UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

(Mark One)

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

For the Fiscal Year Ended September 27, 2003
or

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

Commission File Number: 0-5255

COHERENT, INC.

Delaware		94-1622541
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

5100 Patrick Henry Drive, Santa Clara, California 95054

(Address of principal executive offices) (Zip Code)

Registrant’s telephone number, including area code: (408) 764-4000

Securities registered pursuant to Section 12(b) of the Act:

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

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, $.01 par value

Common Stock Purchase Rights

(Title of Class)

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

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

As of December 1, 2003, 30,045,727 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 March 29, 2003) of Coherent, Inc., held by nonaffiliates was $404,045,278. 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.

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

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the definitive proxy statement to be filed prior to January 26, 2004, pursuant to Regulation 14A of the Securities Exchange Act of 1934 are incorporated by reference into Part III of this Form 10-K.

PART I.

This Annual Report on Form 10-K contains forward-looking statements. These forward-looking statements include, without limitation, predictions regarding our future:

• net sales;

• results of operations;

• gross profits;

• research and development projects and expenses;

• selling, general and administrative expenses;

• amount of after-tax restructuring, impairment and other charges;

• warranty reserves;

• legal proceedings;

• claims against third parties for infringement of our proprietary rights;

• benefits from our acquisition of Positive Light, Inc.;

• liquidity and sufficiency of existing cash, cash equivalents and short-term investments for near-term requirements;

• development and acquisition of new technology and intellectual property;

• write-downs for excess or obsolete inventory;

• competitors and competitive pressures;

• growth of applications for our products and increase of market share;

• obtain components and materials in a timely manner;

• identify alternative sources of supply for components;

• achieve adequate manufacturing yields;

• impact of recent acquisitions;

• leverage of power and energy management products into our next generation products;

• operating efficiencies and minimization of redundant costs;

• compliance with environmental regulations;

• opportunities with high potential;

• participation in the bio-agent detection market;

• leveraging of our technology portfolio and application engineering;

• optimize our leadership position in existing markets;

• collaborative customer and industry relationships;

• emphasis on supply chain management;

• growth of direct digital imaging applications;

• use of financial market instruments;

• simplifications of our foreign legal structure and reduction of our presences in certain countries; and

• focus on long-term improvement of return on invested capital.

In addition, we include forward-looking statements under the “Our Strategy” and “Future Trends” sections set forth below in “Business.”

You can identify these and other forward-looking statements by the use of the words such as “may,” “will,” “could,” “would,” “should,” “expects,” “plans,” “anticipates,” “relies,” “believes,” “estimates,” “predicts,” “intends,” “potential,” “continue,” or the negative of such terms, or other comparable terminology. Forward-looking statements also include the assumptions underlying or relating to any of the foregoing statements.

Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth below in “Business,” “Management’s Discussion and Analysis of Results of Operations and Financial Condition” and under the heading “Risk Factors.” All forward-looking statements included in this document are based on information available to us on the date hereof. We undertake no obligation to update these forward-looking statements as a result of events or circumstances or to reflect the occurrence of unanticipated events.

ITEM 1. BUSINESS

GENERAL

Business Overview

Our fiscal year ends on the Saturday closest to September 30. Fiscal years 2003, 2002 and 2001 ended on September 27, September 28 and September 29, respectively. For convenience, we use September 30 as our fiscal year-end dates throughout this Form 10-K in order to correspond to the accompanying consolidated financial statements.

We are one of the world’s leading suppliers of photonics-based solutions in a broad range of commercial and scientific research 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 internal expansion and through strategic acquisitions of complementary technologies, intellectual property, manufacturing processes and product offerings.

We have two reportable business segments: Electro-Optics and Lambda Physik, which work with customers to provide cost-effective photonics-based solutions. Our Electro-Optics segment focuses on markets such as semiconductor and related manufacturing, materials processing, original equipment manufacturer (OEM) laser components and instrumentation, scientific research and government programs and graphic arts and display. Lambda Physik AG (Lambda Physik), our 94.3% owned subsidiary with headquarters located in Göttingen, Germany, focuses on markets including lasers for the production of thin film transistors (TFT) used in flat panel displays, microlithography applications in the semiconductor industry, ink jet printers, automotive, environmental research, scientific research, medical OEMs, materials processing and micro-machining applications.

We were originally incorporated in California on May 26, 1966 and reincorporated in Delaware on October 1, 1990.

Additional information about Coherent, Inc. (referred to herein as the Company, we, our, or Coherent) is available on our web site at www.coherent.com. We make available, free of charge on our web site, access to our Annual Report on Form 10-K, our quarterly reports on Form 10-Q, our current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after we file them electronically with or furnish them to the Securities and Exchange Commission (SEC). Information contained on our web site is not part of this Annual Report on Form 10-K or our other filings with the SEC.

INDUSTRY BACKGROUND

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 microtechnologies and nanotechnologies; semiconductor inspection; microlithography; measurement, test and repair of electronic circuits; medical and biotechnology; consumer electronics; industrial process and quality control; materials processing; imaging and printing; display; and research and development. Ultraviolet (UV) lasers are profiting from the trend towards miniaturization, which is a driver of innovation and growth in many markets. The short wavelength of lasers that emit light in the UV spectral region make it possible to produce extremely small structures with maximum precision consistent with the latest state of the art technology.

OUR STRATEGY

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:

• Leverage our technology portfolio and application engineering to lead the proliferation of photonics into broader markets – We will continue to identify opportunities in which our technology portfolio and application engineering can be used to offer innovative solutions and gain access to new markets.

• Optimize our leadership position in existing markets – There are a number of markets where we have historically been at the forefront of technological development and product deployment and from which we have derived a substantial portion of our revenues. We plan to optimize our financial returns from these markets.

• Maintain and develop additional strong collaborative customer and industry relationships – We believe that the Coherent brand name and reputation for product quality, technical performance and customer satisfaction will help us to further develop our loyal customer base. We plan to maintain our current customer relationships and develop new ones with customers that are industry leaders and work together with these customers to design and develop innovative product systems and solutions as they develop new technologies.

• Develop and acquire new technologies – We will continue to enhance our market position through our existing technologies and develop new technologies through our internal research and development efforts, as well as through the acquisition of additional complementary technologies, intellectual property, manufacturing processes and product offerings.

• Emphasize supply chain management – We will continue to focus on operational efficiency through an emphasis on supply chain management with the explicit intent of improving gross margins and increasing inventory turns.

• Focus on long-term improvement of Return on Invested Capital – We will continue to focus on long-term improvement of return on invested capital.

APPLICATIONS

Our products address a broad range of applications. Both of our reportable business segments are focused on several areas of the photonics market including: microelectronics, graphic arts and display, materials processing, scientific research and government programs and OEM components and instrumentation.

Microelectronics

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 nanometers (a billionth 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 where beam shape and delivered power are important. 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.

Deep ultraviolet (DUV) lithography

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, through our 94.3% owned Lambda Physik subsidiary, NovaLine lasers with stable, line-narrowed, 2 kilohertz (kHz) operation at 248 nanometers (nm) (30 W); 4 kHz operation at 193nm (20 W); and the innovative 157nm laser which exceeds 20 W of output power and enables optical lithography down to 50nm. Lambda Physik was the first to produce 193nm production-quality lasers and was the first to provide an R&D 157nm litho laser for material testing. We are also involved with XTREME technologies GmbH (Xtreme Technologies), a joint venture between Lambda Physik and Jenoptik AG, to produce extreme ultra violet (EUV) light sources capable of handling feature sizes of 35nm and below. In April 2003, Xtreme Technologies shipped the first prototype of an EUV light source, which was significantly earlier than expected.

Laser direct imaging of photomasks and printed circuit boards.

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 Paladin, Innova Sabre and Innova SabreFreD ion lasers are used in laser systems for these applications.

Semiconductor inspection, measurement, test and repair

As semiconductor device geometries decrease in size, devices become increasingly susceptible to smaller defects during each phase of the 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 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 an around-the-clock operation and it is important for inspection, measurement and testing products to be reliable and have long lifetimes.

Our AZURE, Compass 315M, Compass 415M 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 Vector 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 echoes, the laser system can detect layer thickness, adhesion and composition.

Flat panel display

The high volume consumer market is driving the production of flat panel displays in applications such as digital cameras, personal digital assistants (PDAs), mobile telephones, car navigation systems, laptop computers and television monitors. The most common type of flat panel display is the active-matrix crystal display, which uses a matrix of 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 (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 310 W excimer laser designed for industrial TFT annealing.

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

Advanced packaging and interconnects

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^TM DPSS laser, Diamond^TM carbon dioxide, or CO₂, and GEM^TM 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 materials and components and in microelectronics manufacturing to adjust electronic components. Our Vector, Avia, Diamond and GEM QS lasers are used for these applications.

Graphic arts and display

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 and 415M 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 and Paladin DPSS 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 Sapphire^TM 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, and the emerging area of laser projection used for cinema and television.

Our diode laser bars, recognized as an industry leader in both high slope efficiency and high temperature performance, have enabled new applications in both the commercial and military markets, including imaging in the reprographics market.

Materials processing

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 of nonmetals processing and micromachining. This includes such applications as the cutting and joining of plastics using both our CO₂ and semiconductor lasers, the cutting, perforating and scoring of paper and packaging materials, and various cutting and patterning applications in the textile industry.

Our fiscal 2001 acquisition of DeMaria Electro-Optics Systems, Inc. (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. In fiscal 2003, we were successful with lasers used commercially for cutting and fading fabric and for processing leather in the garment industry.

At the end of the size and wavelength spectrum, the AVIA UV 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, microelectromechanical systems (MEMS) and in flat panel display and semiconductor manufacturing.

In June 2002, Lambda Physik received its first order for excimer lasers used in the treatment of engine cylinder surfaces in the automotive industry.

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.

Scientific research and government programs

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 (YAG) lasers, and ultrafast systems. Our installed base is of tens of thousands of lasers. Current applications for lasers in the scientific market include pump lasers for ultrafast (UF) and continuous wave (CW) systems, CW tunable systems, UF oscillator and amplifiers, Non-linear generation systems (SHG, THG, and OPO’s ). Main scientific applications include biology (multiphoton and confocal microscopy), physics (atomic and molecular spectroscopy, atom cooling, non-linear optics, X-ray generation, solid state and semiconductor studies), chemistry (quantum control, time-resolved and Raman spectroscopy) and engineering (material processing, remote sensing, metrology).

Our Mira Titanium Sapphire laser and RegA regenerative amplifier are examples of ultrafast laser systems 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 OPS laser, the Sapphire, is sold for several bio-instrumentation applications, including flow cytometry, drug discovery and DNA sequencing.

Our Chameleon laser combines a unique blend of features and hands-off performance, making it an ideal workhorse for Multi-Photon Excitation (MPE) microscopy and a powerful tool for many other fields of ultrafast research, such as time-resolved photoluminescence, nonlinear spectroscopy, fluorescence upconversion, quantum optics, materials characterization and terahertz imaging.

Our MBR and 899 CW tunable lasers provide unsurpassed resolution and stability for spectroscopy applications.

Our diode-pumped Verdi laser has established itself as the benchmark in reliability for any pumping application where Ti:Sapphire lasers like our Mira, RegA and 899 are used. A number of Verdi lasers are currently used as laboratory workhorses to pump Coherent lasers, as well as lasers from our competitors.

Our DEOS subsidiary provides custom waveguide CO₂ lasers, far-infrared lasers and other systems to a wide variety of commercial and government customers. In some cases, these custom products are only slightly modified versions of our standard commercial and scientific laser products. In other cases, a custom product may incorporate significant modifications, while still building on the design expertise acquired in the development of our high-volume commercial laser products. We are also heavily involved in the development of optically pumped far-infrared (FIR) lasers, like the SIFIR-50, a THz laser system. These designs utilize many aspects of our highly reliable, sealed resonator technologies to produce compact, dependable, turn-key systems with FIR operation.

Our fiscal 2003 acquisition of Positive Light, Inc. (PLI), a recognized leading designer and manufacturer of advanced solid-state lasers for the scientific and industrial markets, provides us access to one of the largest scientific markets, the high-energy UF amplifier systems, which covers energy ranges from 1 mJ and above and peak powers up to 50 Terawatt. PLI products are used for a variety of physics and chemistry applications, inclusive of X-ray generation and non-linear optics. PLI products are complementary to our UF products and pump lasers, and synergy between these product lines is expected to take place.

OEM components and instrumentation

Our substantial experience with optics, optical coatings, and diode lasers for optical pumping and harmonic generation enable our OEM components business. We provide value-added optical solutions and both directly-coupled and fiber-coupled optical pumping diode laser packages to laser manufacturers participating in other OEM markets such as materials processing, scientific, and medical.

Instrumentation is one of our more mature commercial applications. Representative applications within this segment include flow cytometry, high-throughput screening for pharmaceutical discovery, genomic and proteomic analysis, Raman spectroscopy, forensics, veterinary science, and bio-threat detection. Our optically-pumped (OPS) laser, the Sapphire, is sold for several bio-instrumentation applications including DNA sequencing, flow cytometry and drug discovery. Our Innova ion lasers are also sold to bio-instrument manufacturers for applications such as cell sorting, DNA and protein sequencing, as well as drug and clinical screening.

Flow cytometry

Flow cytometry is a laser-based, micro fluorescence technique for analyzing single cells or populations of cells in a heterogeneous mixture. Its numerous applications include cell biology, immunology, reproductive biology, oncology, and infectious disease such as Acquired Immune Deficiency Syndrome (AIDS). Flow cytometry is both a powerful research tool and an indispensable mainstream clinical diagnostic and prognostic tool. Commercially available instruments typically measure more than six simultaneous discriminating factors at analysis speeds of thousands of cells per second and many instruments have the capability to selectively sort individual cells for subsequent analysis or cell culture. The recent design trend in flow cytometry is toward more compact, powerful, and reliable instruments. Our Sapphire solid-state 488nm laser, Compass 215M and Radius laser diode modules are the lasers of

choice in the current generation of cutting-edge instrumentation replacing the bulkier, inefficient and sometimes unreliable air-cooled argon-ion and helium neon laser systems that were used in the past.

Genomics and Proteomics

Laser-based fluorescence techniques abound within the study of Genomics and Proteomics (human genome and proteome) and allied fields. As with the flow cytometry application, a challenge to manufacturers of analytical devices is to produce instruments of increasing complexity and capability, while at the same time minimizing their size. This is particularly important in fields such as these, where often times many instruments are deployed in a single location for the purpose of parallel processing. Our Sapphire, Compass 215M and Radius lasers are used in instrument techniques ranging from DNA sequencing to micro array scanners, to lab-on-chip and fluorescence correlation spectroscopy.

Raman spectroscopy

Raman spectroscopy is the spectral measurement of inelastic scattering of monochromatic radiation from molecular species. Depending on the molecular species, physical state thereof, and the experimental paradigm, laser sources for Raman can range from infrared to UV. Raman measurements are useful for process monitoring, environmental monitoring, and biomedical applications, to name a few. Our Innova and Compass product lines are widely deployed in Raman applications, both at the commercial and scientific level. Exciting new research at the university level also suggests that our powerful tunable deep-UV source, the Indigo, will prove to be a very useful tool in deciphering protein secondary structure.

Bio-agent detection

A number of laser-based techniques for point source and standoff detection of pathogens or other bio-toxins are being explored in the government and private sectors. Systems of this type could be deployed to guard military facilities, major sporting events or other large gatherings of citizens, or vital infrastructure components such as subways, airports, or industrial hubs. We have a number of laser systems under evaluation for such systems, and are well positioned to actively participate in this segment.

Forensics

Lasers have been employed in criminal forensics for a number of decades. Applications include latent fingerprint detection and trace evidence illumination and identification. In the past, laser usage was often limited to forensics labs due to the physical size and complexities of the lasers. Portable models seldom generated enough output for use in high ambient light conditions, and for large-scale sweeps of the crime scene. Owing to recent advances in optical output versus physical size, forensic scientists now have the capability to bring an unprecedented level of latent fingerprint and trace evidence detection directly to the crime scene. Our IncriminatorÔ 532nm 10 W fiber-coupled laser system directly addresses the needs of large-scale criminal investigation organizations by providing a superior combination of high brightness and portability to bear on the most difficult forensic analysis.

Medical OEM

We sell a variety of components and lasers to medical laser companies in end-user applications such as ophthalmology, aesthetic, surgical, therapeutic and dentistry. Innova ion laser tubes and our GEM series CO₂ lasers are widely deployed in ophthalmic, aesthetic and surgical markets. Additionally, our Compass 215M series and Sapphire 488 series lasers are deployed in the retinal scanning market in diagnostic imaging systems.

FUTURE TRENDS

Microelectronics

The semiconductor industry appears to be entering the initial phase of a growth cycle, however, the recovery thus far has been cautious at best. New technologies that were put on hold in the past several years are slowly starting to be deployed and we are not yet seeing the benefit of high volume requests for new products. As these new technologies are increasingly laser based, the new growth cycle in the semiconductor industry bodes well for the expansion of laser markets.

Graphic arts and display

If the adoption of newer digital technologies in the graphic arts market continues to remain robust as it was in fiscal 2003, we anticipate that this will have the continued effect of driving purchases of new printing technology. In the display market, there is substantial interest in laser projection for both large venues (digital cinema) and consumer television. While this technology is still in

an early stage, it is expected that it will drive substantial development for low cost, mass producible laser devices.

Materials processing

Anticipated drivers for expansion in the materials processing market include requirements for smaller features and expansion into new geographical areas. The market for materials processing in Asian countries grew substantially in early 2003, which was then curbed by the SARS epidemic. Growth has recently resumed at a rate similar to the rate experienced prior to the SARS epidemic and we anticipate this growth to continue in future years.

Scientific research and government programs

The scientific research market has historically grown at a rate similar to the growth rate experienced in the general U.S. economy and we anticipate this trend to continue into fiscal 2004. We expect that new applications in ultrashort pulses and in bio-research will be the drivers of anticipated growth within the scientific research market. Additionally, we anticipate that our acquisition of PLI will enable us to enhance growth in the scientific market through additional product offerings.

OEM components and instrumentation

The instrumentation market has seen a migration from the use of mature laser technologies, mainly ion lasers, to new technologies primarily based on solid state and semiconductors. Because of this migration, new markets are expected to surface in areas such as security, including the detection of bio-agents and the monitoring of people and goods. These markets are likely to require an increased number of lasers. The majority of these activities are still in the research and development stage and we expect only a moderate impact on the laser industry in fiscal 2004, with increases anticipated in future years.

PRODUCTS

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.

Market Segment	Application	Products	Technology
Microelectronics	DUV lithography	NovaLine series	Excimer
	Mask writing	SabreFreD Innova	Frequency doubled ion Ion
	Semiconductor inspection	Vitesse Compass series Enterprise AZURE, Indigo Sapphire	Ultrafast DPSS Ion, DPSS, OPS DPSS OPS
	Marking	Avia	DPSS
	Flat panel display (TFT annealing)	Lambda STEEL series	Excimer
	Advanced packaging and interconnects	Avia	DPSS
		Diamond & Gem Series	CO₂
		FAP family	Semiconductor
Graphic arts and display	Computer-to-plate printing	Single-stripe diodes Fiber coupled diodes Diode bars Compass series	Semiconductor Semiconductor Semiconductor DPSS
	Writing data to master disks	Innova family AZURE Radius	Ion DPSS Semiconductor
	Entertainment	Innova family Viper	Ion DPSS
	Photo finishing	Sapphire Compass	OPS DPSS
	Laser projection	Sapphire	OPS
Materials processing	Marking, welding, engraving, cutting and drilling	FAP family	Semiconductor
		Diamond	CO₂
		Gator family	DPSS
	Automotive production	Lambda STEEL series	Excimer
	Rapid prototyping	Avia	DPSS
Scientific research and government programs	Pump source for solid-state lasers	FAP family, Diode bars Diode bars	Semiconductor Semiconductor
	Pump source for Ultrafast and CW Tunable lasers	Verdi, Vitesse, Evolution	DPSS DPSS
	Regenerative amplification	Legend	DPSS
		Terawatt	Ultrafast
	Multiphoton excitation microscopy	Mira, Chameleon	Ultrafast
	Pollution analysis	COMpex	Excimer
	Metrology (measuring technology)	OPTex, COMPex	Excimer
		NovaTech	Excimer
	Spectroscopy	COMPex Gator family, Chameleon, Indigo Mira, RegA, OPO 899, MBR, MBD Innova family	Excimer DPSS DPSS Ultrafast CW Tunable Ion
	Physical chemistry	COMPex	Excimer
	Photochemistry	COMPex	Excimer
	Laser diagnostics and measurement	Modemaster Fieldmaster Labmaster	Electronics Electronics Electronics

Market Segment	Application	Products	Technology
Scientific research and government programs (continued)	Thermal imaging	Infrared optics	Optical fabrication and coating
	Laser components	Optics for lasers	Optical fabrication and coating
OEM components and instrumentation	Confocal microscopy	Enterprise Sapphire	Ion OPS
	DNA sequencing	Compass Sapphire	DPSS OPS
	Flow cytometry/cell sorting	Innova family Compass Sapphire Radius	Ion DPSS OPS Laser Diode Module
	Drug discovery	Innova family Compass Sapphire Radius	Ion DPSS OPS Laser Diode Module
	Raman spectroscopy	Innova family Compass	Ion DPSS
	Forensics	Incriminator Innova family	DPSS Ion
	Laser Doppler velocimetry	Verdi Innova family	DPSS Ion
	Bio-agent detection	Compass, AVIA Radius	DPSS Laser Diode Module
	Fluorescence spectroscopy	Innova family Compass Sapphire Radius	Ion DPSS OPS Laser Diode Module
	Medical (OEM)	OPTex, COMPex Diode bars Innova family Compass Sapphire Diamond	Excimer Semiconductor Ion DPSS OPS CO₂

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

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 less than 1 W for individual emitters to 60 W for bars, to several hundred watts for stacked bars. These products are available in various forms of complexity including the following: bar 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 Tampere, 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 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 age-related macular degeneration 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.

Diode-pumped solid-state lasers

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; advanced packaging and interconnects; repair, test and measurement; computer-to-plate printing; writing data to master disks; entertainment; photo finishing: marking, welding, engraving, cutting and drilling; drug discovery; forensics; laser Doppler velocimetry; bio-agent detection; medical; rapid prototyping; DNA sequencing; flow cytometry; laser pumping and spectroscopy.

SALES AND MARKETING

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, Korea and the People’s Republic of China, as well as through independent representatives in other parts of the world. Foreign sales accounted for 61% and 60% of our total net sales in fiscal 2003 and fiscal 2002, respectively. Sales made to independent representatives and distributors are generally priced in U.S. dollars. Foreign sales that we make directly to customers 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 2003, 2002 or 2001.

We maintain a customer support and field service staff in major markets within 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 typically provide one-year parts and service warranties on our lasers, laser-based systems, optical and laser components 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 consolidated balance sheets, have generally been sufficient to cover product warranty repair and replacement costs.

RESEARCH AND DEVELOPMENT

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 microelectronics, materials processing and bio-instrumentation markets and excimer lasers for DUV lithography. Research and development expenditures for fiscal 2003 were $50.8 million, or 12% of net sales, compared to $52.6 million, or 13% of net sales, for fiscal 2002 and $53.0 million, or 11% of net sales, for fiscal 2001. 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. In the first quarter of fiscal 2003, we terminated the activities of our Coherent Telecom-Actives Group (CTAG) operating segment. Expenditures for research and development related to CTAG were $1.9 million in fiscal 2003, $6.3 million in fiscal 2002 and $5.0 million in fiscal 2001.

In fiscal 2002, we formed a Technical Advisory Board to facilitate our assessment of new and emerging technologies across a broad range of disciplines affecting the field of photonics. The Technical Advisory Board is comprised of outside experts in various disciplines within the photonics universe and will assist our internal Technology Council in the evaluation of emerging opportunities and lend their expertise to our technology review process. The inaugural membership of the Technical Advisory Board included Dr. Martin Fejer of Stanford University, Dr. David Hanna from the University of Southampton, Dr. Detlef Hommel from the University of Bremen and Dr. Erich Ippen from Massachusetts Institute of Technology, each of whom has accepted a two year appointment.

MANUFACTURING

Strategies

One of our core manufacturing strategies is to tightly control our supply of key parts, components and assemblies. We believe this is essential in order to maintain high quality products 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 in order to retain quality control. We provide customers with 24-hour technical expertise and quality that is ISO certified at our principal manufacturing sites. In June 2003, we transferred our printed circuit board manufacturing activities in Auburn, California, to a global electronics contract manufacturer, Venture, which has factories in North America, Asia and Europe. We also completed the restructuring of our CO₂ operations, resulting in the consolidation of all CO₂manufacturing operations at our Bloomfield, Connecticut location.

We have designed and implemented proprietary manufacturing tools, equipment and techniques in an effort to provide products that differentiate us from our competitors. These proprietary manufacturing techniques are utilized in a number of our product lines, including both ion and CO₂ laser production, optics fabrication, optics 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 items may not be 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.

Operations

Our electro-optical products are manufactured at sites in Santa Clara, Auburn and Los Gatos, California; Portland, Oregon; East Hanover, New Jersey; Bloomfield, Connecticut; Lübeck, Germany; Leicester, England; Glasgow, Scotland; and Tampere, Finland. Our ion and CO₂ lasers; a portion our DPSS lasers (Verdi, Avia and Vitesse); semiconductor lasers; and ultrafast scientific lasers are manufactured in Santa Clara and Los Gatos, California; Bloomfield, Connecticut; and Glasgow, Scotland. Our optical component products and laser instrumentation products are manufactured at our facilities in Auburn, California and Leicester, England. We manufacture exotic crystals in East Hanover, New Jersey. 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. We make a range of advanced solid-state lasers used in developing applications, including scientific research and semiconductor test equipment, in Glasgow, Scotland.

As part of our efforts to consolidate manufacturing operations, we are currently negotiating the sale of our Glasgow, Scotland operations.

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

INTELLECTUAL PROPERTY

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 340 U.S. and foreign patents and we have approximately 91 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. A U.S. patent application is published eighteen months after the claimed priority date unless it is stated by the applicant that the application will not be filed in a foreign country, in which case the application is maintained in secrecy until a patent is issued. Foreign-filed patent applications are maintained in secrecy for up to eighteen months. Because of this we can conduct only limited searches to determine whether our technology infringes any patents held by 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:

• stop selling, incorporating or using our products that use the infringed intellectual property;

• obtain from the owner of the infringed intellectual property right a license to sell or use the relevant technology, which license may not be available on reasonable terms, or at all; or

• redesign the products that use the infringed intellectual property.

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.

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.

COMPETITION

Competition is very intense in the various laser markets in which we provide products. In the microelectronics, materials processing, scientific research and government programs and graphic arts and display markets we compete against a number of companies, including Thermo Electron Corporation’s Spectra-Physics Lasers business unit; JDS Uniphase Corp.; Cymer, Inc.; Gigaphoton, Inc.; Rofin-Sinar Technologies, Inc.; Lightwave Electronics Corp.; and Excel Technology, Inc. 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 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, competitive pressures may result in price reductions, reduced margins and loss of market share.

BACKLOG

At September 30, 2003, our backlog of orders scheduled for shipment was approximately $127.7 million, compared to $124.4 million at September 30, 2002 and $134.8 million at September 30, 2001. Orders used to compute backlog are generally cancelable without substantial penalties. Historically, the rate of cancellation experienced by us has 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, 2003 was higher than backlog at September 30, 2002 in our Electro-Optics reportable segment and lower than backlog at

September 30, 2002 in our Lambda Physik reportable segment. Backlog at September 30, 2002 was lower than at September 30, 2001 in both operating segments. Backlog at September 30, 2001 was also lower than at September 30, 2000 in both operating segments.

EMPLOYEES

As of September 30, 2003, we had 2,136 full-time employees. Approximately 314 of our employees are involved in research and development; 1,252 of our employees are involved in operations, manufacturing, service and quality assurance; and 570 of our employees are involved 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.

ACQUISITIONS

During fiscal 2003, we acquired Molectron Detector, Inc. (Molectron) of Portland, Oregon and PLI of Los Gatos, California for approximately $11.5 million and $38.9 million in cash, respectively. Molectron designs and manufactures laser test and measurement equipment used across all photonics-based applications and markets. We expect that the acquisition of Molectron will enable us to leverage their well-regarded power and energy management products into our next generation products in both the scientific research and commercial markets. PLI designs and manufactures advanced solid-state lasers for the scientific research and industrial markets. We anticipate that the acquisition of PLI will enable us to gain market share in the scientific research and industrial markets through additional product and service offerings.

In fiscal 2003, we initiated a tender offer to purchase the remaining 5,250,000 (39.62%) outstanding shares of our Lambda Physik subsidiary for approximately $10.50 per share. As a result of the tender offer and the purchase of additional outstanding shares subsequent to the tender offer, as of September 30, 2003 we own 94.26% of the outstanding shares of Lambda Physik. We expect that the acquisition of these additional shares will enable us to increase operating efficiencies by providing management and technical expertise, as well as minimizing redundant administrative costs.

RESTRUCTURINGS AND CONSOLIDATION

In fiscal 2003, we undertook several initiatives aimed at both changing business strategy and improving operational efficiencies. Changes in business strategy included the termination of the activities of CTAG. In an attempt to improve operational efficiencies, we outsourced the production of printed circuit boards, reassessed the planned utilization of certain long-lived assets at various operating sites and consolidated the activities of a foreign subsidiary. As a direct result of these initiatives, we recognized $31.1 million in restructuring, impairment and other charges in fiscal 2003. These initiatives are discussed further in “Management’s Discussion and Analysis of Results of Operations and Financial Condition.”

GOVERNMENT REGULATION

Environmental regulation

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. In the event of such an accident involving such materials, we could be liable for damages and such liability could exceed the amount of our liability insurance coverage and the resources of our business.

SEGMENT INFORMATION

Financial information relating to segment operations for the three years ended September 30, 2003, 2002 and 2001, is set forth in Note 18, “Segment Information” of the Notes to Consolidated Financial Statements.

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, 2003, 2002 and 2001, is set forth in Note 18, “Segment Information” of the Notes to Consolidated Financial Statements.

ITEM 2. PROPERTIES

At September 30, 2003, our primary locations were as follows:

Our corporate headquarters and major Electro-Optics manufacturing and office 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 manufacturing and office facilities are located in Auburn, Los Gatos and San Jose, California and Portland, Oregon. The Auburn facilities consist of four buildings totaling 254,380 square-feet, all of which we own on leased land, with land leases expiring from 2021 through 2046. The Los Gatos facility consists of an 18,000 square-foot building leased through December 2003. The San Jose facility consists of a 28,800 square-foot building leased through February 2007 with a five-year renewal option. The Portland facility consists of a 25,064 square-foot building leased through June 2007.

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 vacant and is being held as an investment as it did not meet the necessary criteria to be classified as an asset held for sale at September 30, 2003.

Coherent GmbH’s office facility in Dieburg, Germany consists of a 31,306 square-foot building leased through December 2007, with a five-year renewal option.

Coherent Lübeck’s manufacturing and office facilities in Lübeck, Germany consists of (1) a 32,507 square-foot building leased through June 2005 and (2) a 21,980 square-foot building leased through December 2009 with an option to purchase the building at the end of the lease term.

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

Coherent Tutcore’s manufacturing and office facility in Tampere, Finland, where we manufacture semiconductor wafers, consists of approximately 5 acres of land and a 40,970 square-foot building that we own.

Coherent Japan’s office facilities include a 17,550 square-foot building in Tokyo leased through April 2005 and a 2,156 square-foot building in Osaka leased through March 2004.

Coherent Scotland’s manufacturing and office facility in Glasgow, Scotland consists of a 30,000 square-foot building that we own.

Lasertec BV’s manufacturing and office facility in Barendrecht, Netherlands consists of a 2,992 square-foot building leased until April 2006.

Crystal Associates’ manufacturing and office facility, located in East Hanover, New Jersey, consists of a 30,000 square-foot building leased through October 2005.

Coherent DEOS’ manufacturing and office facility, located in Bloomfield, Connecticut, consists of a 48,046 square-foot building leased through December 2012.

Lambda Physik AG’s manufacturing and office facility in Göttingen, Germany, which also houses Optomech, consists of four owned buildings totaling 119,500 square-feet on 7.6 acres of owned land.

Lambda Physik’s primary domestic office facility is located in Fort Lauderdale, Florida, consisting of a 27,868 square-foot building leased until December 2008. Additionally, two other domestic leased buildings of approximately 1,000 square-feet each are located in San Diego, California and Boise, Idaho and are leased through June 2005 and November 2005, respectively.

Lambda Physik Japan’s office facilities in Yokohama, Japan, consist of a 7,080 square-foot building leased through October 2004 and two building sites totaling 940 square-feet under varying leases expiring from July 2004 through April 2006.

MicroLas Laser System GmbH’s manufacturing and office facility in Göttingen, Germany, consists of a 32,232 square-foot building leased until December 2006.

We maintain sales and service offices under varying leases expiring from 2005 through 2014 in Korea, China, France, Italy, the United

Kingdom and the Netherlands.

We lease 216,000 square-feet of office, research and development and manufacturing space in Santa Clara, California, a portion of which we are subleasing to Lumenis, Ltd. The lease was originally set to expire in February 2007; however, in the first quarter of fiscal 2004, we entered into an irrevocable agreement to purchase the facility for $24.6 million (see Note 11, “Commitments and Contingencies” in our Notes to Consolidated Financial Statements).

We consider our facilities to be both suitable and adequate to provide for current and near term requirements.

ITEM 3. LEGAL PROCEEDINGS

Certain claims and lawsuits have been filed or are pending against us. In the opinion of management, all such matters have been adequately provided for, are without merit, or are of such kind that if disposed of unfavorably, would not have a material adverse effect on our consolidated results of operations or financial position.

We, along with several other companies, have been named as a party to a remedial action order issued by the California Department of Toxic Substance Control relating to soil and groundwater contamination at and in the vicinity of the Stanford Industrial Park in Palo Alto, California, where our former headquarters facility is located. The responding parties to the Regional Order (including Coherent) have completed Remedial Investigation and Feasibility Reports, which were approved by the State of California. The responding parties have installed four remedial systems and have reached agreement with responding parties on final cost sharing.

We were was also named, along with other parties, to a remedial action order for the Porter Drive facility site itself in Stanford Industrial Park. The State of California has approved the Remedial Investigation Report, Feasibility Study Report, Remedial Action Plan Report and Final Remedial Action Report, prepared by us for this site. We have been operating remedial systems at the site to remove subsurface chemicals since April 1992. During fiscal 1997, we settled with the prior tenant and neighboring companies, on allocation of the cost of investigating and remediating the site at 3210 Porter Drive, Palo Alto and the bordering site at 3300 Hillview Avenue, Palo Alto.

Management believes that our probable, nondiscounted net liability at September 30, 2003 for remaining costs associated with the above environmental matters is $0.5 million, which has been previously accrued. This amount consists of total estimated probable costs of $0.6 million ($0.1 million included in other current liabilities and $0.5 million included in other long-term liabilities) reduced by minimum probable recoveries of $0.1 million included in other assets from other parties named to the order.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

Not applicable.

PART II

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.

	Quarters Ended
	Year ended September 30, 2003								Year ended September 30, 2002
	Dec. 28		Mar. 29		June 28		Sept. 27		Dec. 29		Mar. 30		June 29		Sept. 28

Closing Price:
High	$	21.63	$	21.94	$	25.50	$	28.44	$	31.70	$	35.46	$	34.75	$	28.43
Low	$	16.17	$	17.47	$	18.75	$	22.77	$	26.27	$	26.98	$	26.99	$	18.64

The number of stockholders of record as of December 1, 2003 was 1,664. 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 our Common Stock. See Note 9, “Short-term Borrowings” in our Notes to Consolidated Financial Statements.

Equity Compensation Plans

The following table provides information regarding the Company’s outstanding stock options in plans approved by stockholders compared to those stock options issued outside of stockholder-approved plans as of September 30, 2003:

	Number of Shares to be Issued Upon Exercise of Outstanding Options	Weighted Average Exercise Price of Outstanding Options		Number of Shares Remaining Available for Future Issuance
Equity compensation plans approved by stockholders:
Stock Option Plans and Non-Employee Director’s Plan (a) (b)	4,957,300	$	31.22	1,577,796
Employee Stock Purchase Plan	—	—		914,556
Productivity Incentive Plan	—	—		76,829
Equity compensation plans not approved by stockholders:	—	—		—
Total	4,957,300	$	31.22	2,569,181

(a) Consists of five plans: 2001 Stock Option Plan, 1995 Stock Option Plan, 1987 Stock Option Plan, 1998 Non-Employee Director’s Stock Option Plan and 1990 Non-Employee Director’s Stock Option Plan.

(b) All shares remaining available for future issuance are related to the 2001 Stock Option Plan, 1995 Stock Option Plan and 1998 Non-Employee Director’s Stock Option Plan.

ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA

The following selected consolidated financial data for each of the last five fiscal years have been derived from our audited financial statements. The following selected consolidated financial data reflects our former Medical segment as discontinued operations. See Note 3, “Discontinued Operations” of Notes to Consolidated Financial Statements.

The information set forth below is not necessarily indicative of results of future operations and should be read in conjunction with “Management’s Discussion and Analysis of Results of Operations and Financial Condition” and the Consolidated Financial Statements and Notes to Consolidated Financial Statements.

	Years ended
Consolidated financial data	Sept. 27, 2003(5)			Sept. 28, 2002(4)			Sept. 29, 2001(3)		Sept. 30, 2000(2)		Oct. 2, 1999(1)
	(In thousands, except per share data)

Net sales	$	406,235		$	397,324		$	477,945	$	383,983	$	320,480
Gross profit	148,768			161,006			199,773		176,284		140,057
Income (loss) from continuing operations	$	(46,533	)	$	(70,837	)	$	27,485	$	61,224	$	16,229
Income (loss) from continuing operations per share (6):
Basic	$	(1.58	)	$	(2.46	)	$	0.99	$	2.42	$	0.68
Diluted	$	(1.58	)	$	(2.46	)	$	0.95	$	2.24	$	0.66
Shares used in computation (6):
Basic	29,448			28,786			27,709		25,252		23,957
Diluted	29,448			28,786			28,817		27,319		24,633
Total assets (excluding discontinued operations)	$	709,365		$	804,257		$	874,517	$	591,313	$	352,376
Long-term obligations	27,911			43,345			58,159		68,647		74,745
Other long-term liabilities	29,008			55,860			53,097		32,143		15,626
Minority interest in subsidiaries	7,475			49,602			49,367		48,855		3,945
Stockholders’ equity	$	543,858		$	557,243		$	598,295	$	461,769	$	277,098

(1) Includes a $2.7 million after-tax charge for the write-off of purchased in-process research and development.

(2) Includes a $33.5 million after-tax gain on issuance of stock by our Lambda Physik AG subsidiary.

(3) Includes a $5.8 million after-tax charge for write-offs of inventory and open purchase commitments in our Lambda Physik segment. Also includes a $1.6 million after-tax charge for the write-off of purchased in-process research and development associated with the acquisitions of DEOS and MicroLas.

(4) Includes a $79.2 million after-tax impairment charge on our Lumenis common stock; a $6.7 million after-tax asset impairment charge resulting primarily from a decision to cease most of our activities related to the telecom passives component market; a $3.0 million tax benefit relating to a refund of prior year taxes; $1.0 million after-tax gain on sale of real estate; $0.7 million after-tax and minority interest royalty revenues; and a $0.7 million after-tax and minority interest non-recurring favorable inventory adjustment.

(5) Includes a $10.2 million impairment charge on our Lumenis common stock; a $9.2 million after-tax charge related to the termination of activities in our Telecom-Actives group; a $7.9 million after-tax charge for the write-down of manufacturing facilities and equipment to net realizable value due to excess capacity and consolidation of operations; a $6.3 million charge for the write-off of purchased in-process research and development associated with our acquisition of Positive Light, Inc and step acquisition of Lambda Physik; a $5.6 million valuation allowance against Lambda Physik’s deferred tax assets; a $2.7 million after-tax impairment charge to write down our Lincoln, California facility to net realizable value; a $2.3 million after-tax charge to write down our loan to Picometrix, Inc. to net realizable value; a $1.8 million, net of minority interest, impairment charge to write off goodwill associated with Lambda Physik’s lithography business; severance costs at Lambda Physik of $1.3 million, after-tax and net of minority interest; a $1.0 million after-tax charge related to early lease termination costs associated with our Santa Clara, California facility; a $2.1 million tax benefit relating to refund of prior years’ taxes; a customer contract settlement fee of $2.0 million, after-tax and net of minority interest received by Lambda Physik; and a gain of $1.5 million related to the sale of 5.2 million shares of Lumenis, Ltd.

(6) See Note 2, “Significant Accounting Policies” and Note 17, “Earnings (Loss) Per Share” of Notes to Consolidated Financial Statements for an explanation of the determination of the number of shares used in computing income (loss) per share.

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

The following discussion of our financial condition and results of operations should be read in conjunction with our Consolidated Financial Statements and related notes included in Item 8, “Financial Statements and Supplementary Data” in this Annual Report on Form 10-K. This discussion contains forward-looking statements, which involve risk and uncertainties. Our actual results could differ materially from those anticipated in the forward looking statements as a result of certain factors, including but not limited to those discussed in “Risk Factors” and elsewhere in this Annual Report on Form 10-K. See “Special Note Regarding Forward Looking Statements” at the beginning of the Annual Report on Form 10-K.

OVERVIEW

On November 6, 2002, we decided to terminate the activities of our Coherent Telecom-Actives Group (CTAG), an operating segment that had been aggregated with our Photonics Group in our Electro-Optics reportable segment. Based on new market information and insights and the status of our development projects at CTAG obtained subsequent to September 30, 2002, we determined that our return on investment for at least the next several years would have been unsatisfactory and, therefore, additional investments were no longer justified. The charge related to our CTAG operating segment in fiscal 2003 resulted from the $6.5 million write-down of equipment and leasehold improvements to net realizable value; a $6.8 million accrual for the estimated contractual obligation for lease and other facility costs of the building, net of estimated sublease income, in San Jose, California, formerly occupied by CTAG; the $1.4 million write-off of our option to purchase Picometrix, Inc. (Picometrix) and $0.1 million of other restructuring costs.

In the fourth quarter of fiscal 2002, management decided that, given our exit from the passive telecom market and the outsourcing of the production of printed circuit boards, our manufacturing facility located in Lincoln, California was not needed to support our operations and committed to sell certain land, buildings and improvements and equipment with a total carrying value of $12.4 million. In fiscal 2003, the proposed sale of the facility met the necessary criteria to be classified as assets held for sale under Statement of Financial Accounting Standards (SFAS) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (SFAS 144). Accordingly, the carrying values of the land, buildings and improvements and equipment were adjusted to their respective fair values less costs to sell of $9.0 million and $0.3 million, respectively, and as a result, we recorded an impairment charge of $3.1 million ($2.7 million after-tax) during fiscal 2003. The determinations of fair values were based on quoted market prices and comparable sales of similar assets. On July 30, 2003, we completed the sale of the land, buildings and improvements and equipment and received net proceeds of $9.2 million.

On November 22, 2002, we terminated our option to purchase Picometrix and wrote-off the value of the option ($1.4 million) in our restructuring, impairment and other charges for our CTAG operating segment, as noted above. As a result of our decision to terminate our option, the note receivable from Picometrix was payable to us in full on May 26, 2003. During the first quarter of fiscal 2003, we evaluated the collectibility of the Picometrix note receivable, including the ability of Picometrix to make the required interest and principal payments and determined that the estimated net realizable value of the note was $0.9 million, and accordingly recorded an impairment loss of $3.7 million ($2.3 million after-tax) during the quarter then ended. To date, no amount has been paid on the principal balance of the note receivable, as we have not called the note. At September 30, 2003, we evaluated the collectibility of the note, including the ability of Picometrix to make the required interest and principal payments, and concluded that the net realizable value of the note was $0.9 million.

On December 6, 2002, we acquired Molectron Detector, Inc. (Molectron) of Portland, Oregon for approximately $11.5 million in cash. Molectron designs and manufactures laser test and measurement equipment used across all photonics-based applications and markets. We expect that the acquisition will enable us to leverage Molectron’s well-regarded power and energy management products into our next generation products in both the scientific and commercial markets. The acquisition was accounted for as a purchase and, accordingly, we recorded $5.5 million as goodwill and $6.1 million as other intangibles for the excess of the purchase price over the fair value of net tangible assets acquired. The other intangibles, principally existing technology, customer base and trade name are amortized over the estimated useful lives of 1 to 10 years.

As of the first quarter of fiscal 2003, the market value of our investment in Lumenis, Ltd. (Lumenis) common stock had declined to $9.9 million. This decline was deemed to be other-than-temporary and an impairment loss of $10.2 million was recognized in the first quarter of fiscal 2003. We recorded no net tax benefit related to the $10.2 million impairment loss, as we recorded a $4.1 million valuation allowance against this capital loss deferred tax asset.

During the second quarter of fiscal 2003, we recorded a goodwill impairment charge of $2.4 million ($1.8 million net of minority interest) related to Lambda Physik’s lithography business as a result of significant changes in the economic outlook for this business.

On April 1, 2003, we acquired Positive Light, Inc. (PLI) of Los Gatos, California for approximately $35.0 million in cash (net of cash

acquired of $3.9 million). PLI designs and manufactures advanced solid-state lasers for the scientific and industrial markets. The acquisition was accounted for as a purchase and, accordingly, we recorded $18.9 million as goodwill and $10.9 million as other intangibles for the excess of the purchase price over the fair value of net tangible assets and $4.4 million as in-process research and development (IPR&D) acquired. The other intangibles, principally existing technology, customer base, trade name, backlog and a non-compete agreement are amortized over the estimated useful lives of 1 to 8 years.

On June 3, 2003, we initiated a tender offer to purchase the remaining 5,250,000 (39.62%) outstanding shares of our Lambda Physik subsidiary for approximately $10.50 per share. The offer period was originally set to expire on July 15, 2003, however, as a result of our decision to waive our requirement of owning a minimum of 95% of the total shares of Lambda Physik subsequent to the tender offer, the offer period was extended to July 30, 2003. As of the closing date of the offer period, we purchased 4,448,569 outstanding shares of Lambda Physik for approximately $47.4 million, resulting in a total ownership percentage of 93.95% (inclusive of shares previously owned). We purchased an additional 32,472 of outstanding shares of Lambda Physik for approximately $0.3 million subsequent to the offering period, resulting in a total ownership percentage of 94.26% (inclusive of shares previously owned) as of September 30, 2003. We have accounted for this transaction as a step acquisition using the purchase method. We immediately charged $1.9 million to expense for amounts representing purchased IPR&D and recorded $4.2 million of identifiable intangible assets. Identifiable intangible assets include existing technology, trade name, backlog, customer base and patents and are amortized over the estimated useful lives of six months to ten years. At September 30, 2003, we had $8.3 million held in an escrow account that is restricted for the sole purpose of acquiring the remaining outstanding shares of Lambda Physik and are included in non-current restricted cash, cash equivalents and short-term investments on our consolidated balance sheets.

In the fourth quarter of fiscal 2003, management reassessed the planned utilization of certain long-lived assets of our operating sites in Auburn, California and Tampere, Finland, and determined that we had excess manufacturing capacity. As a result, management committed to a plan to sell certain equipment with a carrying value of $5.7 million and to dispose of certain building improvements with a carrying value of $1.0 million. The proposed sale of the equipment met the necessary criteria to be classified as assets held for sale under SFAS 144. Accordingly, the carrying value of the equipment was adjusted to its current fair value less costs to sell of $0.8 million. The building improvements were determined to have no future benefit and were abandoned in the fourth quarter of fiscal 2003. As a result, we recorded an impairment charge of $5.9 million ($3.5 million after-tax) in fiscal 2003.

In the fourth quarter of fiscal 2003, management initiated plans to consolidate the activities of a foreign subsidiary located in Glasgow, Scotland in an attempt to increase operating efficiency. Management determined that the carrying value of long-lived assets located at this subsidiary exceeded their estimated future undiscounted cash flows. Accordingly, long-lived assets with a carrying value of $6.3 million were written down to their estimated fair value of $2.9 million, resulting in an impairment charge of $3.4 million in fiscal 2003. Additionally, certain long-lived assets that were classified as held for use at our Barendrecht, the Netherlands subsidiary were impaired, resulting in a charge of $0.3 million.

In the fourth quarter of fiscal 2003, we were not in compliance with certain financial covenants associated with the operating lease arrangement for our Santa Clara, California facility. In October 2003, we entered into an irrevocable agreement to purchase the facility for $24.6 million, and subsequently received a waiver for this violation from the lessor effective as of September 30, 2003. As of September 30, 2003, the estimated fair value of the facility was $1.7 million less than the purchase price of $24.6 million and we have recorded such amount in other current liabilities. During the first quarter of 2004, we purchased the facility for $24.6 million.

In the fourth quarter of fiscal 2003, we recorded income from discontinued operations of $0.6 million, net of tax, related to a tax benefit for the refund of prior year taxes relating to our former Medical segment.

RESULTS OF OPERATIONS—YEARS ENDED SEPTEMBER 30, 2003, 2002 AND 2001

Consolidated Summary

Loss from continuing operations for fiscal 2003 was $46.5 million, or $1.58 per diluted share, including restructuring, impairment and other charges of $35.2 million ($24.8 million after-tax), an impairment charge related to the write-down of our shares of Lumenis of $10.2 million, a write-off of $6.3 million for purchased IPR&D relating to the acquisitions of PLI and 33.88% of Lambda Physik, a $5.6 million net of minority interest charge to reflect the establishment of a valuation allowance against Lambda’s deferred tax assets and severance costs at Lambda Physik of $2.5 million ($1.3 million after-tax and net of minority interest), partially offset by a settlement fee of $4.4 million ($2.0 million after-tax and net of minority interest) received by Lambda Physik related to the cancellation of a customer contract dating back to the fourth quarter of fiscal 2001, gains of $2.1 million relating to refunds of prior year taxes and a gain of $1.5 million related to the sale of 5.2 million shares of Lumenis.

During fiscal 2002, loss from continuing operations was $70.8 million, or $2.46 per diluted share, including impairment charges of $115.3 million ($85.9 million after-tax), a $3.0 million tax benefit related to a refund of prior year taxes, a gain on sale of real estate of $1.7 million ($1.0 million after-tax), royalty revenue of $2.0 million ($0.7 million after-tax and net of minority interest) and a non-

recurring favorable inventory adjustment of $1.6 million ($0.7 million after-tax and net of minority interest). During fiscal 2001, our income from continuing operations was $27.5 million, or $0.95 per diluted share, including a $10.7 million ($5.8 million after-tax and net of minority interest) charge for excess inventory and open purchase order commitments at Lambda Physik and a $2.5 million ($1.6 million after-tax) write-off of purchased IPR&D.

The fiscal 2003 restructuring, impairment and other charges of $35.2 million ($24.8 million after-tax) include a $14.8 million ($9.2 million after-tax) restructuring and impairment charge related to the termination of activities of our CTAG operating segment, impairment charges of $9.6 million ($7.9 million after-tax) relating to manufacturing facilities and equipment due to excess capacity and consolidation of operations, a $3.7 million ($2.3 million after-tax) allowance against our note receivable from Picometrix, a $3.1 million ($2.7 million after-tax) write-down of our Lincoln, California facility to estimated net realizable value at December 28, 2002, goodwill impairment of $2.4 million ($1.8 million net of minority interest) and $1.7 million ($1.0 million after-tax) of early lease termination costs relating to our operating lease for our facility in Santa Clara, California, partially offset by the recovery of $0.1 million in excess of estimated net realizable value for assets previously impaired and classified as held for sale.

The fiscal 2002 impairment charges include a $104.2 million ($79.2 million after-tax) write-down of the value of the Lumenis stock we acquired as a result of the April 2001 sale of our Medical segment to Lumenis, as well as an $11.0 million ($6.7 million after-tax) charge for equipment impairment due to management’s decision to cease most of our activities related to the telecom passives component market.

The fiscal 2003 decrease in loss from continuing operations as compared to fiscal 2002 was primarily attributable to the prior year’s impairment charges, the current year’s gain on settlement contracts, the current year’s gain on sale of Lumenis shares, partially offset by the current year’s restructuring, impairment and other charges, lower gross margins as a percentage of sales, current year’s impairment charge on Lumenis shares, current year’s IPR&D charges, current year’s valuation allowance against Lambda’s deferred tax assets, current year’s severance costs at Lambda Physik, lower interest and dividend income, the prior year’s gain on sales of real estate, prior year’s royalty revenue and prior year’s favorable inventory adjustment.

The fiscal 2002 decrease in income from continuing operations as compared to fiscal 2001 was primarily attributable to the fiscal 2002 impairment charges, lower sales volumes, lower gross margins as a percentage of sales and lower interest and dividend income, partially offset by the fiscal 2001 charge for excess inventory and open purchase order commitments at Lambda Physik, the fiscal 2002 tax benefit related to a refund of prior year taxes, the fiscal 2001 IPR&D charge, the fiscal 2002 gain on sale of real estate, the non-recurring favorable inventory adjustment in fiscal 2002 and the cessation of goodwill amortization due to the adoption of SFAS No. 142 “Goodwill and Other Intangible Assets” (SFAS 142) in fiscal 2002.

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.

	Years ended September 30,
	2003				2002				2001
	Amount		Percentage of total net sales		Amount		Percentage of total net sales		Amount		Percentage of total net sales
	(Dollars in thousands)
Consolidated:
Domestic	$	157,171	38.7	%	$	159,247	40.1	%	$	213,365	44.6	%
Foreign	249,064		61.3	%	238,077		59.9	%	264,580		55.4	%
Total	$	406,235	100.0	%	$	397,324	100.0	%	$	477,945	100.0	%

Electro-Optics:
Domestic	$	142,310	35.0	%	$	140,371	35.3	%	$	172,833	36.2	%
Foreign	181,998		44.8	%	167,251		42.1	%	183,997		38.5	%
Total	$	324,308	79.8	%	$	307,622	77.4	%	$	356,830	74.7	%

Lambda Physik:
Domestic	$	14,861	3.7	%	$	18,876	4.8	%	$	40,532	8.4	%
Foreign	67,066		16.5	%	70,826		17.8	%	80,583		16.9	%
Total	$	81,927	20.2	%	$	89,702	22.6	%	$	121,115	25.3	%

Consolidated

During fiscal 2003, net sales increased by $8.9 million, or 2%, to $406.2 million from $397.3 million in fiscal 2002 as a result of increased sales volumes in the Electro-Optics segment, partially offset by decreased sales volumes in the Lambda Physik segment. Foreign sales increased $11.0 million, or 5%, while domestic sales decreased $2.1 million, or 1%. Foreign sales were 61% of net sales in fiscal 2003 and 60% in fiscal 2002.

During fiscal 2002, net sales decreased by $80.6 million, or 17%, to $397.3 million from $477.9 million in fiscal 2001 as a result of decreased sales volumes in both reportable segments. Domestic sales decreased at a higher rate than foreign sales for a total decrease of $54.1 million, or 25%. Foreign sales were 60% of net sales in fiscal 2002 and 55% in fiscal 2001.

Electro-Optics

Electro-Optics net sales increased by $16.7 million, or 5%, in fiscal 2003 to $324.3 million from $307.6 million in fiscal 2002. Foreign sales increased by $14.8 million, or 9%, and domestic sales increased by $1.9 million, or 1%, from fiscal 2002. Sales increased primarily due to the acquisitions of Molectron and PLI and across all five primary market segments: microelectronics, graphic arts and display, materials processing, scientific research and government programs, and OEM components and instrumentation. Net sales within the scientific and government lines of business improved by approximately $4.8 million, or 5%, compared to fiscal 2002 primarily as a result of the increase in sales from PLI, partially offset by a decline in other scientific business. The microelectronics market application net sales increased $3.9 million, or 8%, from fiscal 2002 due to improving fundamentals in the semiconductor equipment and consumer electronics markets. Graphic arts and display benefited from a transition to more environmentally friendly digital processes in both the computer-to-plate and photo-finishing applications, resulting in a $3.4 million, or 16% increase in sales from fiscal 2002. The materials processing market application net sales increased $2.3 million, or 5%, from fiscal 2002 as the laser replaced conventional machine tools for cutting, marking, and coding, and benefited from an increase in sales to Asia, although growth was somewhat tempered as a result of the spread of SARS in the region. Our OEM components and instrumentation net sales increased $2.2 million, or 2%, resulting from increased demand and sales of bio-instrumentation products offset by a decline in sales to Lumenis. Additionally, the strengthening of the Euro and Yen against the U.S. dollar also resulted in an increase to net sales. Although we experienced increases in orders received over the past several quarters and we continued to have a sizeable backlog of orders, current market conditions make it difficult to predict future orders.

Electro-Optics net sales decreased by $49.2 million, or 14%, in fiscal 2002 to $307.6 million from $356.8 million in fiscal 2001. Domestic sales decreased by $32.5 million, or 19%, and foreign sales decreased by $16.7 million, or 9%, in fiscal 2002. Sales decreased primarily due to lower sales volumes in semiconductor and related manufacturing markets, including semiconductor lasers for non-metal printed circuit board (PCB) and hole drilling applications, as well as lower optical telecommunications sales volumes.

Lambda Physik

Lambda Physik net sales decreased by $7.8 million, or 9%, in fiscal 2003 to $81.9 million from $89.7 million in fiscal 2002. Domestic sales decreased by $4.0 million, or 21%, and foreign sales decreased by $3.8 million, or 5%. Net sales decreased primarily due to lower sales volumes in the industrial market due to weakness in the flat panel business, lower royalty revenue and lower demand with medical OEM customers, partially offset by the strengthening of the Euro against the U.S. dollar and higher sales volumes in the lithography market due to the introduction of the new 193nm wavelength lasers, following a period of decline caused by the downturn of the semiconductor industry.

Lambda Physik net sales decreased by $31.4 million, or 26%, in fiscal 2002 to $89.7 million from $121.1 million in fiscal 2001. Domestic sales decreased by $21.6 million, or 53%, and foreign sales decreased by $9.8 million, or 12%. The decrease in sales was primarily due to weakness in the overall lithography market, as well as lower demand with medical OEM customers, partially offset by $2.0 million in fiscal 2002 royalty revenue.

In fiscal 2003, one customer accounted for 18% of Lambda Physik’s net sales while another customer accounted for 11% of Lambda Physik net sales. In fiscal 2002, one customer accounted for 32% of Lambda Physik’s net sales. In fiscal 2001, two customers accounted for 16% each of Lambda Physik’s net sales and one customer accounted for 10% of Lambda Physik’s net sales.

Gross Profit

Consolidated

The consolidated gross profit rate decreased by 3.9% to 36.6% in fiscal 2003 from 40.5% in fiscal 2002. The decrease in the gross profit rate was primarily due to lower shipments of higher margin industrial systems in the Lambda Physik segment, lower shipments of higher margin commercial solid state products in the Electro-Optics segment, higher manufacturing expenses as a percentage of sales in the Lambda Physik segment due to lower sales volumes, higher inventory valuation reserve requirements due to a lower forecasted outlook for the lithography business and higher warranty expenses in both segments.

Our consolidated gross profit rates have been and will continue to be affected by a variety of factors including foreign and domestic sales mix, manufacturing efficiencies, excess and obsolete inventory write-downs, warranty costs, pricing by competitors or suppliers, new product introductions, production volume, customization and reconfiguration of systems, foreign currency fluctuations and field service margins.

The consolidated gross profit rate decreased by 1.3% to 40.5% in fiscal 2002 from 41.8% in fiscal 2001. The decrease in the gross profit rate was primarily due to lower sales of higher margin commercial solid-state products and underutilization of capacity in the Electro-Optics segment, partially offset by higher margins in the Lambda Physik segment. The increase in gross profit rate in the Lambda Physik segment was primarily due to the fiscal 2001 unusual charge of $13.9 million for excess inventory and open purchase order commitments (11.4% negative impact on fiscal 2001 margin) and the fiscal 2002 $2.0 million royalty revenue (1.5% favorable impact on fiscal 2002 margin) offset by lower volume of higher margin lithography shipments, underutilization of capacity and lower margins on service revenue.

Electro-Optics

The gross profit rate decreased by 2.4% to 39.3% in fiscal 2003 from 41.7% in fiscal 2002. The decrease was primarily due to lower sales of higher margin commercial solid-state products and higher warranty expense due to the introduction of several more complex products.

The gross profit rate decreased by 3.9% to 41.7% in fiscal 2002 from 45.6% in fiscal 2001. The decrease was primarily due to lower sales of higher margin commercial solid-state products and under-utilization of capacity due to lower sales volumes.

Lambda Physik

The gross profit rate decreased by 10.5% to 26.2% in fiscal 2003 from 36.7% in fiscal 2002. The decrease in gross profit rate was primarily due to lower shipments of higher margin industrial systems, higher manufacturing expenses as a percentage of sales due to lower sales volumes, higher inventory write-downs due to a lower forecasted outlook for the lithography business and higher warranty expenses in the industrial business.

The gross profit rate increased by 6.6% to 36.7% in fiscal 2002 from 30.1% in fiscal 2001. The increase in the gross profit rate was primarily due to the fiscal 2001 unusual charge of $13.9 million for excess inventory and open purchase order commitments (11.4% negative impact on fiscal 2001 margin) and the fiscal 2002 $2.0 million royalty revenue (1.5% favorable impact), partially offset by lower volume of higher margin lithography shipments, underutilization of capacity and lower margins on service revenue.

Operating Expenses

	Years Ended September 30,
	2003				2002				2001
	Amount		Percentage of total net sales		Amount		Percentage of total net sales		Amount		Percentage of total net sales
	(Dollars in thousands)
Research and development	$	50,751	12.5	%	$	52,613	13.2	%	$	52,961	11.1	%
In-process research and development	6,338		1.6	%	—		—		2,471		0.5	%
Selling, general and administrative	103,929		25.6	%	94,114		23.7	%	104,746		21.9	%
Restructuring, impairment and other charges	35,163		8.6	%	11,015		2.8	%	—		—
Intangibles amortization	5,147		1.3	%	3,427		0.9	%	5,262		1.1	%
Total operating expenses	$	201,328	49.6	%	$	161,169	40.6	%	$	165,440	34.6	%

Fiscal 2003 total operating expenses, including restructuring, impairment and other charges of $35.2 million and IPR&D charges of $6.3 million, increased by $40.2 million, or 25%, from fiscal 2002. As a percentage of net sales, total operating expenses increased to 49.6% in fiscal 2003 from 40.6% in fiscal 2002. Exclusive of the fiscal 2003 restructuring, impairment and other charges and IPR&D charges and the fiscal 2002 restructuring, impairment and other charges, operating expenses increased $9.7 million, or 6%, and increased to 39.3% of net sales in fiscal 2003 from 37.8% in fiscal 2002.

Fiscal 2002 operating expenses decreased by $4.3 million, or 3%, from fiscal 2001. As a percentage of net sales, operating expenses increased to 40.6% of net sales in fiscal 2002 from 34.6% in fiscal 2001. Exclusive of the fiscal 2002 restructuring, impairment and other charges and the fiscal 2001 write-off of purchased IPR&D, operating expenses decreased by $12.8 million, or 8%, but as a percentage of net sales increased to 37.8% from 34.1%.

Research and development

Fiscal 2003 research and development expenses decreased by $1.9 million, or 4%, from fiscal 2002 and decreased to 12.5% from 13.2% of net sales. The decrease is primarily due to the termination of our CTAG operations in the first quarter of fiscal 2003 and lower spending on projects in our Electro-Optics segment, partially offset by increased research and development activities related to individually addressable semiconductor laser bar products in our Electro-Optics segment and the strengthening of the Euro against the U.S. dollar in our Lambda Physik segment. Fiscal 2003 and 2002 research and development expenses include $1.9 million and $6.3 million, respectively, for our CTAG operating segment, which was terminated in the first quarter of fiscal 2003.

Fiscal 2002 research and development expenses decreased by $0.3 million, or 1%, from fiscal 2001 but increased to 13.2% from 11.1% of net sales. The dollar decrease was primarily due to the implementation of cost savings programs, partially offset by increased spending on telecom projects, as well as the integration of DEOS, which we acquired in the third quarter of fiscal 2001. The increase as a percentage of net sales is due to the decrease in fiscal 2002 net sales. Fiscal 2002 and 2001 research and development expenses include $6.3 million and $5.0 million, respectively, for our terminated CTAG operating segment.

In-process research and development

Fiscal 2003 IPR&D expense of $6.3 million resulted from our acquisition of PLI ($4.4 million) and our acquisition of an additional 33.88% of the minority interest ownership of Lambda Physik ($1.9 million). The values assigned to purchased IPR&D were determined by identifying research projects in areas for which technological feasibility were not established and that had no alternative future use. The values were determined by estimating the costs to develop the acquired in-process technologies into commercially viable products, estimating the resulting net cash flows from such projects, and discounting the net cash flows back to their present value.

Selling, general and administrative

Fiscal 2003 selling, general and administrative expenses increased by $9.8 million, or 10%, from fiscal 2002 and increased as a percentage of net sales from 23.7% to 25.6%. The increase was primarily due to consulting and depreciation expense related to our investments in information technology systems, the acquisitions of Molectron and PLI, severance costs in our Lambda Physik segment and increased sales commissions as a result of higher sales volumes, partially offset by lower incentive compensation and cost containment efforts.

Fiscal 2002 selling, general and administrative expenses decreased by $10.6 million, or 10%, from fiscal 2001, but increased as a percentage of net sales from 21.9% to 23.7%. The dollar decrease was primarily due to lower commissions as a result of lower sales volume and lower employment-related expenses due to headcount reductions and lower incentive compensation, partially offset by increased investments in information technology. The increase as a percentage of net sales is due to the decrease in fiscal 2002 net sales.

Restructuring, impairment and other charges

In fiscal 2003, restructuring, impairment and other charges consists of: (1) a $14.8 million charge related to the termination of our CTAG operations for the write-down of equipment to net realizable value; an accrual for the estimated contractual obligation for lease and other facility costs of the building formerly occupied by CTAG, net of sublease income; and the write-down of our option to purchase Picometrix; (2) $9.6 million of charges relating to manufacturing facilities and equipment due to excess capacity and consolidation of operations; (3) a $3.7 million charge to write-down the value of our note receivable from Picometrix to net realizable value; (4) a $3.1 million charge to write-down our Lincoln, California land, buildings and improvements and equipment to their estimated net realizable value; (5) a charge of $2.4 million due to the write-off of goodwill associated with Lambda Physik’s lithography business; and (6) $1.7 million of early lease termination costs relating to our operating lease for our facility in Santa Clara, California, partially offset by the recovery of $0.1 million in excess of estimated net realizable value for assets previously impaired and classified as held for sale.

In fiscal 2002 we recognized an impairment loss of $11.0 million related to the write-off of equipment due to management’s decision to cease most of our activities related to the telecom passives component market. A significant portion of the assets impaired was acquired in connection with capacity expansions in anticipation of future demand and was not placed in service.

Intangibles amortization

Fiscal 2003 intangibles amortization expense increased by $1.7 million, or 50%, primarily due to the acquisitions of PLI, Molectron and an additional 33.88% of Lambda Physik in fiscal 2003.

Fiscal 2002 intangibles amortization expenses decreased by $1.8 million, or 35%, primarily due to the cessation of goodwill amortization due to the adoption of SFAS 142, partially offset by the amortization of intangibles resulting from the acquisitions of

MicroLas, DEOS and Crystal Associates, Inc.

Other income (expense)

Other expense, net, decreased by $92.5 million in fiscal 2003 to $4.9 million from $97.4 million in fiscal 2002. Fiscal 2003 and fiscal 2002 other expense, net, includes charges of $10.2 and $104.2 million, respectively, due to the write-down of our investment in Lumenis common stock (investment write-down) due to other-than-temporary impairments. Exclusive of the investment write-downs, other income, net of other expense, decreased $1.5 million primarily due to $4.7 million lower interest and dividend income due to lower interest rates and lower cash balances and the non-recurring gain on sale of real estate of $1.7 million in fiscal 2002, partially offset by a $4.4 million settlement fee received by Lambda Physik relating to the cancellation of a customer contract in fiscal 2003.

Other expense, net, was $97.4 million in fiscal 2002 compared to other income, net, of $8.8 million in fiscal 2001. Fiscal 2002 other expense, net, includes a $104.2 million charge due to the investment write-down. Exclusive of this investment write-down, other income, net of other expense, decreased $2.0 million primarily due to lower interest income and lower dividends resulting from the purchase of MicroLas, partially offset by the gain on sale of real estate and rental income from the sublease of the Condensa facility to Lumenis.

Minority interest in subsidiaries earnings (losses)

Minority interest in subsidiaries losses was $4.2 million during fiscal 2003 compared to minority interest in subsidiaries’ earnings of $0.4 million during fiscal 2002 due to net losses incurred by our Lambda Physik segment. We expect minority interest in subsidiaries’ earnings (losses) to decrease in fiscal 2004 due to our acquisition of additional shares of Lambda Physik during fiscal 2003. As of September 30, 2003, minority shareholders owned 5.74% of the shares of Lambda Physik.

Minority interest in subsidiaries earnings decreased by $0.1 million during fiscal 2002 compared to fiscal 2001 primarily due to decreased profitability in our Lambda Physik segment.

Income taxes

The effective tax rate on loss from continuing operations (before minority interest) for fiscal 2003 was (11.6%) compared to (27.8%) for fiscal 2002. The effective tax rate decreased as a result of valuation allowances recorded on a portion of the write-down of Lumenis stock ($6.1 million) due to capital loss limitations, valuation allowances recorded on deferred tax assets at Lambda Physik ($7.8 million) and the nondeductibility of the current year IPR&D and goodwill impairment charges, partially offset by a benefit from the refund of prior year taxes.

The effective tax rate on income (loss) from continuing operations (before minority interest) for fiscal 2002 was (27.8%) compared to 35.1% for fiscal 2001. The effective tax rate decreased as a result of a valuation allowance recorded on a portion of the write-down of Lumenis stock due to capital loss limitations (including a $16.6 million valuation allowance provided on the Lumenis capital loss deferred tax asset) and changes in the distribution of taxable income among jurisdictions, partially offset by the proportionately lower impact of tax credits due to the large fiscal 2003 loss from continuing operations before income taxes.

FINANCIAL CONDITION

Liquidity and capital resources

Our ratio of current assets to current liabilities was 3.9:1 at September 30, 2003 compared to 5.4:1 at September 30, 2002. The decrease in our ratio from September 30, 2002 to September 30, 2003 is due to decreases in cash, cash equivalents and short-term investments of $130.0 million resulting from the purchases of Molectron, PLI and the minority interest of Lambda Physik and the reclassification of amounts to non-current restricted cash, cash equivalents and short-term investments. The decrease is partially offset by an increase in current restricted cash, cash equivalents and short-term investments of $15.3 million.

At September 30, 2003, our primary sources of liquidity were cash, cash equivalents and short-term available-for-sale investments of $134.9 million. Additional sources of liquidity were a multi-currency line of credit and bank credit facilities totaling $57.5 million as of September 30, 2003, of which $57.2 million was unused and available. During fiscal 2003, these credit facilities were used in the United States, Japan and Europe. Our domestic lines of credit include a $12.5 million unsecured revolving account from Union Bank of California, which expires January 31, 2005. Our Union Bank of California agreement is subject to standard covenants related to financial ratios, profitability and dividend payments and requires us to maintain $50 million of cash and certain short-term investments (as defined in the agreement) at all times in any bank in the United States (the Minimum Balance Arrangement). We were not in compliance with certain of these covenants, including the Minimum Balance Arrangement, and the line of credit was not available to us at September 30, 2003. Additionally, no amounts were outstanding on this agreement at September 30, 2003. We are currently working with our banks to obtain a new domestic line of credit agreement on terms acceptable to us. Our foreign lines of credit are principally unsecured. We believe that cash generated from operations, together with the liquidity provided by existing cash balances and financing capacity, is sufficient to satisfy liquidity requirements for the next 12 months.

During the second quarter of fiscal 2002, we renewed the lease for our Santa Clara, California facility that expires in February 2007. The facility consists of 216,000 square feet of office, research and development and manufacturing space. Upon expiration of the lease, we have an option to purchase the facility for $24.6 million, renew the lease for an additional five years or arrange for the sale of the facility to a third party where we would retain an obligation to the owner for the difference between the sale price, if less than $24.6 million, and $21.3 million, subject to certain provisions of the lease. If we do not purchase the facility or arrange for its sale as discussed above, we would be obligated for an additional lease payment of $21.3 million. The lease requires us to maintain specified financial covenants. At September 30, 2003, we were not in compliance with the net losses limit we agreed to maintain pursuant to our agreement. The net losses limit does not permit our consolidated net income to be less than zero for any two consecutive fiscal quarters; to be less than zero for any fiscal quarter by an absolute amount that exceeds 5% of owners equity adjusted for net intangibles on the last day of the previous quarter; and to be less than zero for any period of four consecutive fiscal quarters by an absolute amount that exceeds 5% of owners equity adjusted for net intangibles on the last day of the previous quarter. In October 2003, we entered into an irrevocable agreement to purchase the facility for $24.6 million, and subsequently, received a waiver for this violation from the lessor effective as of September 30, 2003. During the first quarter of fiscal 2004, we completed the purchase of the facility for $24.6 million.

During fiscal 2002, we amended the notes used to finance our acquisition of Star Medical (Star notes). The amendment included modifications of certain covenants associated with the notes and allowed a prepayment of a portion of the principal balance. As a result, in October 2002 we prepaid $7.3 million of the principal balance with no prepayment penalty. The Star notes originally included financial covenants such as maintaining a minimum tangible net worth, minimum consolidated debt to capitalization ratio, fixed charge coverage ratio, as well as non-financial covenants such as providing quarterly statements to the note holders. In September 2003, we amended the agreement to relinquish all financial covenant requirements. In place of the covenants, the amendment requires that we place cash and short-term investment balances in an amount equal to 120% of the principal balance in a restricted collateral account. At September 30, 2003, $15.2 million and $30.4 million of current and non-current restricted cash, cash equivalents and short-term investments were related to the Star notes (see Note 6 in our Notes to Consolidated Financial Statements).

As part of our tender offer to purchase the remaining outstanding shares of our Lambda Physik subsidiary, we were required by local regulations to have funds available for the offer in an account located in Germany. As of September 30, 2003, we had $8.3 million restricted for the purchase of the remaining outstanding shares of Lambda Physik and are included in non-current restricted cash, cash equivalents and short-term investments on our consolidated balance sheets.

Contractual Obligations and Off-Balance Sheet Arrangements

Other than the operating lease for our Santa Clara, California facility discussed above, we have no off-balance sheet arrangements as defined by Regulation S-K. The following summarizes our contractual obligations at September 30, 2003, and the effect such obligations are expected to have on our liquidity and cash flow in future periods (in thousands):

	Total		Less than 1 year		1 to 3 years		3 to 5 years		More than 5 years

Long-term debt payments	$	41,294	$	13,625	$	26,811	$	858	$	—
Operating lease payments (1)	50,782		6,914		10,893		25,999		6,976
Capital lease payments	791		549		242		—		—
Purchase commitments	971		971		—		—		—
Total	$	93,838	$	22,059	$	37,946	$	26,857	$	6,976

APPLICATIONS

Deep ultraviolet (DUV) lithography

Semiconductor inspection, measurement, test and repair

Flat panel display

Advanced packaging and interconnects

OEM components and instrumentation

Genomics and Proteomics

Bio-agent detection

Forensics

Microelectronics

Graphic arts and display

Materials processing

Scientific research and government programs

OEM components and instrumentation

PRODUCTS

Market Segment

Application

Products

Technology

Semiconductor lasers

Diode-pumped solid-state lasers

BACKLOG

SEGMENT INFORMATION

ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA

Research and development

Restructuring, impairment and other charges

Income taxes

FINANCIAL CONDITION

Liquidity and capital resources

Contractual Obligations and Off-Balance Sheet Arrangements