash equivalents		$	77,409		$	156,521
	Short-term investments			258,414			99,681
	Accounts receivable—net of allowances of $4,794 (2001) and $3,553 (2000)			90,688			73,353
	Inventories			107,980			84,965
	Net current assets of discontinued operations						66,594
	Prepaid expenses and other assets			24,120			21,019
	Deferred tax assets			25,826			18,996

TOTAL CURRENT ASSETS				584,437			521,129

PROPERTY AND EQUIPMENT				251,318			163,138
ACCUMULATED DEPRECIATION AND AMORTIZATION				(82,782	)		(66,687	)

	Property and equipment—net			168,536			96,451

GOODWILL—net of accumulated amortization of $14,660 (2001) and $11,821 (2000)				31,329			12,909
NET NON-CURRENT ASSETS OF DISCONTINUED OPERATIONS							51,773
OTHER ASSETS				90,215			27,418

			$	874,517		$	709,680

*LIABILITIES AND STOCKHOLDERS' EQUITY*
CURRENT LIABILITIES:
	Short-term borrowings		$	21,545		$	4,211
	Current portion of long-term obligations			10,020			7,687
	Accounts payable			18,002			23,013
	Income taxes payable			4,322			5,415
	Other current liabilities			61,710			57,940

TOTAL CURRENT LIABILITIES				115,599			98,266

LONG-TERM OBLIGATIONS				58,159			68,647
OTHER LONG-TERM LIABILITIES				53,097			32,143
MINORITY INTEREST IN SUBSIDIARIES				49,367			48,855
STOCKHOLDERS' EQUITY:
	Common stock, par value $.01:
		Authorized—500,000 shares (2001) and 50,000 shares (2000) Outstanding—28,426 shares (2001) and 27,102 shares (2000)		283			270
	Additional paid-in capital			270,873			227,973
	Notes receivable from stock sales			(861	)		(1,392	)
	Accumulated other comprehensive loss			(13,425	)		(5,757	)
	Retained earnings			341,425			240,675

TOTAL STOCKHOLDERS' EQUITY				598,295			461,769

			$	874,517		$	709,680

		Common Stock										Accum. Other Comp. Income (Loss)
		Shares	Par Value		Add. Paid-in Capital		Notes Rec. From Stock Sales			Retained Earnings		Accum. Other Comp. Income (Loss)			Total			Total Comp. Income
BALANCE, OCTOBER 1, 1998		23,736	$	236	$	102,469	$	(310	)	$	158,897	$	1,219		$	262,511
Net income											11,841					11,841		$	11,841
Other comprehensive income (net of tax):
	Translation adjustment												(1,291	)		(1,291	)		(1,291	)

	Total comprehensive income																	$	10,550

Sales of shares under Employee Stock Option Plan		201		2		1,974		(247	)							1,729
Productivity Incentive Plan distributions		25				329										329
Sales of shares under Employee Stock Purchase Plan		180		2		1,540										1,542
Tax benefit of Employee Stock Option Plan						436										436

BALANCE, SEPTEMBER 30, 1999		24,142		240		106,748		(557	)		170,738		(72	)		277,097
Net income											69,937					69,937		$	69,937
Other comprehensive income (net of tax):
	Translation adjustment												(5,743	)		(5,743	)		(5,743	)
	Unrealized gain on available for sale securities												58			58			58

	Total comprehensive income																	$	64,252

Issuance of common stock related to public offering, net of issuance costs		1,500		15		91,837										91,852
Sales of shares under Employee Stock Option Plan		903		9		14,527		(1,179	)							13,357
Productivity Incentive Plan distributions		17				651										651
Sales of shares under Employee Stock Purchase Plan		540		6		4,456										4,462
Tax benefit of Employee Stock Option Plan						9,754										9,754
Collection of notes receivable								344								344

BALANCE, September 30, 2000		27,102		270		227,973		(1,392	)		240,675		(5,757	)		461,769
Net income											100,750					100,750		$	100,750
Other comprehensive income (net of tax):
	Translation adjustment												2,484			2,484			2,484
	Unrealized loss on available for sale securities												(10,199	)		(10,199	)		(10,199	)
	SFAS 133 transition adjustment												(275	)		(275	)		(275	)
	Net gain on derivative instruments												322			322			322

	Total comprehensive income																	$	93,082

Stock-based compensation charge (See Note 2)						12,860										12,860
Sales of shares under Employee Stock Option Plan		1,043		10		16,287		(308	)							15,989
Productivity Incentive Plan distributions		22				861										861
Sales of shares under Employee Stock Purchase Plan		259		3		5,511										5,514
Tax benefit of Employee Stock Option Plan						7,381										7,381
Collection of notes receivable								839								839

BALANCE, SEPTEMBER 30, 2001		28,426	$	283	$	270,873	$	(861	)	$	341,425	$	(13,425	)	$	598,295

	2001		2000
Purchased parts and assemblies	$	39,169	$	27,483
Work-in-process		44,494		37,024
Finished goods		24,317		20,458

Inventories	$	107,980	$	84,965

	2001		2000		Useful Life
Land	$	10,334	$	7,294
Buildings and improvements		84,123		48,157	20-40 years
Equipment, furniture and fixtures		130,217		96,922	3-10 years
Leasehold improvements		26,644		10,765	Terms of lease

Property and equipment	$	251,318	$	163,138

	2001			2000		1999
Net Sales	$	109,219		$	206,464	$	163,610

Income (Loss) from Operations Prior to Phase-out Period	$	(1,672	)	$	13,596	$	(7,464	)
Provision (Benefit) for Income Taxes		(193	)		4,883		(3,076	)

Income (Loss) from Operations, net		(1,479	)		8,713		(4,388	)

Gain on Disposal		116,576
Provision for Income Taxes on Gain		44,729
Operating Income During Phase-out Period		3,888
Provision for Income Taxes on Operating Income in Phase-out Period	1,045
Gain on Disposal, net	74,690
Income (loss) from Discontinued Operations, net	$	73,211		$	8,713	$	(4,388	)

		Years ended September 30,
		2001				2000				1999
		Amount		Percentage of total net sales		Amount		Percentage of total net sales		Amount		Percentage of total net sales
		(Dollars in thousands)
Consolidated:
	Domestic	$	213,365	44.6	%	$	155,619	40.5	%	$	130,442	40.7	%
	International		264,580	55.4	%		228,364	59.5	%		190,038	59.3	%

	Total	$	477,945	100.0	%	$	383,983	100.0	%	$	320,480	100.0	%

Electro-Optics:
	Domestic	$	172,833	36.2	%	$	135,090	35.2	%	$	109,675	34.2	%
	International		183,997	38.5	%		155,146	40.4	%		137,712	43.0	%

	Total	$	356,830	74.7	%	$	290,236	75.6	%	$	247,387	77.2	%

Lambda Physik:
	Domestic	$	40,532	8.4	%	$	20,529	5.3	%	$	20,767	6.5	%
	International		80,583	16.9	%		73,218	19.1	%		52,326	16.3	%

	Total	$	121,115	25.3	%	$	93,747	24.4	%	$	73,093	22.8	%

Net current assets (liabilities):
	Cash	$	1,967
	Accounts receivable, net		38,876
	Inventories		41,823
	Deferred income taxes		19,890
	Other current assets		1,971
	Accounts payable		(6,269	)
	Other current liabilities		(31,664	)

		$	66,594

Net non-current assets (liabilities):
	Property and equipment	$	6,139
	Goodwill		25,885
	Other intangibles		15,137
	Other non-current assets		7,083
	Deferred income and other liabilities		(2,471	)

		$	51,773