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                                 UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                           -------------------------

                                   FORM 10-K
                           -------------------------

(MARK ONE)

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

                  FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999

                                       OR

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

                       COMMISSION FILE NUMBER: 000-23461

                          SPECTRA-PHYSICS LASERS, INC.
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

<TABLE>
<S>                                            <C>
                   DELAWARE                                      77-0264342
       (STATE OR OTHER JURISDICTION OF                        (I.R.S. EMPLOYER
        INCORPORATION OR ORGANIZATION)                      IDENTIFICATION NO.)
</TABLE>

           1335 TERRA BELLA AVENUE, MOUNTAIN VIEW, CALIFORNIA, 94043
              (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)

        REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: 650-961-2550

          SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
                              TITLE OF EACH CLASS:

                                      NONE
                   NAME OF EACH EXCHANGE ON WHICH REGISTERED:

                                      NONE

          SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:

                         COMMON STOCK, $0.01 PAR VALUE
                                (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 [X]  No [ ]

    Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the 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.  [ ]

    As of February 3, 2000, 16,529,193 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 February 3, 2000) of
Spectra-Physics Lasers, Inc., held by nonaffiliates was $95,554,000. For purpose
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.

                      DOCUMENTS INCORPORATED BY REFERENCE

    Portions of the definitive proxy statement to be filed on or prior to April
28, 2000, pursuant to Regulation 14A of the Securities Exchange Act of 1934, are
incorporated by reference into Part III of this Form 10-K.

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                                     PART I

ITEM 1. BUSINESS

GENERAL

     Spectra-Physics Lasers, Inc. (the "Company") is a leader in the design,
development, manufacture and distribution of lasers, laser systems and optics
for a broad range of markets. The Company has been a pioneer in the laser
industry and has developed a proprietary and patented portfolio of laser, optic
and related manufacturing technologies. The Company offers three broad product
lines: high power semiconductor-based lasers and laser-based systems (which
consist of high power semiconductor lasers ("HPSL") and solid state lasers);
optics; and conventional lasers. The Company's high power semiconductor-based
products range from semiconductor lasers, the basic engine, through
semiconductor laser pumped lasers to end user systems. Through technological
innovation, the Company is leading the transition to high power
semiconductor-based lasers from conventional lasers such as gas, liquid and lamp
pumped lasers. The Company has been at the forefront of high power
semiconductor-based laser technology for the last 16 years and is leveraging its
technical strengths to develop high power semiconductor-based lasers, which are
generally more efficient, reliable, cost-effective and compact than conventional
lasers. These lasers are enabling many new applications and replacing
conventional lasers in existing applications in industrial, OEM and research and
development markets. According to Strategies Unlimited, a market research firm,
the use of high power semiconductor-based lasers is expected to increase
approximately 20% to 40% annually over the next several years.

     The Company also supplies a broad range of optics products to the
telecommunications, computer and microelectronics manufacturing, industrial
manufacturing, medical and image recording markets. For example, in the
telecommunications market, the Company recently introduced 200 GHz. thin film
filters for use in dense wavelength division multiplexing ("DWDM") systems which
are used to increase the capacity of fiber optic lines.

     The Company is also a leading supplier of conventional lasers to industrial
and research and development customers. These lasers, while based on older
technology, have unique performance characteristics that make them the only
current solution for certain demanding technical applications. According to
Laser Focus World, the market for high power conventional lasers is expected to
grow from $1.5 billion in 1999 to $1.8 billion in 2000. The Company's
conventional products include ultrafast systems, amplifier systems, optical
parametric oscillators, air and water-cooled ion lasers, and high-energy flash
lamp pumped YAG lasers. The Company's strong market position and technology
leadership in these conventional laser applications enhances its opportunity to
expand its high growth semiconductor-based laser business by generating funds,
capitalizing on strong customer relationships and leveraging its technological
expertise.

     The Company works closely with its customers to develop its products and is
focused on providing innovative solutions to customer needs. To control critical
aspects of product quality, significantly improve time-to-market, reduce costs
and identify new applications, the Company has vertically integrated into
strategic technologies. The Company sells its products to a wide range of
customers for use in a variety of applications in markets such as
telecommunications, computers and microelectronics manufacturing, industrial
manufacturing, medical, image recording and research. The Company's customers
include 3D Systems, Becton Dickinson, DaiNippon Screen, Electro-Scientific
Industries, ETEC Systems, General Scanning, Haemonetics, IBM, Inspex,
KLA/Tencor, Komag, Presstek, Rofin-Sinar, Seagate and Western Digital.

     Thermo Instrument Systems Inc. ("TIS"), a company whose common stock is
traded on the American Stock Exchange and a subsidiary of Thermo Electron
Corporation, indirectly owns approximately 79.0% of the Company's outstanding
common stock, which common stock is subject to a registration rights agreement
in favor of a subsidiary of TIS.

     The Company has entered into certain agreements with indirect subsidiaries
of TIS relating to certain aspects of the ongoing relationships between them,
such as administrative support services and distribution, facilities leasing,
trademark and patent license arrangements.

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STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT

     Certain information in this Annual Report on Form 10-K, including but not
limited to the Management's Discussion and Analysis of Financial Condition and
Results of Operations, may constitute forward-looking statements as such term is
defined in Section 27A of the Securities Act of 1933 (the "Securities Act") and
Section 21E of the Securities Exchange Act of 1934. Certain forward-looking
statements can be identified by the use of forward-looking terminology such as,
"believes," "expects," "may," "will," "should," "seeks," "approximately,"
"intends," "plans," "estimates," "anticipates," or "hopeful," or the negative
thereof or other comparable terminology, or by discussions of strategy, plans or
intentions. Forward-looking statements involve risks and uncertainties,
including those described in the Risk Factors section of Item 1 of this Annual
Report on Form 10-K, which could cause actual results to be materially different
than those in the forward-looking statements. Readers are cautioned not to place
undue reliance on these forward-looking statements, which speak only as of the
date hereof. The Company assumes no obligation to update such information.

RISK FACTORS

Fluctuations In Quarterly Operating Results

     The Company's operating results have fluctuated significantly in the past
and are expected to fluctuate in the future on a quarterly and annual basis as a
result of a number of factors, many of which are beyond the Company's control.
Results in any period could be affected by changes in market demand, competitive
market conditions, market acceptance of new or existing products, fluctuations
in foreign currency exchange rates, the cost and availability of components, the
Company's ability to manufacture and ship products, the mix of the Company's
customer base and sales channels, the mix of products sold, the Company's
ability to expand its sales and marketing organization effectively, the
Company's ability to attract and retain key technical and managerial employees
and general economic conditions. Due to the foregoing factors, the Company's
operating results in one or more future periods are expected to be subject to
significant fluctuations. In the event such fluctuations result in the Company's
financial performance being below the expectations of public market analysts and
investors, the price of the Company's Common Stock would likely decline, perhaps
substantially.

     Sales to individual customers are often related to a customer's specific
requirements, the timing of which is subject to change. From time to time, the
Company has experienced accelerations and slowdowns in shipments to customers,
causing changes in the sales level of a given quarter relative to both the
preceding and subsequent quarters. A significant portion of the Company's sales
are to customers in the research and development market. Sales into this market
have historically varied from quarter-to-quarter due to seasonal fluctuations
and governmental spending patterns. In addition, announcements by the Company or
its competitors of new products or technologies could cause customers to defer
purchases of the Company's existing products. In the event that anticipated
orders from customers fail to materialize, or delivery schedules are deferred or
canceled as a result of the above factors or other unanticipated factors, the
Company's business, operating results and financial condition would be
materially adversely affected. As a result, the Company believes that
period-to-period comparisons of its operating results are not necessarily
meaningful and should not be relied upon as indicative of future performance.

     The Company has experienced a trend in its sales whereby its fiscal fourth
quarter net sales represent a disproportionate share of the Company's annual net
sales and whereby the Company's first quarter net sales decline significantly
compared to the fourth quarter of the prior fiscal year. The Company believes
these sales patterns occur in part because of seasonal sales patterns related to
customers' fiscal years and in part from the Company's incentive compensation
plan which compensates employees based on annual results. The Company recognizes
that the non-linear pattern of its shipments leads to inefficiencies in asset
and employee utilization. The Company is taking steps to mitigate this sales
trend, but this pattern is likely to continue in the near term.

     Despite the fluctuations in its quarterly sales patterns, the Company's
operating expenses are incurred on an approximately ratable basis. As a result,
if expected sales are deferred for any reason, the Company's business, operating
results and financial condition could be materially adversely affected.

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     The Company's gross margin is affected by a number of factors, including
product mix, product pricing, cost of components, the proportion of third party
products incorporated into the Company's systems, foreign currency exchange
rates and manufacturing costs. For example, since high power semiconductor-based
lasers and laser systems generally have higher gross margins than conventional
lasers, absent other factors, a shift in sales toward semiconductor-based lasers
and systems would lead to a gross margin improvement for the Company. On the
other hand, if market conditions in the highly competitive conventional laser
market forced the Company to lower unit prices, the Company would suffer a
decline in gross margin unless the Company were able to timely offset the price
reduction by a reduction in production costs or by sales of other products with
higher gross margins. Either of these events could have a material effect on the
Company's business, operating results and financial condition.

     The Company's backlog on a given date consists of written purchase orders
or other commitments for products which are scheduled to be shipped within the
following twelve months. Orders in backlog are firm, but are generally subject
to cancellation or rescheduling without penalty. Decisions by customers to
reduce inventory levels could lead to reductions in purchases from the Company
and could have a material adverse effect on the Company's business, operating
results and financial condition.

Control by Principal Stockholder

     At January 31, 2000, TIS beneficially owns approximately 79.0% of the
outstanding shares of Common Stock of the Company. As a result, TIS is able to
control the outcome of matters requiring stockholder approval, including the
election of directors, and has the ability to control the business and affairs
of the Company. So long as TIS continues to beneficially own a significant
amount of the Company's outstanding Common Stock, only a limited percentage of
the Common Stock will be traded in the public market.

Risks Associated with Sole Suppliers and Limited Sources

     A number of components necessary for the manufacture and operation of many
of the Company's products such as crystals, ceramic components and Q switches
are obtained from sole suppliers or a limited group of suppliers. The Company
has experienced shortages of such supplies in the past. The Company does not
maintain any long-term supply agreements with any of its suppliers. The
Company's reliance on sole or a limited group of suppliers involves several
risks, including a potential inability to obtain an adequate supply of required
components and reduced control over pricing. The disruption or termination of
any of these sources could have a material adverse effect on the Company's
business, operating results and financial condition. Any inability to obtain
adequate deliveries or any other circumstance that would require the Company to
seek alternative sources of supply or to manufacture such components internally
could significantly delay the Company's ability to ship its products, which
could damage relationships with current and prospective customers and could have
a material adverse effect on the Company's business, operating results and
financial condition.

Dependence on Key Personnel

     The success of the Company depends to a significant degree on the efforts
of the Company's senior management team. The Company's operations may be
adversely affected if one or more members of senior management were to leave the
Company. The Company is also dependent upon its ability to attract and retain
qualified employees, particularly highly skilled design, process and test
engineers involved in the manufacture of existing products and the development
of new products and processes. The competition for such personnel is intense,
and the loss of key employees or the failure to attract qualified new employees
could have a material adverse effect on the Company's business, operating
results and financial condition.

Manufacturing Risks

     The manufacture of certain of the laser and optic components, products and
systems sold by the Company is a highly complex and precise process. As a result
of the technical complexity of the Company's products, changes in the Company's
or its suppliers' manufacturing processes, or the inadvertent use of

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defective or contaminated materials by the Company or its suppliers, could
result in a material adverse effect on the Company's ability to achieve
acceptable manufacturing yields and product reliability. To the extent the
Company does not achieve such yields or product reliability, its business,
operating results, financial condition and customer relationships would be
adversely affected.

     The Company relies exclusively on its own production capability to
manufacture certain optics and optical systems, semiconductor lasers, and
laser-based systems. Because the Company manufactures, packages and tests these
components, products and systems at its own facilities, and such components,
products and systems are not readily available from other sources, any
interruption in manufacturing resulting from shortages of parts or equipment,
fire, earthquake, natural disaster, equipment failures or otherwise would have a
material adverse effect on the Company's business, operating results and
financial condition.

Dependence on Key Markets and Successful Identification of New Markets

     The Company's current products serve many applications in
telecommunications, computers and microelectronics manufacturing, industrial
manufacturing, medical, image recording and research markets. No assurances can
be given that these markets will continue to generate significant or consistent
demand for the Company's products. Existing markets could be significantly
diminished by new technologies or products that replace or render obsolete the
Company's technologies and products. The Company is dependent on successfully
identifying new markets for its products. There can be no assurance that the
Company will be able to successfully identify new high-growth markets in the
future. Moreover, there can be no assurance that new markets will develop for
the Company's or its customers' products, or that the Company's technology or
pricing will enable such markets to develop.

Dependence on Key Customers

     The Company's customers are generally not contractually obligated to
purchase any specified quantity of products in any particular period, and
product sales to major customers have varied widely from quarter to quarter and
year to year. There can be no assurance that the Company's current customers
will continue to place orders with the Company, that orders by existing
customers will continue at the levels of previous periods or that the Company
will be able to obtain orders from new customers. Loss of, or a material
reduction in orders by, one or more of the Company's major customers would have
a material adverse effect on the Company's business, operating results and
financial condition. Even if relationships with existing major customers
continue, such customers' requirements for the Company's products will depend on
the success of their product development, marketing, sales and other business
efforts. The Company's or its customer's products could be replaced or made
obsolete by other technologies or products, potentially leading to an adverse
impact on the Company's business, operating results and financial condition.

Risks of Managing Future Growth

     Any significant growth in the Company's sales or any significant expansion
in the scope of its operations would likely strain the Company's management,
financial, manufacturing and other resources and may require the Company to
implement and improve a variety of operating, financial and other systems,
procedures and controls. While the Company plans significant expansion of its
manufacturing, sales, accounting and other information systems to meet these
challenges, there can be no assurance that these efforts will succeed, or that
any existing or new systems, procedures or controls will be adequate to support
the Company's operations or that its systems, procedures and controls will be
designed, implemented or improved in a cost effective and timely manner. Any
failure to implement, improve and expand such systems, procedures and controls
in a timely and efficient manner could have a material adverse effect on the
Company's business, operating results and financial condition.

Rapid and Fundamental Technological Change

     The laser and optics industry is characterized by extensive research and
development expenditures and rapid technological change. The development by
current or future competitors of new or improved products,

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processes or technologies may make the Company's current or proposed products
obsolete or less competitive. Although the Company devotes significant resources
to further develop and enhance its existing products, there can be no assurance
that new or alternative technologies will not make the Company's products
obsolete or less competitive. The Company's future business, operating results
and financial condition will depend on its ability to enhance its existing
products, develop new products that address the particular needs of its
customers and respond to technological advances and emerging industry standards
and practices.

Competition

     The Company's various markets are highly competitive. The Company's overall
competitive position depends on a number of factors including the price, quality
and performance of its products, the level of customer service, the development
of new technology and the Company's ability to participate in emerging markets.
The Company faces competition from three primary sources: current direct
competitors, potential competitors and suppliers of new technologies. The
Company offers a range of components, subsystems, products and systems and has a
number of competitors worldwide in various segments of its markets. In its HPSL
markets, direct competitors include SDL, Inc., Coherent, Inc., Siemens and
Thompson-CSF. In its solid state laser markets, major competitors include
Coherent, Inc. and Lightwave Electronics Inc. In its other product markets, the
Company's major competitors include Coherent, Inc., Continuum (a division of
Hoya) and JDS/Uniphase Corporation. None of the Company's competitors competes
in all of the product areas and industries currently served by the Company.
However, as existing or new markets continue to grow, the Company expects that
new competitors will emerge and present competitors will seek to increase their
market share.

     New technologies may emerge to compete with the Company's products. In most
of the Company's product lines, both the Company and its competitors are working
to develop new technologies, or improvements and modifications to existing
technologies, which will render present products obsolete. There can be no
assurance that the Company's development efforts will be successful. In
addition, there can be no assurance that markets will develop for any such
future products, or that any such products will be competitive with other
technologies or products that may be developed by others. Some of the Company's
competitors have significantly greater financial, technical, manufacturing,
marketing, sales and other resources than the Company. In addition, some of
these competitors may be able to respond more quickly to new or emerging
technologies, evolving industry trends and changes in customer requirements and
to devote greater resources to the development, promotion and sale of their
products than the Company. There can be no assurance that the Company's current
or potential competitors will not develop or acquire products comparable or
superior to those developed by the Company, combine or merge to form larger,
more significant competitors, or adapt more quickly than the Company to new
technologies, evolving industry trends and changing customer requirements.
Increased competition has resulted and is expected, in the future, to result in
price reductions, reduced margins or loss of market share, any of which could
materially and adversely affect the Company's business, operating results and
financial condition. There can be no assurance that the Company will be able to
compete successfully against current or future competitors or that competitive
pressures faced by the Company will not have a material adverse effect on its
business, operating results and financial condition. The Company expects that
both direct and indirect competition will increase in the future. Additional
competition could adversely affect the Company's business, operating results and
financial condition through price reductions or loss of market share.

Dependence on Proprietary Technology; Risk of Patent Infringement Claims

     The Company's future success and competitive position is dependent upon its
proprietary technology, and the Company relies on patent, trade secret,
trademark and copyright law to protect its intellectual property. There can be
no assurance that the patents owned or licensed by the Company will not be
invalidated, circumvented, challenged or licensed to others, that the rights
granted thereunder will provide competitive advantages to the Company or that
any of the Company's pending or future patent applications will be issued within
the scope of the claims sought by the Company, if at all. Furthermore, there can
be no assurance that others will not develop technologies that are similar or
superior to the Company's technology, duplicate the

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Company's technology or design around the patents owned by the Company. In
addition, effective copyright, patent and trade secret protection may be
unavailable, limited or not applied for in certain foreign countries. Certain of
the Company's technology is licensed on a non-exclusive basis from third parties
which may license such technology to others, including competitors of the
Company. There can be no assurance that the steps taken by the Company to
protect its technology will prevent misappropriation of such technology.

     The laser and optics industry is characterized by frequent litigation
regarding patent and other intellectual property rights. Litigation has been
necessary and may be necessary in the future to enforce the Company's patents
and other intellectual property rights, to protect the Company's trade secrets,
to determine the validity and scope of the proprietary rights of others or to
defend against claims of infringement or invalidity. Such litigation has in the
past resulted in substantial costs and diversion of resources and any future
actions could have a material adverse effect on the Company's business,
operating results and financial condition. In particular, the Company has been
involved in litigation with two of its principal competitors, SDL, Inc. and
Uniphase Corporation. The SDL litigation, which was settled in 1997, was
initiated by the Company in 1995 to enforce its rights under a technology
agreement with SDL. The Uniphase litigation, which was settled in 1994, was
initiated by the Company in 1991 to enforce the Company's rights under one of
its patents.

     From time to time the Company has received and expects in the future to
receive notices of claims of infringement of other parties' proprietary rights.
There can be no assurance that infringement claims (or claims for
indemnification resulting from infringement claims) will not be asserted against
the Company or will not result in an injunction against the sale of allegedly
infringing products or otherwise materially adversely affect the Company's
business, operating results and financial condition.

Risks Associated With International Sales

     International sales accounted for approximately 55%, 46%, and 45% of the
Company's net sales in 1999, 1998 and 1997, respectively. International sales
carry a number of inherent risks, including exposure to currency fluctuations,
potentially adverse tax consequences, reduced protection for intellectual
property rights in some countries, the impact of recessionary environments in
economies outside the United States, generally longer accounts receivable
collection periods, changes in political and regulatory environments, tariffs
and other potential trade barriers. In addition, certain of the Company's
international sales are subject to export licensing and approvals by U.S.
governmental agencies. Although to date the Company has experienced no
significant difficulty in obtaining such licenses or approvals, the failure to
obtain such licenses or approvals or comply with such regulations in the future
could have a material adverse effect on the Company's business, operating
results and financial condition.

Potential Adverse Impact of Environmental and Other Governmental Regulations

     The Company's facilities and operations are subject to a wide variety of
foreign, federal, state and local environmental laws, regulations and
ordinances, including those related to air emissions, wastewater discharges and
chemical and hazardous waste management and disposal ("Environmental Laws"). The
Company's operations also are governed by laws relating to workplace safety and
worker health, primarily the Occupational Safety and Health Act ("Employee
Safety Laws"). Further, compliance with Environmental Laws also may require the
acquisition of permits or other authorizations for certain activities and
compliance with various standards or procedural requirements. Although the
Company believes that its operations are in compliance in all material respects
with current requirements under Environmental Laws and Employee Safety Laws, the
nature of the Company's operations exposes it to the risk of liabilities or
claims with respect to such matters.

     Certain of these Environmental Laws, including the Comprehensive
Environmental Response, Compensation and Liability Act, as amended by the
Superfund Amendments and Reauthorization Act of 1986 ("CERCLA") and similar
state laws (collectively, "Superfund Laws"), hold owners or operators of land or
businesses liable for their own and for previous owners' or operators' releases
of certain hazardous or toxic substances, materials or wastes, pollutants or
contaminants, including petroleum and petroleum products ("Hazardous
Substances"). Such Superfund Laws also provide for responses to and liability
for releases of

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certain Hazardous Substances into the environment. The nature of the Company's
operations and the long history of industrial uses at some of its current or
former facilities expose the Company to risk of liabilities or claims under
Superfund Laws. In 1988, the Company was named on the General Notification List
of the Environmental Protection Agency ("EPA") stating that the Company may be a
Potentially Responsible Party ("PRP") under the Superfund Laws for Hazardous
Substances which may have been generated by its former operations at a former
site. Since that time, the Company has not been named in the EPA's first or
second tier lists, and has not been pursued as a PRP by the EPA or any of the
other PRPs.

     Since 1984, the Company's facilities in Mountain View, California
("Mountain View Site") have been undergoing investigation and remediation in
response to past releases of industrial solvents to the soil and groundwater. In
addition, the impacted groundwater has migrated to what is referred to as the
North Bayshore Area. As a result of these past releases, the Mountain View Site
and other neighboring sites are listed on the National Priorities List ("NPL" or
the "Superfund List") under CERCLA. The Company is subject to orders issued by
the California Regional Water Quality Control Board ("Orders") that require the
Company to perform remediation on-site and off-site and investigate other
potentially responsible parties. Pursuant to the Orders and other orders issued
to other responsible parties, the Company and other responsible parties are
jointly performing and funding remediation which includes soil vapor extraction
and groundwater extraction, treatment and monitoring. All of the required soil
and groundwater remediation and monitoring systems currently required by the
Orders are in place, and consequently the initial capital expenses for such
systems have been incurred. As of December 31, 1999, the Company has been
granted approval by the Regional Water Quality Control Board to shut down two of
its extraction wells in the North Bayshore Extraction System and to shut down
two soil vapor extraction systems.

     In October 1997, the Company was served with a complaint that had been
filed on behalf of five individuals in the Superior Court of the State of
California seeking an unspecified amount of damages for personal injuries and
property damage incurred by residents of a single location alleged to have
resulted from the Company's and others' negligent and/or intentional handling of
toxic chemicals (Rosario Balcita et al. v. Teledyne Semiconductor,
Spectra-Physics Lasers, et al.). As of December 31, 1999, there has been a
summary judgement ruling in the case in favor of the Company and its
co-defendants in regards to the four adults involved in the case. The fifth
plaintiff has agreed to settle for a nominal amount. There can be no assurances
that other parties will not come forward and claim personal injury or property
damage.

     Based on the Company's experience to date, the Company believes that the
future cost of compliance with existing Environmental Laws (or liability for
known environmental liabilities or claims) and Employee Safety Laws should not
have a material adverse effect on the Company's business, operating results and
financial condition. However, future events, such as changes in existing laws
and regulations or their interpretation, or the discovery of heretofore unknown
contamination, may give rise to additional compliance costs or liabilities that
could have a material adverse effect on the Company's business, operating
results and financial condition. Compliance with more stringent laws or
regulations, as well as more vigorous enforcement policies of regulatory
agencies or stricter or different interpretations of existing laws, may require
additional expenditures by the Company that may be material.

Potential Sales of Stock by Holdings; Shares Eligible for Future Sale

     Future sales by Spectra-Physics Holdings USA, Inc., an indirect wholly
owned subsidiary of TIS ("Holdings"), of the Company's Common Stock could
adversely affect the prevailing market price of the Common Stock. Holdings is
permitted to sell in the public market specified amounts of Common Stock without
registration pursuant to Rule 144 under the Securities Act of 1933, as amended
(the "Securities Act"). In addition, the Company is obligated under a
registration rights agreement with Holdings to register under the Securities Act
the shares of Common Stock owned by Holdings upon its demand.

     No predictions can be made as to the effect, if any, that sales in the
public market of shares or the availability of additional shares for future sale
will have on the market price of the Common Stock. The market price of the
Common Stock could be adversely affected by future sales of Common Stock or the
perception that such sales may occur.

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Certain Anti-Takeover Matters; Possible Issuance of Preferred Stock

     Certain provisions of Delaware law, the Company's Certificate of
Incorporation and the Company's Bylaws could delay or make more difficult a
merger, tender offer or proxy contest involving the Company. The Company is
subject to Section 203 of the Delaware General Corporation Law ("DGCL") which,
subject to certain exceptions, prohibits a Delaware corporation from engaging in
any of a broad range of business combinations with any "interested stockholder"
for a period of three years following the date that such stockholder became an
interested stockholder. Under the Company's Certificate of Incorporation and
Bylaws, the directors may enlarge the size of the Board and fill any vacancies
on the Board. The Company's Bylaws provide that nominations for directors may
not be made by stockholders at any annual meeting unless the stockholder
intending to make a nomination notifies the Company of its intention a specified
period in advance and furnishes certain information, and require advance notice
of business to be brought by a stockholder before the annual meeting. The shares
of the Company's Preferred Stock may be issued in the future without further
stockholder approval and upon such terms and conditions, and having such rights,
privileges and preferences, as the Board of Directors may determine. The rights
of holders of Common Stock will be subject to, and may be adversely affected by,
the rights of any holders of Preferred Stock that may be issued in the future.
The issuance of Preferred Stock and the application of Section 203 of the DGCL
and certain other provisions of the Company's Certificate of Incorporation and
Bylaws could have the effect of discouraging, delaying or preventing a change of
control of the Company.

INDUSTRY BACKGROUND

     A laser uses energy from a power source to stimulate a particular type of
material, which creates and emits photons (i.e., light). The light emitted by
lasers is more intense and has higher purity than the light emitted by
conventional light sources. These characteristics enable applications in several
broad markets such telecommunications, computers and microelectronics
manufacturing, industrial manufacturing, medical, image recording and research.
The principal factors that distinguish different types of lasers and determine
the particular laser suitable for a specific application are wavelength (color),
output power, repetition rate, cost and operating life.

     During the early years of laser development in the 1960s and 1970s, lasers
were relatively expensive and large, and had low reliability and performance
characteristics. Consequently, lasers were used primarily for scientific
research and limited industrial applications where there were few alternatives
to lasers. Since then, improvements in laser technology have resulted in lower
cost, smaller, more reliable and more efficient lasers. As a result, the use of
lasers for industrial and other commercial applications has increased
significantly. Today, lasers are used in a wide range of applications and
various markets including biotechnology, consumer electronics, industrial
process control, materials processing, measurement, medical, printing, research
and development, semiconductor manufacturing and telecommunications. According
to Laser Focus World, the worldwide market for lasers grew from approximately
$1.1 billion in 1993 to an estimated $4.9 billion in 1999, which represents a
compound annual growth rate of approximately 28%.

     Lasers can be generally classified into four basic types: gas, liquid, lamp
pumped and semiconductor-based. A significant portion of the installed base of
lasers is comprised of gas, liquid and lamp pumped lasers. The principal markets
for these conventional lasers have been materials processing, medical and
scientific applications. Despite continuous advances in technology, significant
shortcomings still exist with most conventional lasers. Most gas lasers are
relatively large, expensive, inefficient and fragile, many liquid lasers use
carcinogenic dyes and have limited performance ranges, and lamp pumped lasers
are limited by their dependence on inefficient and unreliable incandescent
lamps. However, these lasers, while based upon older technology, have unique
performance characteristics that make them the only current solution for certain
demanding technical applications.

     Semiconductor-based lasers are a relatively new and innovative technology.
A semiconductor-based laser creates light from the flow of an electric current
through a specially designed semiconductor device. Semiconductor-based lasers
include both high and low power devices as well as lasers in which the
semiconductor lasers pumps a crystal to generate enhanced beam quality (solid
state laser).

                                        9
<PAGE>   10

     The laser industry has been characterized by a high degree of technological
innovation. In recent years, the laser industry has been undergoing a
fundamental technology transition to semiconductor-based lasers from
conventional lasers. This transition is being driven by a number of advantages
of semiconductor-based lasers including:

     - Lower Operating Cost. The annual costs for power and water to operate a
       10 W solid state laser is less than 5% of the cost to operate a gas
       laser. For example, the annual cost in California for power and water to
       operate a 10 W solid state laser for 2,000 hours is $300, compared to
       more than $17,000 for a 10 W gas laser.

     - Smaller Size. Semiconductor-based lasers are much smaller than
       conventional lasers of comparable power. For example, a 10 W
       semiconductor-based laser is one-tenth the size of a 10 W gas laser, and
       semiconductor laser diodes can be as small as a grain of salt.

     - Higher Reliability. Solid state lasers have lifetimes exceeding 10,000
       hours, compared to 500 hours for a lamp pumped laser.

     - Greater Efficiency. Semiconductor lasers convert electrical power to
       light much more efficiently, converting greater than 40% of input power
       compared to 0.02% for a gas laser.

     As a result of the foregoing advantages, semiconductor-based lasers are
replacing conventional laser technologies in existing applications as well as
enabling many new applications. However, semiconductor-based lasers currently
cannot address applications that require very high power output and laser light
of certain wavelengths. Conventional lasers are the only solution for these
technically demanding applications due to their unique performance
characteristics.

     The semiconductor-based laser market generally can be divided into two
categories: low power (less than 1.0 W) such as lasers used in CD players and
laser printers, and high power (1.0 W or greater). To date, the greatest
penetration of semiconductor-based lasers has been in applications that require
low power. As high power semiconductor-based laser technology continues to
advance, the use of high power semiconductor-based lasers is expected to
increase approximately 20% to 40% annually over the next several years according
to Strategies Unlimited, a market research firm.

     Customers for high power semiconductor-based lasers are seeking improved
performance and reliability, reduced cost and a greater number of product
offerings. Faced with these challenges and increasing time-to-market pressures,
customers are increasingly relying upon third party technology providers for
further innovations in lasers, optics and other related technologies. Meeting
these requirements is extremely complex and requires significant expertise,
breadth of technology and engineering resources and a substantial financial
commitment.

STRATEGY

     The Company has been a leading supplier of lasers, laser systems and optics
for over 38 years and has been developing high power semiconductor-based lasers
for the last 16 years. The Company has a significant proprietary and patented
portfolio of lasers, optics and other related laser and manufacturing
technologies. As a result, the Company believes that it is uniquely positioned
to capitalize on the significant market opportunities for high power
semiconductor-based lasers and end-user systems. Key elements of the Company's
strategy include the following:

          Capitalize on Leadership in Semiconductor-based Laser and Optical
     Technologies. To enhance its leadership position, the Company is continuing
     to focus substantial resources on semiconductor-based laser and optical
     technologies, enabling the Company to continue developing new products for
     existing and emerging markets. For example, the Company continues to offer
     the highest power and brightest commercially available semiconductor-based
     lasers.

          Develop New Applications and Markets, including
     Telecommunications. The Company leverages its technology and close working
     relationships with its key customers to develop innovative solutions to
     complex customer requirements. In response to specific customer needs, the
     Company is working with

                                       10
<PAGE>   11

     customers to develop systems incorporating laser technology in fiber laser
     pumping, PC board drilling and dense wavelength division multiplexing
     communication systems.

          Leverage Benefits of Strategic Vertical Integration. The Company has
     vertically integrated into strategic laser technologies, components and
     manufacturing processes such as optics and semiconductor wafers, and
     expects to continue such strategic vertical integration in the future. This
     vertical integration enables the Company to control the quality of
     strategic components, significantly improve time-to-market for new products
     and technologies and more easily identify new applications.

MARKETS

     The Company produces a broad range of lasers, laser systems, optics,
optical systems and end user systems for the industrial, OEM and research and
development markets. The primary applications for the Company's products in
these markets are as follows:

     - Telecommunications. The Company has developed narrowband thin film
       filters for DWDM systems which are used to increase the capacity of fiber
       optic lines. The Company is also developing multi-mode Telcordia
       qualified semiconductor lasers with power output of 1 W to 5 W. One to 10
       of these lasers will be coupled into a fiber to produce single mode
       output to serve as an amplifier source (Raman Laser) for DWDM systems.

     - Image Recording. Historically, the commercial printing market has used
       silver halide-based film. In recent years, the commercial printing
       industry has increasingly shifted to thermal-based materials which
       require high power semiconductor-based lasers in the film exposure
       process. The Company believes that the incremental use of thermal-based
       materials for commercial printing will increase the demand for high power
       semiconductor-based lasers. The Company's high power semiconductor-based
       lasers are being used in conjunction with thermal-based plate development
       by major film suppliers as well as in direct-to-press applications.

     - Industrial Manufacturing. Rapid Prototyping is one application in
       industrial manufacturing where lasers are used. Rapid Prototyping is the
       computer generation of three-dimensional objects from CAD/ CAM system
       input which typically is used for producing models, manufacturing
       prototypes, masters and patterns. Rapid Prototyping involves exposing a
       proprietary photopolymer with ultraviolet light which "cures" the polymer
       creating a solid model in hours. Traditional hand crafting or machining
       methods can take weeks or even months to achieve the same result. Because
       of the advantages of solid state lasers, they have replaced conventional
       lasers in Rapid Prototyping applications requiring high power. Other
       industrial manufacturing applications for lasers include laser pumping
       and marking.

     - Computer and Microelectronics Manufacturing. Lasers are used in computers
       and microelectronics manufacturing to adjust the electrical
       characteristics of resistors, to inspect semiconductor wafers for defects
       and to repair semiconductor devices such as DRAMs and SRAMs. Because of
       their high reliability and ease of use, solid state lasers are widely
       used in these applications. Additionally, lasers are used in via hole
       drilling. Historically, holes in printed circuit boards have been made
       using mechanical drilling techniques. Increased packing density has led
       to a new technique where very small holes are drilled from an outer layer
       to specific inner layers and then plated to make electrical contact. The
       size of these holes (80 microns or less) preclude efficient mechanical
       drilling and manufacturers are moving to laser-based methods. Solid state
       lasers are increasingly being utilized for this application. The Company
       has developed ultraviolet solid state laser sources for this application.
       Also, lasers are used in marking applications. Marking applications
       include plastics marking (e.g., marking the keys on a computer keyboard)
       and the marking of finished electronic components (e.g., marking very
       small semiconductor packages in final stages of semiconductor
       manufacturing). Solid state lasers are replacing conventional flash lamp
       pumped YAG lasers in these and other direct-write marking applications
       where the performance characteristics of such lasers are required.

     - Medical. Semiconductor-based lasers are increasingly used in therapeutic,
       surgical, dental and diagnostic medical applications. Therapeutic
       applications include a variety of skin treatments, such as

                                       11
<PAGE>   12

       hair removal, and thermal treatments using endoscopic delivery to
       internal organs such as the prostate. Surgical applications are expanding
       rapidly and now include general purpose endoscopic contact and
       non-contact surgical tools. Several diagnostic techniques, including
       magnetic resonance imaging, also employ semiconductor lasers. In this
       market, the Company provides semiconductor-based lasers to medical device
       OEMs.

     - Research and Development. Research and development has historically been
       a major market for conventional laser technology, such as water cooled
       gas lasers, high energy flash lamp pumped YAG lasers and ultrafast
       systems with an installed base of tens of thousands of lasers. As new
       solid state lasers that can replicate the performance of conventional
       lasers are developed, they are rapidly replacing conventional lasers in
       this market. For example, in 1996 the Company commenced shipments of a 5
       W CW green solid state laser called the Millennia to research and
       development customers. The Company has introduced the Millennia s series
       of 2 W to 10 W systems packaged in the industry's smallest footprint. To
       date, approximately 1200 Millennia lasers have been sold, many of which
       are being used by research and development customers to replace their
       existing water cooled ion lasers. Current applications for solid state
       lasers in the research and development market include pump lasers for
       ultrafast systems, confocal microscopy systems and seed lasers in
       amplifier systems.

PRODUCTS

     The Company produces a broad range of lasers, laser systems, optics,
optical systems and end user systems. The Company's semiconductor-based laser
products include high power semiconductor and solid state lasers and other
semiconductor laser-based systems. Conventional products include gas lasers,
flash lamp pumped yttrium aluminum garnet (YAG) lasers, optical parametric
oscillators (OPOs), amplifiers, accessories, optics and optical systems, and
related services.

     The following chart illustrates the Company's principal products and their
applications.

<TABLE>
<CAPTION>
                                                                     PRODUCT
                                               ---------------------------------------------------
              LASER APPLICATION                SEMICONDUCTOR   SOLID STATE   OPTICS   CONVENTIONAL
              -----------------                -------------   -----------   ------   ------------
<S>                                            <C>             <C>           <C>      <C>
Image Recording..............................        *              *          *           *
Industrial Manufacturing.....................        *              *          *           *
Computer and Microelectronics
  Manufacturing..............................        *              *          *           *
Research.....................................        *              *          *           *
Medical......................................        *              *          *           *
Telecommunications...........................        *              *          *
</TABLE>

     High Power Semiconductor Lasers. HPSLs are extremely efficient converters
of electrical power to light and are also highly efficient in focusing generated
light into small spots. While many applications require small spots of very
intense heat, many others, such as pumping crystals and illumination, depend on
the semiconductor laser's ability to create large amounts of nearly
monochromatic photons. These lasers are compact, enabling more cost effective
solutions to a large number of problems. Because the light from
semiconductor-based lasers is emitted in a pattern very different from other
lasers (more like a fan of light rather than a "beam"), the Company has
developed technology to couple the light into an optical fiber to enhance the
"beam" quality or more conveniently deliver the light to the desired location.

     The Company manufactures a range of HPSL products with wavelengths from 785
nm to 1800 nm and output powers from less than one Watt to stacked bars (two
dimensional arrays) which produce hundreds or thousands of watts. These products
are available in various forms, from bare diodes on heat sinks, to fiber-
coupled single emitters and bars, to two dimensional arrays, to fully integrated
modules and microprocessor-controlled units containing power supplies and active
coolers.

     Solid State Lasers. Solid state lasers use semiconductor lasers to pump a
crystal to produce laser beams with special characteristics in terms of mode
quality, power stability, optical noise, monochromaticity or energy storage.
Like HPSLs, solid state lasers are smaller, more efficient, more reliable and
less costly to operate than the conventional laser technologies they are
replacing.

                                       12
<PAGE>   13

     The Company produces solid state lasers to satisfy a broad range of
customer requirements. Depending on customer needs, a solid state laser can
combine various features including a modular power supply and laser head
designs, various crystals, fiber coupling, and different repetition rates, pulse
widths and wavelengths. The Company's solid state lasers contain several design
features that distinguish them from competing products. Examples of such
features include: air cooled laser heads that do not require a separate water
supply; semiconductor lasers in the power supply rather than in the head which
allow the lasers to be replaced in the field without disturbing system
alignment; and lasers designed with significant overhead which increases
reliability and product life. The Company has also developed a complete line of
intelligent power supplies to satisfy demanding customer requirements. All of
these power supplies support remote mounting of the fiber-coupled HPSL to
enhance field serviceability.

     Optics. Optics and thin film coatings are passive components that are used
to transmit, reflect and shape light. Laser optics are some of the most
demanding optics to manufacture because they cannot tolerate defects in the area
where the laser light interacts with the optic. High power lasers and laser
systems depend on high quality optical components in order to perform to their
maximum potential. The Company is a leading supplier of high performance laser
optics and thin film coatings.

     The Company manufactures a wide variety of laser optics in moderate to high
volumes. Standard components include 200 GHz. narrow band pass filters, LiNbO(3)
wedges for isolator components, high reflectors, output couplers, Brewster
windows, cube beamsplitters and polarizers. The spectral region for these optics
range from 193 nm to 2 microns. Custom optics and coatings include: high laser
damage resistance polarizer coatings (greater than 23 J/cm(2) 3 ns pulse) and
very low loss optics (sub 10 parts per million). The Company provides full
metrology verification testing and documentation.

     Conventional Products. The Company is a leading supplier of high power
conventional lasers to industrial and research and development customers. These
lasers, while based upon older technology, have unique performance
characteristics that make them the only current solution for certain demanding
technical applications. The Company's strong market position and technology
leadership in these conventional laser applications enhances its opportunity to
expand its high growth semiconductor-based laser business by generating funds,
capitalizing on strong customer relationships and leveraging its technological
expertise. The Company manufactures and sells a broad range of conventional
laser products including:

     - Air-cooled gas lasers ranging from 5 to 300 mW (14 models)

     - Water-cooled gas lasers ranging from 4 to 30 W (8 models)

     - Flash lamp pumped YAG lasers ranging from 500 mJ to 3 J as well as 4
       harmonic wavelengths (12 models)

     - Ultrafast lasers with pulse widths as low as 35 femtoseconds (8 models)

     - OPOs covering wavelengths from 220 nm to 2600 nm (4 basic models with
       numerous options)

     - Amplifiers covering a wide range of powers, wavelengths, pulse widths and
       repetition rates (2 basic models with numerous options)

TECHNOLOGY

     General. The word "laser" is an acronym for "light amplification by
stimulated emission of radiation." A laser consists of (i) an active lasing
medium that gives off its own light (radiation) when excited; (ii) an optical
resonator with a partially reflective output mirror at one end and a fully
reflective rear mirror at the other that permits the light to bounce back and
forth between the mirrors through the lasing medium; and (iii) an external
energy source used to excite the lasing medium. The energy source can be light
from special lamps, light from another laser, an electric current or a chemical
reaction. The lasing medium can be a gas (such as helium and neon, argon or
carbon dioxide), a liquid (such as an organic dye), a semiconductor material
(such as aluminum gallium arsenide) or a crystal (such as ruby, YAG or titanium
sapphire). A laser works by causing the energy source to excite (pump) the
lasing medium, converting the energy from the source into an emission consisting
of particles of light (photons). These photons stimulate the release of more

                                       13
<PAGE>   14

photons as they are reflected back and forth between the two mirrors that make
up the laser's resonator. The resulting build-up in the number of photons is
emitted in the form of a laser beam through the output port or "window" created
by the partially reflective mirror. By changing the energy and the lasing
medium, different wavelengths and types of laser light can be produced. Heat
generated by the excitation of the lasing medium is dissipated through a cooling
mechanism, which varies according to the type of laser technology; lasers can be
cooled by water, air or, in the case of semiconductor-based lasers, heat sinks
attached to the semiconductor lasers.

     Laser light has three fundamental properties that distinguish it from
conventional "spontaneous emission" light sources: monochromaticity,
directionality and coherence. Monochromaticity refers to the purity of color or
spectral bandwidth of emitted light; directionality describes the degree of
collimation or parallelism of the light rays; and coherence refers to the phase
relationship of the light waves as they are propagated. Laser light features
each of these properties to a high degree, and laser design revolves around
modulating and combining the three properties to serve the requirements of
specific applications. For example, monochromatic laser light can be used to
probe the structure of atoms, control complex chemical reactions or produce
realistic three dimensional holograms. Highly directional and coherent laser
light can be focused to much smaller spot sizes than any ordinary light source
which enables a wide range of applications including printing, marking and
inspection and measurement. Lasers can be continuous wave, pulsed or modelocked
with varying repetition rates; they can have different bandwidths (more or less
monochromatic) and different line widths; and they come in different powers from
microJoules to thousands of Watts. Different laser designs result in various
output characteristics in terms of power, pulse width, repetition rate and
wavelength depending on the needs of the application.

     Spectra-Physics Technology. Formed in 1961 as the first commercial laser
company, the Company has a long history of introducing innovative technologies
and laser products. Some of the innovative laser products successfully
introduced by the Company include: commercial argon gas lasers (1964), high
power helium neon lasers (1976), sealed cavity air cooled gas lasers (1981),
HPSLs (1983), fiber-coupled SLPSS lasers (1986), titanium-sapphire ultrafast
lasers (1990), FC bar semiconductor technology (1992), high power CW SLPSS green
lasers (1996), the highest power (60 W) commercially available HPSLs (1998) and
In-Situ Optics Monitoring (1999).

     Recent examples of the Company's technological leadership in
semiconductor-based lasers and systems include its discovery of QMAD, a patented
technique for shortening the fundamental output wavelength from a solid state
laser that enables the Company to produce green lasers with powers up to 12 W.
The high efficiency QMAD technique has also enabled the Company to produce green
solid state lasers with lower powers for price sensitive OEM markets. The
Company also recently developed and commercialized high power semiconductor bars
that produce over 60 W of power.

     Additionally, the Company recently introduced its Advantage(TM) series of
air-cooled argon ion lasers. These lasers utilize a power supply design which
automatically senses and compensates for variations in line voltage. This power
supply is also extremely compact, being only half the weight and 2/3 the size of
previous designs. These air-cooled lasers can be used in such applications as
semiconductor wafer inspection, confocal microscopy, DNA sequencing, flow
cytometry, image setting and computer-to-plate printing.

SALES AND MARKETING

     The Company's sales and service strategy is to have one primary channel to
the customer on a worldwide basis. This is accomplished through a separate
distribution organization responsible for selling and servicing products
directly in several countries and through over 30 independent distributors in
the rest of the world. The Company has direct sales units in North America,
Japan, Germany, France, the Netherlands and the United Kingdom. The Company
began establishing international direct sales offices in the mid-1970s.
Distributors are managed by the Company's export unit which is based in Mountain
View, California and has an office in Darmstadt, Germany.

     As of December 31, 1999, the Company's direct sales units employed 142
people performing sales, service engineering, customer support and
administrative functions. They are responsible for the complete

                                       14
<PAGE>   15

order fulfillment cycle, from quotation through order placement to delivery. The
sales organization is also responsible for bringing the appropriate marketing
and technical resources to bear on a customer's requirements and ensuring the
customer receives high-quality support.

     The Company's sales strategy also involves establishing long-term
relationships with its customers. For industrial and OEM customers, this
relationship starts at the early design-in of the Company's lasers and laser
systems into customer applications. The Company supports its customers with
on-site field service, technical service engineers and training programs and
telephone support from its direct sales units. Each sales unit maintains an
inventory of critical components and certain replacement systems and sub-systems
to help minimize customer downtime. The Company in general warrants its products
for twelve to twenty-four months depending on the product line. Certain
manufacturing intensive industries such as the hard disk manufacturing industry
require high levels of support to minimize costly downtime. The Company provides
direct service to its hard disk drive customers which are principally located in
California, Japan, Taiwan and Southeast Asia.

     The Company's marketing activities include: analyzing and understanding
future product requirements of the Company's target markets and translating
those requirements into product specifications and cost targets by working
closely with customers and key technologists in industry and academia; providing
applications engineering support as part of the sales process to industrial and
OEM customers; and product promotion, which includes participating in trade
shows and conferences and advertising through trade journals, new product
announcements and direct mailings.

     Backlog consists of written purchase orders or other commitments for
products which are scheduled to be shipped within the following twelve months.
As of December 31, 1999, the Company's backlog was approximately $57.4 million,
compared with approximately $38.0 million at December 31, 1998. Orders in
backlog are firm, but are subject to cancellation or rescheduling by the
customer without penalty. Because of the possible changes in product delivery
schedules and cancellation of product orders and because the Company's sales
will often not reflect orders shipped in the same quarter that they are booked,
the Company's backlog at any particular date is not necessarily indicative of
actual sales for any succeeding period.

CUSTOMERS

     Through its global distribution and service network the Company provides a
range of laser solutions to its major markets. The Company has approximately
2000 customers, over 800 of which are OEM customers and over 1200 are research
and development customers. The Company's major customers include: 3D Systems,
Becton Dickinson, DaiNippon Screen, Electro-Scientific Industries, ETEC, General
Scanning, Haemonetics, IBM, Inspex, KLA/Tencor, Komag, Presstek, and
Rofin-Sinar. During 1999 and 1998, 44.8% and 54.2% of the Company's sales were
in North America, 25.3% and 19.4% were in Japan, 23.2% and 19.9% were in Europe,
3.6% and 3.9% were in Other Asia, and 3.1% and 2.6% were in Rest of the World,
respectively. No single customer accounted for more than 5% of the Company's
sales for 1999 or 1998.

RESEARCH AND DEVELOPMENT

     The Company's research and development activities are divided into two main
areas: advanced research in selected fields such as optics fabrication and
coating, HPSLs and solid state lasers; and product engineering which focuses on
designing and developing products for known, quantified markets with clearly
defined performance goals and cost targets. The primary focus of these research
and development efforts is high power semiconductor-based lasers and optics. The
Company often develops new products at the customer's design-in stage in order
to maximize the functionality of the product for the customer. The Company's
products are designed for manufacturability and serviceability. In addition,
high parts commonality is a goal that has been achieved on a number of product
lines through the use of common power supplies and laser head platforms.

     In 1999, 1998 and 1997, the Company expended approximately $17.0 million,
$16.7 million and $14.4 million, respectively, on internally funded research and
development. The Company expects to continue to spend substantial amounts on
research and development activities. The Company's ability to successfully

                                       15
<PAGE>   16

compete will be substantially dependent on its ability to design, develop and
introduce new products on a timely basis.

     As of December 31, 1999, the Company had 126 employees engaged in advanced
research and product development and engineering, of whom 70 are professional
engineers or have master's or doctor's degrees (including 24 Ph.D.s). The
Company's research and development activities are carried out in Mountain View,
California for solid state lasers, optical coatings, and conventional products,
in Oroville, California for optical systems and optics fabrication and in
Tucson, Arizona for HPSLs. The Company maintains close working relationships
with several leading industrial, government and university research laboratories
around the world. Such relationships include funding of third party research,
joint development programs and licensing of patents developed by such
organizations. The Company also participates in certain U.S. government funded
programs such as Technology Reinvestment Program (TRP), when the programs'
objectives are consistent with the Company's technology road map.

MANUFACTURING OPERATIONS

     The Company's manufacturing activities include semiconductor laser
manufacturing, plasma tube manufacturing, optics fabrication and coating, fine
mechanics manufacturing and assembly, integration and test. One of the Company's
core business philosophies is to concentrate its manufacturing efforts on
strategic activities and to outsource production of other components. This
philosophy forms the basis for the Company's vertical integration into
semiconductor wafer fabrication, semiconductor lasers, optics fabrication and
coating and very fine mechanical parts. The Company believes each of these
operations is essential to the rapid development of new products and to
maintaining a high level of product quality.

     The Company focuses substantial efforts on maintaining and enhancing the
efficiency and quality of its manufacturing operations. The Company uses kanban,
just-in-time and product flow line techniques to reduce manufacturing cycle
times and inventory levels and to enable it to offer on-time delivery and high
quality products to its customers.

     The Company has manufacturing operations in Mountain View and Oroville,
California and Tucson, Arizona. The Company's four manufacturing operations in
Mountain View include research optics manufacturing, plasma tube manufacturing,
and laser manufacturing, including assembly and test. The Company's
manufacturing operations in Tucson include semiconductor laser manufacturing.
The Company has manufacturing operations in Oroville that include optics
fabrication and coating, optical system manufacturing and metal component
fabrication. The Company's principal manufacturing operations are:

     - Semiconductor Laser Manufacturing. The Company's semiconductor laser
       manufacturing operation is vertically integrated and has capabilities in
       wafer fabrication, wafer processing, bar processing, device packaging,
       test and burn-in and fiber-coupling. The Company has three large-scale
       epitaxial deposition units, two of which are capable of handling three
       inch wafers.

     - Plasma Tube Manufacturing. The Company makes three types of plasma tubes:
       glass, metal beryllium oxide and metal ceramic. These tubes are used as
       the photon source for its gas lasers.

     - Optics Fabrication and Coating. The Company fabricates and coats many of
       the optics used in its lasers. These operations are conducted in a
       state-of-the-art facility constructed to Class 10,000 clean room
       standards with portions of the building maintained at either Class 1000
       or Class 100 levels as required.

     - Fine Mechanics Manufacturing. The fine mechanics operation primarily
       produces aluminum, brass and stainless steel components with relatively
       high feature content and surface finish requirements for use in the
       Company's laser and optical systems.

     - Research Optics Manufacturing. The Company's film coating facility is
       designed for the development of new coating technology and the production
       of very large optics up to three feet in diameter.

     - Assembly, Integration and Test. As part of the manufacturing process, the
       Company assembles, integrates and tests its systems, including laser,
       optical and power supply systems.

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<PAGE>   17

INTELLECTUAL PROPERTY

     The Company has approximately 147 active patents and approximately 53
additional patent applications pending. The Company also has a royalty-free
license to all of SDL's patents applied for or issued prior to June 25, 1993.

     The Company's future success and competitive position is dependent upon its
proprietary technology, and the Company relies on patent, trade secret,
trademark and copyright law to protect its intellectual property. There can be
no assurance that any of the patents owned or licensed by the Company will not
be invalidated, circumvented, challenged or licensed to others, that the rights
granted thereunder will provide competitive advantages to the Company or that
any of the Company's pending or future patent applications will be issued within
the scope of the claims sought by the Company, if at all. Furthermore, there can
be no assurance that others will not develop technologies that are similar or
superior to the Company's technology, duplicate the Company's technology or
design around the patents owned by the Company. In addition, effective
copyright, patent and trade secret protection may be unavailable, limited or not
applied for in certain foreign countries. Certain of the Company's technology is
licensed on a non-exclusive basis from third parties which may license such
technology to others, including competitors of the Company. There can be no
assurance that the steps taken by the Company to protect its technology will
prevent misappropriation of such technology.

COMPETITION

     The Company's various markets are highly competitive. The Company's overall
competitive position depends on a number of factors including the price, quality
and performance of its products, the level of customer service, the development
of new technology and the Company's ability to participate in emerging markets.
The Company faces competition from three primary sources: current direct
competitors, potential competitors and suppliers of new technologies. The
Company offers a range of components, subsystems, products and systems and has a
number of competitors worldwide in various segments of its markets. In its HPSL
markets, direct competitors include SDL, Inc., Coherent, Inc., Siemens and
Thompson-CSF. In its solid state laser markets, major competitors include
Coherent, Inc. and Lightwave Electronics Inc. In its other product markets, the
Company's major competitors include Coherent, Inc., Continuum (a division of
Hoya) and JDS/Uniphase Corporation. None of the Company's competitors competes
in all of the product areas and industries currently served by the Company.
However, as existing or new markets continue to grow, the Company expects that
new competitors will emerge and present competitors will seek to increase their
market share.

EMPLOYEES

     At December 31, 1999, the Company had 763 full time employees, including
126 in research, development and engineering, 142 in sales, service and
marketing, 392 in operations and 103 in general management, administration and
finance. The Company intends to hire additional personnel in each of these
areas. The Company also had approximately 41 temporary workers and consultants
at December 31, 1999. The Company's employees are not represented by any
collective bargaining organization, and the Company has never experienced a
general work stoppage, slowdown or strike. The Company considers its employee
relations to be good.

                                       17
<PAGE>   18

ITEM 2. PROPERTIES

     The Company conducts its business from office and manufacturing facilities
at six locations in Mountain View, California, two facilities in Oroville,
California and one facility in Tucson, Arizona. In the aggregate, the Company
occupies approximately 46,100 square feet of owned space and 129,500 square feet
of leased space in Mountain View, 63,000 square feet of leased space in Oroville
and 80,600 square feet of owned space in Tucson. The Company's lease agreements
have expiration dates ranging from 2000 to 2008. In addition, the Company leases
sales and service offices in Tokyo and Osaka, Japan, Darmstadt, Germany, Z.A. de
Courtaboeuf, France, Eindhoven, the Netherlands and Hemel Hempstead, Great
Britain. These leases have expiration dates ranging from 2000 to 2002.

ITEM 3. LEGAL PROCEEDINGS

     The Company's facilities and operations are subject to a wide variety of
Environmental Laws and Employee Safety Laws. Further, compliance with
Environmental Laws also may require the acquisition of permits or other
authorizations for certain activities and compliance with various standards or
procedural requirements. Although the Company believes that its operations are
in compliance in all material respects with current requirements under
Environmental Laws and Employee Safety Laws, the nature of the Company's
operations exposes it to the risk of liabilities or claims with respect to such
matters.

     Certain of these Environmental Laws, including Superfund Laws, hold owners
or operators of land or businesses liable for their own and for previous owners'
or operators' releases of certain Hazardous Substances. Such Superfund Laws also
provide for responses to and liability for releases of certain Hazardous
Substances into the environment. The nature of the Company's operations and the
long history of industrial uses at some of its current or former facilities
expose the Company to risk of liabilities or claims under Superfund Laws. In
1988, the Company was named on the General Notification List of the EPA stating
that the Company may be a PRP under the Superfund Laws for Hazardous Substances
which may have been generated by its former operations at a former site. Since
that time, the Company has not been named in the EPA's first or second tier
lists, and has not been pursued as a PRP by the EPA or any of the other PRPs.

     Since 1984, the Company's Mountain View Site has been undergoing
investigation and remediation in response to past releases of industrial
solvents to the soil and groundwater. In addition, the impacted groundwater has
migrated to what is referred to as the North Bayshore Area. As a result of these
past releases, the Mountain View Site and other neighboring sites are listed on
the NPL or the Superfund List under CERCLA. The Company is subject to Orders
that require the Company to perform remediation on-site and off-site and
investigate other potentially responsible parties. Pursuant to the Orders and
other orders issued to other responsible parties, the Company and other
responsible parties are jointly performing and funding remediation which
includes soil vapor extraction and groundwater extraction, treatment and
monitoring. All of the required soil and groundwater remediation and monitoring
systems currently required by the Order are in place, and consequently the
initial capital expenses for such systems have been incurred. As of December 31,
1999, the Company has been granted approval by the Regional Water Quality
Control Board to shut down two of its extraction wells in the North Bayshore
Extraction System and to shut down two soil vapor extraction systems.

     In October 1997, the Company was served with a complaint that had been
filed on behalf of five individuals in the Superior Court of the State of
California seeking an unspecified amount of damages for personal injuries and
property damage incurred by residents of a single location alleged to have
resulted from the Company's and others' negligent and/or intentional handling of
toxic chemicals (Rosario Balcita et al. v. Teledyne Semiconductor,
Spectra-Physics Lasers, et al.). As of December 31, 1999, there has been a
summary judgement ruling in the case in favor of the Company and its
co-defendants in regards to the four adults in the case. The fifth plaintiff has
agreed to settle for a nominal amount. There can be no assurances that other
parties will not come forward and claim personal injury or property damage.

     Based on the Company's experience to date, the Company believes that the
future cost of compliance with existing Environmental Laws (or liability for
known environmental liabilities or claims) and Employee Safety Laws should not
have a material adverse effect on the Company's business, operating results and

                                       18
<PAGE>   19

financial condition. However, future events, such as changes in existing laws
and regulations or their interpretation, or the discovery of heretofore unknown
contamination, may give rise to additional compliance costs or liabilities that
could have a material adverse effect on the Company's business, operating
results and financial condition. Compliance with more stringent laws or
regulations, as well as more vigorous enforcement policies of regulatory
agencies or stricter or different interpretations of existing laws, may require
additional expenditures by the Company that may be material.

     The Company is subject to various claims which arise in the normal course
of business. In the opinion of management, the ultimate resolution of these
claims will not have a material adverse effect on the Company's financial
position or results of operations.

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

     None.

                                       19
<PAGE>   20

                                    PART II

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

     Spectra-Physics Lasers, Inc.'s Common Stock began trading on the NASDAQ
National Market System under the symbol SPLI on December 12, 1997. Prior to such
time, there was no public market for the Common Stock of the Company. The
following table sets forth for the periods indicated the high and low sale
prices per share for the Company's Common Stock as reported on the Nasdaq
National Market.

<TABLE>
<CAPTION>
                                                               HIGH      LOW
                                                              ------    ------
<S>                                                           <C>       <C>
Fiscal 1999:
  First quarter.............................................  $12.00    $ 7.00
  Second quarter............................................   10.88      6.69
  Third quarter.............................................   12.88      7.63
  Fourth quarter............................................   28.00      8.31
Fiscal 1998:
  First quarter.............................................  $18.50    $12.25
  Second quarter............................................   21.50      9.00
  Third quarter.............................................   12.81      6.50
  Fourth quarter............................................    9.50      5.63
Fiscal 1997:
  Fourth quarter (from December 12, 1997)...................  $13.63    $12.13
</TABLE>

     The number of stockholders of record as of February 26, 2000, was 26. No
cash dividends have been declared or paid and the Company has no present
intention to declare or pay cash dividends.

                                       20
<PAGE>   21

ITEM 6. SELECTED FINANCIAL DATA

<TABLE>
<CAPTION>
                                                              YEARS ENDED DECEMBER 31,
                                              ---------------------------------------------------------
                                                1999        1998        1997        1996        1995
                                              ---------   ---------   ---------   ---------   ---------
                                               (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND FOOTNOTES)
<S>                                           <C>         <C>         <C>         <C>         <C>
STATEMENT OF OPERATIONS DATA:
Net sales...................................  $141,310    $169,016    $159,174    $135,434    $112,527
Cost of products sold.......................    90,922     103,724      98,772      88,320      73,040
Cost of products sold -- special............     3,700          --          --          --          --
                                              --------    --------    --------    --------    --------
Total cost of products sold.................    94,622     103,724      98,722      88,320      73,040
                                              --------    --------    --------    --------    --------
  Gross margin..............................    46,688      65,292      60,402      47,114      39,487
Operating expenses:
  Research and development..................    17,044      16,728      14,365      12,005       7,933
  Selling, general and administrative.......    34,255      34,903      32,539      28,966      27,848
  Other(1)..................................     2,540          --      15,757       6,915       1,863
                                              --------    --------    --------    --------    --------
          Total operating expenses..........    53,839      51,631      62,661      47,886      37,644
                                              --------    --------    --------    --------    --------
     Operating income (loss)................    (7,151)     13,661      (2,259)       (772)      1,843
Other income (expense):
  Interest income (expense).................       857       1,335      (4,005)     (5,374)     (4,590)
  Foreign currency gain (loss)..............        89          --       2,067       2,532       1,046
  Legal settlement(2).......................        --          --      17,010          --          --
                                              --------    --------    --------    --------    --------
          Total other income (expense)......       946       1,335      15,072      (2,842)     (3,544)
                                              --------    --------    --------    --------    --------
     Income (loss) before income taxes......    (6,205)     14,996      12,813      (3,614)     (1,701)
Income tax expense (benefit)................    (2,357)      5,349     (21,048)        634         318
                                              --------    --------    --------    --------    --------
     Net income (loss)......................  $ (3,848)   $  9,647    $ 33,861    $ (4,248)   $ (2,019)
                                              ========    ========    ========    ========    ========
     Net income (loss) per share:
       Basic................................  $  (0.24)   $   0.60    $   2.57    $  (0.33)
                                              ========    ========    ========    ========
       Diluted..............................  $  (0.24)   $   0.59    $   2.57    $  (0.33)
                                              ========    ========    ========    ========
     Shares used in computing net income
       (loss) per share(3):
       Basic................................    16,169      16,168      13,162      13,000
                                              ========    ========    ========    ========
       Diluted..............................    16,169      16,473      13,191      13,000
                                              ========    ========    ========    ========
</TABLE>

<TABLE>
<CAPTION>
                                                               AS OF DECEMBER 31,
                                              ----------------------------------------------------
                                                1999       1998       1997       1996       1995
                                              --------   --------   --------   --------   --------
                                                        (IN THOUSANDS, EXCEPT FOOTNOTES)
<S>                                           <C>        <C>        <C>        <C>        <C>
BALANCE SHEET DATA:
Working capital.............................  $ 57,947   $ 72,277   $ 68,941   $ 27,531   $ 30,273
Total assets................................   152,277    157,028    140,524     86,848     80,691
Long term liabilities.......................     1,093      1,983      1,677     71,584     69,067
Stockholders' equity (deficit)..............   105,462    110,068     96,324    (21,223)   (16,480)
OTHER DATA:
Operating income (loss) before infrequent or
  unusual items(4)..........................  $   (911)  $ 13,661   $ 13,498   $  6,143   $  3,706
                                              ========   ========   ========   ========   ========
</TABLE>

---------------
(1) Includes $2,540,000 in 1999 of restructuring expenses; $1,657,000 in 1997,
    $1,915,000 in 1996, and $863,000 in 1995 of legal expenses associated with a
    lawsuit which was settled in the second quarter of fiscal 1997; and
    $14,100,000 in 1997, $5,000,000 in 1996 and $1,000,000 in 1995 of
    compensation expense associated with certain stock options.

(2) In May 1997, the Company received net proceeds of $17,010,000 in settlement
    of a lawsuit.

                                       21
<PAGE>   22

(3) See Note 2 of the Notes to the Consolidated Financial Statements for an
    explanation of shares used in computing net income (loss) per share.

(4) Other data is presented as supplemental information and should not be
    construed as a substitute, or better, indicator of, results of operations
    than operating income (loss) or net income (loss) determined in accordance
    with generally accepted accounting principles. This data represents actual
    operating income (loss) adjusted for the following: (a) special inventory
    writeoffs of $3,700,000 in 1999; (b) restructuring expenses of $2,540,000 in
    1999; (c) legal expenses associated with a lawsuit of $1,657,000 in 1997,
    $1,915,000 in 1996 and $863,000 in 1995; and (d) compensation expense
    associated with stock options of $14,100,000 in 1997, $5,000,000 in 1996 and
    $1,000,000 in 1995. While such items are not expected to be incurred in the
    future, there can be no assurances that similar items might not occur.

                                       22
<PAGE>   23

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

OVERVIEW

     The Company is a leader in the design, development, manufacture and
distribution of lasers, laser systems and optics for a broad range of markets.
Thermo Instrument Systems Inc. ("TIS"), a company whose common stock is traded
on the American Stock Exchange and a subsidiary of Thermo Electron Corporation,
indirectly owns approximately 79.0% of the Company's outstanding common stock at
January 31, 2000. Prior to its acquisition by TIS in February 1999,
Spectra-Physics AB, a Swedish company, beneficially owned approximately 80.0% of
the Company's outstanding common stock.

     Net sales for products are recognized upon shipment. The Company derives
its revenue primarily from the sale of high power semiconductor-based and
conventional lasers and laser systems and optics. High power semiconductor-based
lasers and laser systems are sold into the OEM/industrial market and the
research and development market. The OEM/industrial market is characterized by
unit sales, with varying prices, in volumes of as much as several thousand
units. Conventional lasers are primarily sold into the research and development
market. This market is typically characterized by the sale of single units and
systems with prices that range from approximately $3,000 to $500,000. Sales in
this market have historically varied from quarter to quarter due to seasonal
fluctuations and governmental spending patterns. Optics are sold in varying
units and per unit prices in the telecommunications, computer and
microelectronics manufacturing, industrial manufacturing, medical and image
recording markets. Over the last three years, a growing proportion of the
Company's total net sales and most of its sales growth have been from high power
semiconductor-based lasers.

     The Company's sales have shown a pattern in the last several years whereby
the fiscal fourth quarter net sales represent a large share of the Company's
annual net sales and whereby the Company's first quarter net sales decline
significantly compared to the fourth quarter of the prior fiscal year. The
Company believes these sales patterns occur in part because of seasonal sales
patterns related to customers' fiscal years and in part from the Company's
incentive compensation plan which compensates employees based on annual results.
The Company recognizes that the non-linear pattern of its shipments leads to
inefficiencies in asset and employee utilization. The Company is taking steps to
mitigate this sales trend, but this pattern is likely to continue in the near
term.

     The Company's gross margin is affected by a number of factors, including
product mix, product pricing, cost of components, the proportion of third party
products incorporated into the Company's systems, foreign currency exchange
rates and manufacturing costs. For example, since high power semiconductor-based
lasers and laser systems generally have higher gross margins than conventional
lasers, absent other factors, a shift in sales toward high power
semiconductor-based lasers and laser systems would lead to a gross margin
improvement for the Company. On the other hand, if market conditions in the
highly competitive conventional laser market forced the Company to lower unit
prices, the Company would suffer a decline in gross margin unless the Company
were able to timely offset the price reduction by a reduction in production
costs or by sales of other products with higher gross margins. Either of these
events could have a material effect on the Company's business, operating results
and financial condition.

     The Company spends a significant amount of resources on research and
development. In 1999, the Company focused much of these resources on high power
semiconductor-based lasers and optics for the telecommunications market. The
Company expects to continue to spend substantial resources in developing high
power semiconductor-based lasers and optics for the telecommunications market in
addition to making focused research and development expenditures to maintain its
leadership position in its other markets.

     A significant proportion of the Company's sales are to international
customers and are denominated in currencies other than the U.S. dollar. The
Company also has sales and support operations located in certain European
countries and in Japan which operate in local currencies. As a result, while the
Company attempts to hedge its economic risk of foreign currency fluctuations,
the Company is exposed to fluctuations in foreign currency exchange rates. These
fluctuations have had in the past, and may have in the future, a significant
impact on the Company's results of operations.

                                       23
<PAGE>   24

     The Company has five reportable segments: the Commercial Systems Group
("CSG") business unit; the Industrial and Scientific Lasers ("ISL") business
unit; the Original Equipment Manufacturer ("OEM") business unit; Opto Power
Corporation ("OPC"); and Spectra-Physics Distribution ("SPD") business unit. CSG
designs and manufactures optics, thin films, fabricated parts, plasma tubes, and
subsystems for all operating units within the Company and external customers.
CSG also designs, manufactures and markets low power laser sources and beam
delivery systems for OEM products in the industrial manufacturing and medical
markets. ISL designs, markets and manufactures high power semiconductor-based
and conventional lasers for the industrial and scientific markets. OEM designs,
markets and manufactures high power semiconductor-based lasers for various OEM
markets. OPC designs, markets and manufactures high power semiconductor-based
laser diodes, components and systems. SPD is the Company's worldwide sales,
service and support organization. Reference is made to Footnote 10 of the
Consolidated Financial Statements for disclosures of certain financial
information related to the reportable segments.

RESULTS OF OPERATIONS

     The following table sets forth, for the periods indicated, the Company's
results of operations as a percentage of net sales:

<TABLE>
<CAPTION>
                                                               YEARS ENDED DECEMBER 31,
                                                              --------------------------
                                                               1999      1998      1997
                                                              ------    ------    ------
<S>                                                           <C>       <C>       <C>
Net sales...................................................  100.0%    100.0%    100.0%
Cost of products sold                                          64.4      61.4      62.1
Cost of products sold -- special............................    2.6        --        --
                                                              -----     -----     -----
Total cost of products sold.................................   67.0      61.4      62.1
                                                              -----     -----     -----
  Gross margin..............................................   33.0      38.6      37.9
Operating expenses:
  Research and development..................................   12.1       9.9       9.0
  Selling, general and administrative.......................   24.2      20.7      20.4
  Other.....................................................    1.8        --       9.9
                                                              -----     -----     -----
          Total operating expenses..........................   38.1      30.5      39.3
                                                              -----     -----     -----
          Operating income (loss)...........................   (5.1)      8.1      (1.4)
Other income (expense):
  Interest income (expense).................................    0.6       0.8      (2.5)
  Foreign currency gain.....................................    0.1        --       1.3
  Legal settlement..........................................     --        --      10.7
                                                              -----     -----     -----
          Total other income (expense)......................    0.7       0.8       9.5
                                                              -----     -----     -----
          Income (loss) before income taxes.................   (4.4)      8.9       8.1
Income tax expense (benefit)................................   (1.7)      3.2     (13.2)
                                                              -----     -----     -----
Net income (loss)...........................................   (2.7)%     5.7%     21.3%
                                                              =====     =====     =====
Other Data:
  Operating income (loss) before infrequent or unusual
     items*.................................................   (0.6)%     8.1%      8.5%
                                                              =====     =====     =====
</TABLE>

---------------
* See footnote (4) of Item 6. Selected Financial Data.

YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997

  Net sales

     Net sales were $141.3 million in 1999, $169.0 million in 1998, and $159.2
million in 1997, representing a decrease of 16.4% from 1998 to 1999 and an
increase of 6.2% from 1997 to 1998. Net sales for 1999, calculated using foreign
currency exchange rates for 1998, and for 1998, calculated using foreign
currency

                                       24
<PAGE>   25

exchange rates for 1997, decreased 18.2% from 1998 to 1999 and increased 8.2%
from 1997 to 1998. Net sales were in the following geographic markets:

<TABLE>
<CAPTION>
                                                         YEARS ENDED DECEMBER 31,
                                                     --------------------------------
                                                       1999        1998        1997
                                                     --------    --------    --------
                                                              (IN THOUSANDS)
<S>                                                  <C>         <C>         <C>
North America......................................  $ 63,360    $ 91,545    $ 87,262
Japan..............................................    35,731      32,834      31,334
Europe.............................................    32,812      33,707      31,536
Other Asia.........................................     5,143       6,508       4,673
Rest of the World..................................     4,264       4,422       4,369
                                                     --------    --------    --------
                                                     $141,310    $169,016    $159,174
                                                     ========    ========    ========
</TABLE>

     Net sales are attributed in the above table based on the location of the
Company's customer. Substantially all sales in North America, Other Asia and
Rest of the World are denominated in U.S. dollars. Europe and Japan in the above
table include sales from the Company's European and Japan sales subsidiaries,
respectively. Export sales to countries not located in Asia are included in Rest
of the World.

     Net sales at actual currency exchange rates increased/(decreased): (30.8)%
from 1998 to 1999 and 4.9% from 1997 to 1998 for North America; 8.8% from 1998
to 1999 and 4.8% from 1997 to 1998 for Japan; (2.7)% from 1998 to 1999 and 6.9%
from 1997 to 1998 for Europe; (21.0)% from 1998 to 1999 and 39.3% from 1997 to
1998 for Other Asia; and (3.6)% from 1998 to 1999 and 1.2% from 1997 to 1998 for
Rest of the World. Net sales for 1999, calculated using foreign currency
exchange rates for 1998, and for 1998, calculated using foreign currency
exchange rates for 1997, increased/(decreased): (30.8)% from 1998 to 1999 and
4.9% from 1997 to 1998 for North America; (5.7)% from 1998 to 1999 and 12.9%
from 1997 to 1998 for Japan; 1.1% from 1998 to 1999 and 8.7% from 1997 to 1998
for Europe; (21.0)% from 1998 to 1999 and 39.3% from 1997 to 1998 for Other
Asia; and (3.6)% from 1998 to 1999 and 1.2% from 1997 to 1998 for Rest of the
World.

     Approximately 55% of the decrease in net sales from 1998 to 1999 was
attributable to decreased sales of semiconductor-based lasers and laser systems
and the remainder of the decrease in net sales related to reduced sales of
optics and conventional products. The decreased sales of semiconductor-based
lasers and laser systems was the result of reduced sales in North America
principally in the image recording and industrial manufacturing markets. The
decreased sales of conventional products was principally in the research market.
The decrease in optics sales was principally in the computer and
microelectronics manufacturing market. Sales of semiconductor-based lasers and
laser systems, conventional products and optics were 61.5%, 35.4% and 3.1%,
respectively, of total sales in 1999, compared to 60.9%, 35.1% and 4.0%,
respectively, in 1998.

     The increase in sales in 1998 compared to 1997 was principally due to
increased sales of semiconductor-based lasers and laser systems, which
represented 60.9% of total sales in 1998, compared to 60.0% in 1997.

  Cost of products sold and gross margin

     Cost of products sold includes all manufacturing materials and labor and a
proportionate share of manufacturing overhead costs, as well as costs of
shipping, tooling, royalties, third party products incorporated in the Company's
products and provisions for excess and obsolete inventories and warranty. Cost
of products sold varies by product mix, product pricing, cost of components, the
proportion of third party products incorporated in systems manufactured by the
Company, and manufacturing costs.

     Gross margin was $46.7 million in 1999, $65.3 million in 1998, and $60.4
million in 1997, representing a decrease of 28.5% from 1998 to 1999, and an
increase of 8.1% from 1997 to 1998. As a percentage of net sales, gross margin
was 33.0%, 38.6%, and 37.9% in 1999, 1998 and 1997, respectively. Included in
cost of sales in 1999 were $3.7 million of special inventory write-offs. A
portion of these inventory write-offs related to inventory for the Company's
hard drive disk texturing system product. The Company exited its disk texturing
system business in 1999. The Company also recorded inventory write-offs as a
result of technology changes for high power semiconductor lasers. Without the
$3.7 million special inventory write-offs, gross margin for 1999 was 35.7% of
sales and decreased 22.8% from 1998. The principal reason for the decrease in
gross margin in

                                       25
<PAGE>   26

1999 compared to 1998, in both dollar terms and as a percentage of net sales,
was the decrease in sales. Offsetting this decrease was the positive effect on
gross margin from the weakening of the U.S. dollar compared to the Yen. The
principal reasons for the improvement in gross margin as a percentage of net
sales in 1998 compared to 1997 was the higher proportion of sales of high power
semiconductor-based lasers and laser systems which generally have higher gross
margins than conventional products and the increase in sales that allowed the
absorption of fixed manufacturing overhead expenses over a larger unit base.
Additionally, the Company experienced improved manufacturing yields in 1998
compared to 1997 in the production of semiconductor-based lasers. Mitigating
these favorable factors in 1998 was the negative effect on gross margins from
the strengthening of the U.S. dollar compared to non-U.S. dollar currencies,
particularly the Yen.

  Operating expenses

     Operating expenses totaled $53.8 million in 1999, $51.6 million in 1998,
and $62.7 million in 1997, representing an increase of 4.3% from 1998 to 1999
and a decrease of 17.6% from 1997 to 1998. As a percentage of net sales,
operating expenses were 38.1%, 30.5%, and 39.3% in 1999, 1998, and 1997,
respectively. Included in other operating expenses were restructuring expenses
of $2.5 million in 1999, legal expenses associated with a lawsuit which was
settled in the second quarter of 1997 of $1.7 million in 1997, and compensation
expense associated with certain stock options of two subsidiaries of $14.1
million in 1997. The stock options for one subsidiary were modified so as to
establish the measurement date and the amount of compensation expense the
Company is required to record and, for the other subsidiary, were cancelled for
a combination of cash and common stock of the Company. Accordingly, the Company
will not incur additional compensation expense relating to these stock options
in the future. Excluding such restructuring, legal and compensation expenses,
operating expenses decreased 0.6% from 1998 to 1999 and increased 10.1% from
1997 to 1998 and were 36.3%, 30.5%, and 29.5% of net sales in 1999, 1998 and
1997, respectively.

     Research and development expenses represent expenses associated with
Company funded research and new product development, and efforts designed to
improve the performance of existing products and manufacturing processes.
Customer funded product development engineering for certain OEM customers and
the U.S. government, which to date has been minimal, is recorded as a reduction
of research and development expenses. Research and development expenses are
charged to operations as incurred.

     Research and development expenses totaled $17.0 million in 1999, $16.7
million in 1998 and $14.4 million in 1997, representing an increase of 1.9% from
1998 to 1999 and 16.5% from 1997 to 1998. As a percentage of net sales, research
and development expenses were 12.1%, 9.9% and 9.0% in 1999, 1998 and 1997,
respectively. The increase in research and development expenses in 1999 was
principally focused on optics and semiconductor-based lasers for the
telecommunications market.

     Selling, general and administrative expenses include the expenses of the
Company's sales and support subsidiaries in the United Kingdom, France, Germany,
the Netherlands and Japan as well as the Company's North American sales and
support organization, and other marketing and administrative expenses.

     Selling, general and administrative expenses totaled $34.3 million in 1999,
$34.9 million in 1998, and $32.5 million in 1997, representing a decrease of
1.9% from 1998 to 1999 and an increase of 7.3% from 1997 to 1998. As a
percentage of net sales, selling, general and administrative expenses were
24.2%, 20.7%, and 20.4% in 1999, 1998 and 1997, respectively. The principal
reasons for the increase in selling, general and administrative expenses in
dollar terms in 1998 compared to 1997 were increased expenses associated with
penetrating the industrial/OEM markets and costs of being a public company.

  Interest income (expense)

     Interest income totaled $0.9 million in 1999 and $1.3 million in 1998.
Interest expense totaled $4.0 million in 1997. Interest income for 1999 and 1998
was earned on the Company's invested cash and cash equivalents. Interest expense
in 1997 was incurred on loans and advances from Spectra-Physics AB and
affiliates. Interest expense was also imputed on the certain non-interest
bearing advances from Spectra-Physics AB and affiliates. The amount of such
imputed interest was $0.6 million in 1997. In the fourth

                                       26
<PAGE>   27

quarters of 1997 Spectra-Physics AB and affiliates converted all loans and
advances to the Company to equity. Accordingly, beginning October 1, 1997, the
Company no longer incurred interest expense on such loans and advances.

  Foreign currency gain (loss)

     Effective October 1, 1998, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 133 "Accounting for Derivative Instruments and
Hedging Activities." SFAS No. 133 requires that all derivatives, including
foreign currency exchange contracts, be recognized on the balance sheet at fair
value. Derivatives that are not hedges must be recorded at fair value through
earnings. If a derivative is a hedge, depending on the nature of the hedge,
changes in the fair value of the derivative are either offset against the change
in fair value of assets, liabilities or firm commitments through earnings or
recognized in other comprehensive income until the hedged item is recognized in
earnings. The ineffective portion of a derivative's change in fair value is to
be immediately recognized in earnings. The adoption of SFAS No. 133 resulted in
no cumulative effect on income or other comprehensive income for the Company.

     Forward foreign exchange contracts are used primarily by the Company to
hedge certain operational ("cash flow" hedges) and balance sheet ("fair value"
hedges) exposures resulting from changes in foreign currency exchange rates.
Such exposures primarily result from portions of the Company's operations and
assets that are denominated in currencies other than the U.S. dollar, primarily
the Japanese Yen and certain European currencies. These foreign exchange
contracts are entered into to hedge anticipated product sales and recorded
accounts receivable made in the normal course of business, and accordingly, are
not speculative in nature. As part of its overall strategy to manage the level
of exposure to the risk of foreign currency exchange rate fluctuations, the
Company hedges a portion of its foreign currency exposures anticipated over the
ensuing twelve-month period. At December 31, 1999, the Company had effectively
hedged approximately 75% of its estimated foreign currency exposures that
principally relate to anticipated cash flows to be remitted to the U.S. over the
ensuing twelve month period, using foreign exchange contracts that generally
have maturities of twelve months or less. The Company does not hold or transact
in financial instruments for purposes other than risk management.

     The Company records its foreign currency exchange contracts at fair value
in its consolidated balance sheet as accrued and other current liabilities and
the related gains or losses on these hedge contracts are deferred as a component
of other comprehensive income. These deferred gains and losses are recognized in
income in the period in which the underlying anticipated transaction occurs.
Unrealized gains and losses resulting from the impact of currency exchange rate
movements on forward foreign exchange contracts designated to offset certain
non-U.S. dollar denominated assets are recognized as other income or expense in
the period in which the exchange rates change and offset the foreign currency
losses and gains on the underlying exposures being hedged.

     The Company discontinues hedge accounting prospectively when (1) it is
determined that the derivative is no longer effective in offsetting changes in
fair value or cash flows of a hedged item (including forecasted transactions);
(2) the derivative is sold or terminated; (3) the derivative is dedesignated as
a hedge instrument, because it is unlikely that a forecasted transaction will
occur or a balance sheet exposure ceases to exist; or (4) management determines
that designation of the derivative as a hedge instrument is no longer
appropriate.

     When hedge accounting is discontinued because it is determined that the
derivative no longer qualifies as an effective fair value hedge, the derivative
will continue to be carried on the balance sheet at its fair value until it
settles, and the hedged asset will no longer be adjusted for changes in fair
value. When hedge accounting is discontinued because it is probable that a
forecasted transaction will not occur, the derivative will continue to be
carried on the balance sheet at its fair value until it settles, and gains and
losses that were accumulated in other comprehensive income will be recognized
immediately in income. In all other situations in which hedge accounting is
discontinued, the derivative will be carried at its fair value on the balance
sheet until it settles, with changes in its fair value recognized in current
period earnings.

                                       27
<PAGE>   28

     At December 31, 1999, the Company had contracts for the sale of foreign
currencies and the purchase of U.S. dollars totaling $45.0 million. At December
31, 1999, the Company had deferred losses relating to its foreign currency
contracts of approximately $0.9 million, which is all expected to be recognized
in income over the next twelve months.

     The cash requirements of the above described financial instruments
approximate their fair value. Cash flows associated with these financial
instruments are classified consistent with the cash flows from the transactions
being hedged. The Company's forward foreign exchange contracts contain market
and credit risk not recognized in the consolidated financial statements. The
market risk associated with these instruments resulting from currency exchange
rate movements is expected to offset the market risk of the underlying
transactions and assets being hedged. The credit risk is that the Company's
banking counterparties may be unable to meet the terms of the agreements. The
Company minimizes such risk by limiting its counterparties to major financial
institutions with credit ratings of A/A-2 or better. In addition, the potential
risk of loss with any one party resulting from this type of credit risk is
monitored. Management does not expect any loss as a result of default by other
parties. However, there can be no assurances that the Company will be able to
mitigate market and credit risks described above.

     For the period from the fourth quarter of 1997 to the adoption of SFAS No.
133, the Company followed SFAS No. 52, "Foreign Currency Translation," and used
forward exchange contracts to hedge only assets and firm commitments that
exposed the Company to enterprise risk as a result of fluctuations in foreign
currency exchange rates. Gains and losses on forward exchange contracts that
were designated as hedges of firm orders were deferred in other current
liabilities and were included in the measurement of the underlying transaction.
Hedge accounting was only applied if the derivative reduced the risk of the
underlying hedged item and was designated at inception as a hedge. Derivatives
were measured for effectiveness both at inception and on an ongoing basis.
During this period, no derivative ceased to meet the criteria for deferral and
all expected firm commitments occurred. No contract was sold or terminated prior
to maturity.

     Prior to the fourth quarter of 1997, the Company entered into forward
foreign exchange contracts with Spectra-Physics AB. These contracts were entered
into in anticipation of product sales made in the normal course of business, and
accordingly, did not qualify for hedge accounting under SFAS No. 52. Since the
forward foreign exchange contracts were not designated as hedges of firm,
identifiable foreign currency commitments, the unrealized gains and losses
resulting from the impact of foreign currency exchange rate movements on these
contracts were recognized in the periods in which the exchange rates changed.
Such gains and losses were recorded as other income or expense.

  Income tax expense (benefit)

     The Company is part of a tax sharing arrangement with affiliates of
Spectra-Physics AB. For periods prior to September 30, 1997, income tax expense
reflected foreign taxes only due to the expectation by the Company at that time
of continuing losses in the U.S. Deferred tax assets were established relating
to differences between the financial statements and tax basis of assets and
liabilities based on enacted tax laws and rates applicable to the period in
which the differences are expected to affect taxable income. These deferred tax
assets were offset in total by a valuation allowance due to the expectation of
continued losses in the U.S.

     During the quarter ended September 30, 1997, the Company decreased the tax
valuation allowance and recognized a tax benefit relating to the above items
(net of foreign taxes) totaling $23.3 million. The decrease of the valuation
allowance and the recognition of the tax benefit in the quarter was based on
management's expectations regarding future taxable income for the Company.
Management's expectations included the consideration of the conversion of loans
and advances from Spectra-Physics AB and affiliates to equity in October 1997
which eliminated related interest charges in the future.

     Under the tax sharing agreement in place through September 1997, the
Company's net operating loss carryovers referred to above were used to offset
the taxable income of other members of the tax filing group with no benefit to
the Company. Accordingly, the deferred tax asset arising from the net operating
loss carryforwards (amounting to $10.2 million) was recorded as a dividend to
Spectra-Physics AB. Effective

                                       28
<PAGE>   29

October 1997, the Company and affiliates of Spectra-Physics AB entered into a
new tax sharing arrangement which generally requires the Company to determine
its U.S. tax liability as a separate consolidated group.

     The Company's effective tax rate is 38% of pre-tax income. During the third
quarter of 1998, the Company recorded an income tax adjustment of $0.4 million
to reverse excess income tax reserves. The Company recorded income tax benefits
of $2.4 million in 1999 and $21.0 million in 1997 and income tax expense of $5.3
million in 1998.

     The Company expects its future effective tax rate to approximate statutory
rates.

LIQUIDITY AND CAPITAL RESOURCES

     Through the third quarter of 1997, the Company had satisfied its liquidity
requirements through cash provided by Spectra-Physics AB and affiliates in the
form of loans and advances. As of October 1, 1997, all outstanding loans and
advances from Spectra-Physics AB and affiliates were converted to equity. At
December 31, 1999, the Company had working capital of $57.9 million, including
cash and cash equivalents of $23.3 million, compared to working capital at
December 31, 1998 of $72.3 million, including cash and cash equivalents of $34.6
million.

     Cash provided by operating activities was $1.1 million, $8.8 million, and
$26.6 million in the years ended December 31, 1999, 1998 and 1997, respectively.
Substantially all the net cash provided by operating activities in 1999
represented the net loss for the year ($3.8 million) adjusted for the non-cash
impact of depreciation, amortization, deferred income taxes, restructuring and
special inventory writeoffs ($8.6 million) and for the net increase in operating
assets ($3.6 million). Substantially all the net cash provided by operating
activities in 1998 represented the net income for the year ($9.6 million)
adjusted for the non-cash impact of depreciation and amortization ($5.8 million)
and for the increase in accounts receivable ($6.3 million). The increase in
accounts receivable was the result of a proportionately higher amount of sales
in the last month of 1998 compared to 1997 causing days sales outstanding to
increase from 82 days at December 31, 1997, to 92 days at December 31, 1998.
Substantially all the net cash provided by operating activities in 1997
represented net income for the year ($33.9 million, including a $21.0 million
income tax benefit) adjusted for the non-cash impact of depreciation,
amortization, and deferred income taxes ($3.4 million) and for the increase in
inventories ($4.0 million)

     Cash used in investing activities, mostly purchases of property, plant and
equipment, was $13.7 million, $15.7 million and $9.4 million in the years ended
December 31, 1999, 1998 and 1997, respectively.

     Cash provided by financing activities was $2.0 million, $7.7 million and
$13.7 million in the years ended December 31, 1999, 1998 and 1997, respectively.
During the year ended December 31, 1999, financing activities were primarily net
borrowings under credit facilities. During the year ended December 31, 1998,
financing activities included the sale of 360,000 shares of common stock in
accordance with an overallotment option granted to the underwriters of the
Company's initial public offering of $3.2 million and increases in net
borrowings under the Company's credit facilities of $4.4 million. During the
year ended December 31, 1997, net transfers to Spectra-Physics AB and affiliates
and changes in loans and advances from Spectra-Physics AB amounted to a net
decrease in cash of $25.7 million, principally relating to the utilization by
affiliates of Spectra-Physics AB of the Company's net operating loss carryfoward
for tax purposes and the remittance to Spectra-Physics AB of cash received by
the Company on the settlement of litigation. This amount was offset by the net
proceeds from the Company's initial public offering of its common stock of $20.7
million, by $17.2 million of cash provided by Spectra-Physics AB to settle
certain stock options and other liabilities, and by $1.5 million of net
borrowings under the Company's credit facilities.

     The effect of foreign currency exchange rate changes on cash was a $0.7
million loss and $0.4 million gain in the years ended December 31, 1999 and
December 31, 1998, respectively.

     These activities resulted in a decrease in cash and cash equivalents of
$11.3 million in the year ended December 31, 1999, and an increase in cash and
cash equivalents of $1.1 million and $31.0 million in the years ended December
31, 1998 and 1997, respectively.

                                       29
<PAGE>   30

     In October 1997, the Company entered into certain agreements with employees
of its Opto Power subsidiary who held stock options to purchase common stock of
the subsidiary. Under the agreements, the option holders agreed to terminate the
options in exchange for a combination of cash payment and the Company's common
stock. Such cash payments totaled approximately $14.7 million and were funded by
a capital contribution by Spectra-Physics AB and affiliates.

     The Company has a short-term credit facility in Japan. The credit facility
is with several banks, is unsecured, allows aggregate borrowings of 2.4 billion
Yen ($23.4 million), bears interest at 1.625% per annum and expires at various
times through June 2000. At December 31, 1999, there were approximately $13.5
million of borrowings outstanding under this facility. The Company's foreign
subsidiaries other than Japan have credit facilities aggregating $3.9 million,
none of which was outstanding as of December 31, 1999. The Company also has
available in the U.S. a committed, unsecured credit facility aggregating $10.0
million with a bank which expires in April 2000. From time to time, the amount
available under all credit facilities will be reduced by the amount of
performance bonds outstanding guaranteed by the applicable bank to the Company's
customers, foreign currency contracts outstanding with the applicable bank and
similar arrangements.

     At December 31, 1999, the Company was in technical default of certain
financial covenants of its U.S. credit facility. Because the Company had no
outstanding borrowings with the bank at December 31, 1999, the Company has not
applied for a waiver of default from the bank. The credit agreement expires in
April 2000 and the Company does not expect to make any borrowings under the
facility prior to the scheduled maturity date. Through December 31, 1999, the
Company has not been required to borrow, and has not borrowed, under its U.S.
credit facility.

     The Company has reviewed its short- and long-term liquidity needs. The
Company's liquidity needs for at least the next twelve months will be met by
cash flows from operations, existing cash balances and borrowings available
under its credit facilities.

QUALITATIVE AND QUANTITATIVE DISCLOSURE ABOUT MARKET RISK

     The fair value of the Company's cash and cash equivalents would not be
significantly impacted by either a 100 basis point increase or decrease in
interest rates due to the short-term nature of the Company's portfolio.

     The Company regularly hedges its non-U.S. dollar-based exposures in the
U.S. by entering into forward contracts. The terms of these contracts are for
periods matching the duration of the underlying exposure and generally range
from one month up to one year. The short-term nature of these contracts has
resulted in these instruments having insignificant fair values at December 31,
1999. The Company's largest foreign currency exposure is against the Japanese
yen, primarily because Japan has a higher proportion of local currency
denominated sales. Relative to foreign currency exposures existing at December
31, 1999, a 10% unfavorable movement in foreign exchange rates would not expose
the Company to significant losses in earnings or cash flows or significantly
diminish the fair value of its foreign currency financial instruments, primarily
due to the short lives of the affected financial instruments that effectively
hedge substantially all of the Company's year-end exposures to fluctuations in
foreign currency exchange rates. The calculation assumes that each exchange rate
would change in the same direction relative to the U.S. dollar. In addition to
the direct effects of changes in exchange rates, such changes typically affect
the volume of sales or the foreign currency sales price as competitors' products
become more or less attractive. The Company's sensitivity analysis of the
effects of changes in foreign currency exchange rates does not factor in a
potential change in sales levels or local currency selling prices. See
additional discussion of foreign currency exchange contracts under the heading
"Foreign currency gain (loss)".

YEAR 2000 COMPLIANCE

     An issue existed for all companies that rely on computers as the year 2000
approached. Known as the "Millennium Bug" or the "Year 2000 (Y2K) Problem" the
problem stemmed from the way that some computer systems and other chip
containing equipment were programmed to process date information. To conserve
memory, dates were stored as two digit, rather than as four digit, numbers with
all the dates assumed

                                       30
<PAGE>   31

to be between 1900 and 1999. Thus the year 2000 would be stored as "00" and be
assumed to be 1900, and year 2001 as "01", and be assumed to be 1901, etc. This
practice could result in incorrect results when computers so programmed perform
arithmetic operations, comparisons or data field sorting with dates later than
1999.

     The Board of Directors of Spectra-Physics, and all levels of management,
were aware of the Y2K problem, and the issue was addressed. Spectra-Physics' Y2K
compliance plans were supervised by the Vice President of Finance, under ongoing
review by the Board. The Company's Year 2000 Project Team has completed its
review of Spectra-Physics' (a) Information Technology (IT) and non-IT systems,
(b) products, (c) vendors and (d) customers and corrected all identified
problems.

     Through March 1, 2000, the Company experienced no significant Y2K problems.

EUROPEAN MONETARY UNION (EMU)

     The euro is a new currency introduced by certain European countries
collectively known as the European Monetary Union ("EMU"). The euro was
introduced on January 1, 1999 and the eleven participating EMU members
established fixed conversion rates between their existing currencies ("legacy
currencies") and the euro. The legacy currencies have no value of their own but
will be subsets of the euro. The legacy currencies and the euro will both be
used through June 30, 2002 when the legacy currencies will be withdrawn ("euro
only environment"). The introduction of the euro could have an adverse impact on
a company's information systems, its markets and the economies in which it
operates.

     The Company has completed a review of its information systems and the
introduction of the euro in 1999 had no material impact on its systems.
Furthermore, the Company's review indicated that the Company's information
systems can operate in the euro only environment in 2002. Prior to 2002, the
Company expects to conduct another survey concerning the euro's impact on
information systems.

     The Company has also reviewed its customer list and current selling
practices and expects no material adverse impact from the introduction of the
euro.

     The Company is currently unable to determine the ultimate long term
financial impact of the exclusive use of the euro on the Company's markets and
on the economies of the countries in which the Company operates. This impact
will be dependent upon the evolving competitive situations and macro-economic
impact of the introduction of the euro.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

     See Item 14(a) for an index to the consolidated financial statements and
supplementary information which are attached hereto.

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

     See Form 8-K, dated August 6, 1999.

                                       31
<PAGE>   32

                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

     Information regarding Registrant's officers and directors will be set forth
under the captions "Management" and "Election of Directors" in the Registrant's
proxy statement for use in connection with the Annual Meeting of Stockholders to
be held in May 2000 (the "2000 Proxy Statement"), and is incorporated herein by
reference. The 2000 Proxy Statement will be filed with the Securities and
Exchange Commission within 120 days after the end of the Registrant's fiscal
year end.

ITEM 11. EXECUTIVE COMPENSATION

     Information concerning compensation of the Registrant's directors and
executive officers will be set forth under the captions "Election of
Directors -- Compensation of Directors" and "Management -- Summary Compensation
of Named Executive Officers" in the Registrant's 2000 Proxy Statement and is
incorporated herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     Information regarding security ownership of certain beneficial owners and
management will be set forth under the caption "Security Ownership of Certain
Beneficial Owners and Management" in the Registrant's 2000 Proxy Statement and
is incorporated herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     Information regarding certain relationships and related transactions will
be set forth under the caption "Certain Relationships and Related Transactions"
in the Registrant's 2000 Proxy Statement and is incorporated herein by
reference.

                                    PART IV

ITEM 14.EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND FORM 8-K REPORTS

(a) 1. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

     The following consolidated financial statements of Spectra-Physics Lasers,
Inc. are filed as part of this report on Form 10-K:

        Report of Independent Accountants

        Consolidated Balance Sheet -- December 31, 1999 and 1998

        Consolidated Statement of Operations -- Years ended December 31, 1999,
        1998 and 1997

        Consolidated Statement of Cash Flows -- Years Ended December 31, 1999,
        1998 and 1997

        Consolidated Statement of Stockholders' Equity -- Years Ended December
        31, 1999, 1998, and 1997

        Notes to Consolidated Financial Statements

                                       32
<PAGE>   33

     2. CONSOLIDATED FINANCIAL STATEMENT SCHEDULES

        Schedule II -- Valuation and Qualifying Accounts

        Schedules not listed above have been omitted because the matter or
        conditions are not present or the information required to be set forth
        therein is included in the Consolidated Financial Statements hereto.

(b) REPORTS ON FORM 8-K

     No reports on Form 8-K were filed during the three-months ended December
31, 1999.

(C) EXHIBITS

<TABLE>
<CAPTION>
    EXHIBIT
    NUMBER                         EXHIBIT DESCRIPTION
    -------                        -------------------
    <S>        <C>
     2.1       Plan of Reorganization of the Company (Incorporated by
               reference to exhibit 2.1 of the Company's Registration
               Statement on Form S-1 (No. 333-38329))
     3.1       Certificate of Incorporation of the Company, as amended
               (Incorporated by reference to exhibit 3.1 of the Company's
               Registration Statement on Form S-1 (No. 333-38329))
     3.2       Bylaws of the Company (Incorporated by reference to exhibit
               3.2 of the Company's Registration Statement on Form S-1 (No.
               333-38329))
     4.1       Specimen of Common Stock Certificate (Incorporated by
               reference to exhibit 4.1 of Amendment No. 1 of the Company's
               Registration Statement on Form S-1 (No. 333-38329))
    10.1       Agreement by and between Spectra-Physics USA and the
               Company, dated as of August 29, 1997 (Incorporated by
               reference to exhibit 10.1 of the Company's Registration
               Statement on Form S-1 (No. 333-38329))
    10.2       Registration Rights Agreement between Spectra-Physics USA
               and the Company (Incorporated by reference to exhibit 10.2
               of Amendment No. 2 of the Company's Registration Statement
               on Form S-1 (No. 333-38329))
    10.3       Form of Executive Employment Agreement with certain officers
               of the Company (Incorporated by reference to exhibit 10.3 of
               Amendment No. 2 of the Company's Registration Statement on
               Form S-1 (No. 333-38329))
    10.4       Form of Executive Incentive Plan (Incorporated by reference
               to exhibit 10.5 of Amendment No. 1 of the Company's
               Registration Statement on Form S-1 (No. 333-38329))
    10.5       1997 Spectra-Physics Lasers, Inc. Stock Option Plan
               (Incorporated by reference to exhibit 10.6 of Amendment No.
               1 of the Company's Registration Statement on Form S-1 (No.
               333-38329))
    10.6       Patent License Agreement dated as of October 4, 1997 by and
               between the Company, as licensor, and Spectra Precision,
               Inc., as licensee (Incorporated by reference to exhibit 10.7
               of Amendment No. 1 of the Company's Registration Statement
               on Form S-1 (No. 333-38329))
    10.7       Patent License Agreement dated as of October 4, 1997 by and
               between Spectra Precision, Inc., as licensor, and the
               Company, as licensee (Incorporated by reference to exhibit
               10.8 of Amendment No. 1 of the Company's Registration
               Statement on Form S-1 (No. 333-38329))
    10.8       Tradename and Trademark License Agreement dated as of August
               29, 1997 by and between the Company, Spectra-Physics AB and
               certain Spectra-Physics AB subsidiaries (Incorporated by
               reference to exhibit 10.9 of Amendment No. 1 of the
               Company's Registration Statement on Form S-1 (No.
               333-38329))
</TABLE>

                                       33
<PAGE>   34

<TABLE>
<CAPTION>
    EXHIBIT
    NUMBER                         EXHIBIT DESCRIPTION
    -------                        -------------------
    <S>        <C>
    10.9       Employment Agreement dated January 1, 1998, between the
               Company and Patrick L. Edsell (Incorporated by reference to
               exhibit 10.10 of the Company's Form 10-K for the year ended
               December 31, 1998)
    21.1       List of Subsidiaries (Incorporated by reference to exhibit
               21.1 of the Company's Registration Statement on Form S-1
               (No. 333-38329))
    23.1       Consent of PricewaterhouseCoopers LLP
    23.2       Report of PricewaterhouseCoopers LLP (included on page 60)
    23.3       Consent of Arthur Andersen L.L.P.
    23.4       Report of Arthur Andersen L.L.P.
               (included on page 59)
    24.1       Powers of Attorney (included on signature page)
    27.1       Financial Data Schedule
</TABLE>

                                       34
<PAGE>   35

                                   SIGNATURES

     Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized on March 15, 2000.

                                          SPECTRA-PHYSICS LASERS, INC.

                                          By:     /s/ PATRICK L. EDSELL
                                            ------------------------------------
                                                     Patrick L. Edsell
                                               Chairman, President and Chief
                                                     Executive Officer

                               POWER OF ATTORNEY

     Know all men by these presents, that each person whose signature appears
below constitutes and appoints Patrick L. Edsell and Seth Halio, jointly and
severally, his attorneys-in-fact, each with the power of substitution for him in
any and all capacities, to sign any amendments to this report, and to file the
same, with exhibits thereto and other documents in connection therewith, with
the Securities and Exchange Commission, hereby ratifying and confirming that
each of said attorneys-in-fact, or his substitute or substitutes, may do or
cause to be done by virtue hereof.

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

<TABLE>
<CAPTION>
                        NAME                                        TITLE                    DATE
                        ----                                        -----                    ----
<S>                                                    <C>                              <C>

                /s/ PATRICK L. EDSELL                  (Director, Chairman, President   March 15, 2000
-----------------------------------------------------   and Chief Executive Officer)
                  Patrick L. Edsell

                   /s/ SETH HALIO                        (Vice President -- Finance)    March 15, 2000
-----------------------------------------------------     (Principal Financial and
                     Seth Halio                              Accounting Officer)

               /s/ LAWRENCE C. KARLSON                           (Director)             March 14, 2000
-----------------------------------------------------
                 Lawrence C. Karlson

                  /s/ EARL R. LEWIS                              (Director)             March 15, 2000
-----------------------------------------------------
                    Earl R. Lewis

                  /s/ DENIS A HELM                               (Director)             March 15, 2000
-----------------------------------------------------
                    Denis A. Helm

              /s/ POLYVIOS C. VINTIADIS                          (Director)             March 1, 2000
-----------------------------------------------------
                Polyvios C. Vintiadis
</TABLE>

                                       35
<PAGE>   36

                       REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Stockholders
Spectra-Physics Lasers, Inc.

     We have audited the accompanying consolidated balance sheet of
Spectra-Physics Lasers, Inc. as of December 31, 1999, and the related
consolidated statements of operations, cash flows, and stockholders' equity for
the year ended December 31, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.

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

     In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Spectra-Physics
Lasers, Inc. as of December 31, 1999, and the consolidated results of its
operations and its cash flows for the year ended December 31, 1999, in
conformity with generally accepted accounting principles.

ARTHUR ANDERSEN LLP.

San Jose, California
January 18, 2000

                                       36
<PAGE>   37

                       REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Stockholders
Spectra-Physics Lasers, Inc.

     We have audited the accompanying consolidated balance sheet of
Spectra-Physics Lasers, Inc. and its subsidiaries as of December 31, 1998, and
the related consolidated statements of operations, of cash flows, and of
stockholders' equity for each of the two years in the period ended December 31,
1998. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.

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

     In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
Spectra-Physics Lasers, Inc. and its subsidiaries at December 31, 1998, and the
results of their operations and their cash flows for each of the two years in
the period ended December 31, 1998, in conformity with accounting principles
generally accepted in the United States.

PricewaterhouseCoopers LLP

San Jose, California
January 22, 1999

                                       37
<PAGE>   38

                          SPECTRA-PHYSICS LASERS, INC.

                           CONSOLIDATED BALANCE SHEET
               (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

                                     ASSETS

<TABLE>
<CAPTION>
                                                                  DECEMBER 31,
                                                              --------------------
                                                                1999        1998
                                                              --------    --------
<S>                                                           <C>         <C>
Current assets:
  Cash and cash equivalents.................................  $ 23,278    $ 34,620
  Accounts receivable, including $68 and $339, respectively,
     due from affiliated companies, less allowance for
     doubtful accounts of $1,253 and $405, respectively.....    38,246      45,824
  Inventories...............................................    26,582      25,566
  Deferred tax assets.......................................     9,657       7,300
  Prepaid expenses and other current assets.................     5,906       3,944
                                                              --------    --------
          Total current assets..............................   103,669     117,254
Property, plant and equipment, net..........................    42,015      35,156
Intangible assets, net of accumulated amortization of $2,487
  and $2,160, respectively..................................     1,794       2,122
Other assets................................................     4,799       2,496
                                                              --------    --------
          Total assets......................................  $152,277    $157,028
                                                              ========    ========

                       LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
  Accounts payable..........................................  $ 10,015    $  9,262
  Borrowings under credit facilities........................    13,655      11,756
  Accrued and other current liabilities.....................    22,052      23,959
                                                              --------    --------
          Total current liabilities.........................    45,722      44,977
Long term liabilities.......................................     1,093       1,983
Commitments and contingencies
Stockholders' equity:
  Common stock, par value $0.01:
     Authorized -- 60,000,000 shares
     Outstanding -- 16,176,543 in 1999 and 16,168,043 in
      1998..................................................       162         162
  Additional paid-in capital................................    98,320      97,235
  Retained earnings.........................................     9,428      13,276
  Accumulated other comprehensive income (loss).............    (2,448)       (605)
                                                              --------    --------
       Total stockholders' equity...........................   105,462     110,068
                                                              --------    --------
          Total liabilities and stockholders' equity........  $152,277    $157,028
                                                              ========    ========
</TABLE>

                See Notes to Consolidated Financial Statements.

                                       38
<PAGE>   39

                          SPECTRA-PHYSICS LASERS, INC.

                      CONSOLIDATED STATEMENT OF OPERATIONS
                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
                                                                 YEARS ENDED DECEMBER 31,
                                                             --------------------------------
                                                               1999        1998        1997
                                                             --------    --------    --------
<S>                                                          <C>         <C>         <C>
Net sales..................................................  $141,310    $169,016    $159,174
Cost of products sold......................................    90,922     103,724      98,772
Cost of products sold -- special...........................     3,700          --          --
                                                             --------    --------    --------
Total cost of products sold................................    94,622     103,724      98,772
                                                             --------    --------    --------
  Gross margin.............................................    46,688      65,292      60,402
Operating expenses:
  Research and development.................................    17,044      16,728      14,365
  Selling, general and administrative......................    34,255      34,903      32,539
  Other....................................................     2,540          --      15,757
                                                             --------    --------    --------
          Total operating expenses.........................    53,839      51,631      62,661
                                                             --------    --------    --------
     Operating income (loss)...............................    (7,151)     13,661      (2,259)
Other income (expense):
  Interest income (expense)................................       857       1,335      (4,005)
  Foreign currency gain....................................        89          --       2,067
  Legal settlement.........................................        --          --      17,010
                                                             --------    --------    --------
          Total other income (expense).....................       946       1,335      15,072
                                                             --------    --------    --------
     Income (loss) before income taxes.....................    (6,205)     14,996      12,813
Income tax expense (benefit)...............................    (2,357)      5,349     (21,048)
                                                             --------    --------    --------
     Net income (loss).....................................  $ (3,848)   $  9,647    $ 33,861
                                                             ========    ========    ========
Net income (loss) per share:
  Basic....................................................  $  (0.24)   $   0.60    $   2.57
                                                             ========    ========    ========
  Diluted..................................................  $  (0.24)   $   0.59    $   2.57
                                                             ========    ========    ========
Shares used in computing net income (loss) per share:
  Basic....................................................    16,169      16,168      13,162
                                                             ========    ========    ========
  Diluted..................................................    16,169      16,473      13,191
                                                             ========    ========    ========
</TABLE>

                See Notes to Consolidated Financial Statements.

                                       39
<PAGE>   40

                          SPECTRA-PHYSICS LASERS, INC.

                      CONSOLIDATED STATEMENT OF CASH FLOWS
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                 YEARS ENDED DECEMBER 31,
                                                             --------------------------------
                                                               1999        1998        1997
                                                             --------    --------    --------
<S>                                                          <C>         <C>         <C>
OPERATING ACTIVITIES
Net income (loss)..........................................  $ (3,848)   $  9,647    $ 33,861
Adjustments to reconcile net income (loss) to cash provided
  by (used in) operating activities:
  Depreciation and amortization............................     6,562       5,821       4,839
  Deferred income taxes....................................    (2,357)        600      (8,200)
  Non-cash portion of restructuring charge.................       655          --          --
  Inventory write-offs.....................................     3,700          --          --
  Changes in operating assets and liabilities:
     Accounts receivable, including non-current portion....     5,078      (6,313)     (1,559)
     Inventories...........................................    (4,716)        291      (4,048)
     Prepaid expenses and other current assets.............    (1,962)        465      (2,279)
     Accounts payable......................................       753      (1,191)      2,325
     Accrued and other liabilities.........................    (2,775)       (484)      1,683
                                                             --------    --------    --------
          Total cash provided by (used in) operating
            activities.....................................     1,090       8,836      26,622
                                                             --------    --------    --------
INVESTING ACTIVITIES
Purchases of property, plant and equipment.................   (13,719)    (15,159)     (8,672)
Other......................................................        22        (583)       (720)
                                                             --------    --------    --------
          Total cash provided by (used in) investing
            activities.....................................   (13,697)    (15,742)     (9,392)
                                                             --------    --------    --------
FINANCING ACTIVITIES
Net borrowings under credit facilities.....................     1,899       4,435       1,508
Exercise of common stock options...........................        85          --          --
Changes in loans and advances from SPAB....................        --          --       2,058
Net transfers (to) from SPAB...............................        --          --     (27,743)
Contribution of cash by SPAB to settle certain stock
  options and other liabilities............................        --          --      17,249
Net proceeds from initial public offering of common
  stock....................................................        --       3,248      20,654
                                                             --------    --------    --------
          Total cash provided by (used in) financing
            activities.....................................     1,984       7,683      13,726
                                                             --------    --------    --------
Effect of changes in foreign currency exchange rates.......      (719)        356          --
                                                             --------    --------    --------
       Increase (decrease) in cash and cash equivalents....   (11,342)      1,133      30,956
Cash and cash equivalents at beginning of year.............    34,620      33,487       2,531
                                                             --------    --------    --------
Cash and cash equivalents at end of year...................  $ 23,278    $ 34,620    $ 33,487
                                                             ========    ========    ========
Non-cash financing activities:
  Reorganization:
  Conversion of debt and accrued interest to equity........                          $ 73,758
  Transfer of assets, net of cash..........................                             2,299
  Assumption of liabilities................................                            (2,968)
                                                                                     --------
                                                                                     $ 73,089
                                                                                     ========

  Reversal of accrual for options of a subsidiary which
     lapsed................................................  $  1,000
                                                             ========
</TABLE>

                See Notes to Consolidated Financial Statements.

                                       40
<PAGE>   41

                          SPECTRA-PHYSICS LASERS, INC.

                 CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
                      (IN THOUSANDS, EXCEPT SHARE AMOUNTS)

<TABLE>
<CAPTION>
                                                                                    ACCUMULATED
                                                                                       OTHER
                                        COMMON STOCK       ADDITIONAL              COMPREHENSIVE    PARENT
                                     -------------------    PAID-IN     RETAINED      INCOME        EQUITY
                                       SHARES     AMOUNT    CAPITAL     EARNINGS      (LOSS)       (DEFICIT)    TOTAL
                                     ----------   ------   ----------   --------   -------------   ---------   --------
<S>                                  <C>          <C>      <C>          <C>        <C>             <C>         <C>
BALANCE-DECEMBER 31, 1996..........  13,000,000                                       $   (40)     $(21,183)   $(21,223)
                                     ----------    ----     -------     -------       -------      --------    --------
  Net transfers (to) from SPAB.....          --      --          --          --            --       (27,743)    (27,743)
  Reorganization...................          --    $130     $54,265          --            --        18,694      73,089
  Initial public offering of common
    stock..........................   2,400,000      24      20,630          --            --            --      20,654
  Contribution of cash by SPAB and
    issuance of common stock by the
    Company to settle certain stock
    options of a subsidiary........     408,043       4      19,096          --            --            --      19,100
  Other comprehensive income:
    Foreign currency translation...          --      --          --          --        (1,414)           --      (1,414)
    Net income prior to the
      Reorganization...............          --      --          --          --            --        30,232      30,232
    Net income subsequent to the
      Reorganization...............          --      --          --     $ 3,629            --            --       3,629
                                     ----------    ----     -------     -------       -------      --------    --------
         Total comprehensive
           income..................          --      --          --       3,629        (1,414)       30,232      32,447
                                     ----------    ----     -------     -------       -------      --------    --------
BALANCE-DECEMBER 31, 1997..........  15,808,043     158      93,991       3,629        (1,454)           --      96,324
                                     ----------    ----     -------     -------       -------      --------    --------
  Initial public offering of common
    stock (exercise of
    underwriters' overallotment
    option)........................     360,000       4       3,244          --            --            --       3,248
  Other comprehensive income:
    Foreign currency translation...          --      --          --          --           890            --         890
    Realized gains on forward
      contracts....................          --      --          --          --           563            --         563
    Unrealized losses on forward
      contracts....................          --      --          --          --          (604)           --        (604)
    Net income.....................          --      --          --       9,647            --            --       9,647
                                     ----------    ----     -------     -------       -------      --------    --------
         Total comprehensive
           income..................          --      --          --       9,647           849            --      10,496
                                     ----------    ----     -------     -------       -------      --------    --------
BALANCE-DECEMBER 31, 1998..........  16,168,043     162      97,235      13,276          (605)           --     110,068
                                     ----------    ----     -------     -------       -------      --------    --------
  Exercise of common stock
    options........................       8,500      --          85          --            --            --          85
  Reversal of accrual for options
    of a subsidiary which lapsed...          --      --       1,000          --            --            --       1,000
  Other comprehensive income
    (loss):
    Foreign currency translation...          --      --          --          --          (934)           --        (934)
    Realized gains on forward
      contracts....................          --      --          --          --         1,412            --       1,412
    Unrealized losses on forward
      contracts....................          --      --          --          --        (2,321)           --      (2,321)
    Net loss.......................          --      --          --      (3,848)           --            --      (3,848)
                                     ----------    ----     -------     -------       -------      --------    --------
         Total comprehensive income
           (loss)..................          --      --          --      (3,848)       (1,843)           --      (5,691)
                                     ----------    ----     -------     -------       -------      --------    --------
BALANCE-DECEMBER 31, 1999..........  16,176,543    $162     $98,320     $ 9,428       $(2,448)     $     --    $105,462
                                     ==========    ====     =======     =======       =======      ========    ========
</TABLE>

                See Notes to Consolidated Financial Statements.

                                       41
<PAGE>   42

                          SPECTRA-PHYSICS LASERS, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 1. BUSINESS AND BASIS OF PRESENTATION

     Spectra-Physics Lasers, Inc. designs, develops, manufactures and
distributes lasers, laser systems and optics for the industrial, original
equipment manufacturer (OEM), and research and development markets.

     Prior to the Reorganization referred to below, Spectra-Physics Lasers, Opto
Power Corporation, and Spectra-Physics Laser Data Systems, Inc., together with
various foreign subsidiaries of Spectra-Physics AB that conducted sales and
technical support operations on their behalf (collectively the "Company"), were
operated as a functional group called the Lasers and Optics Group. In
preparation for its initial public offering, the Company was reorganized in
October 1997 so that the assets and liabilities (including contractual rights
and obligations) of the Lasers and Optics Group were held directly or indirectly
by the Company. Accordingly, pursuant to various agreements (i) the assets and
liabilities of the Lasers and Optics Group not held by the Company were
transferred to the Company and (ii) the assets and liabilities of the Company
not part of the Lasers and Optics Group were transferred to SPAB's subsidiaries
(other than the Company and its subsidiaries.) In connection with the
Reorganization, intercompany receivables and payables were eliminated. Unless
specified otherwise, SPAB refers to Spectra-Physics AB and/or affiliates of
Spectra-Physics AB (other than the Company and its subsidiaries). All entities
involved in the Reorganization were direct or indirect wholly-owned subsidiaries
of SPAB.

     The accompanying consolidated financial statements includes the accounts of
the Company and reflects the financial position, results of operations, and cash
flows of the Company as if it were a separate entity for each period presented.
The accompanying financial statements do not include assets and liabilities not
part of the Laser and Optics Group. These net assets were transferred to SPAB.
The Reorganization described above has been accounted for as a transfer between
entities under common control in a manner similar to a pooling of interests.

     The accompanying consolidated financial statements for the periods prior to
the Reorganization also include allocations of certain SPAB corporate and group
expenses (including cash management and treasury, legal, employee benefits,
insurance, income taxes and corporate overhead services) relating to the
Company's businesses. Management believes these allocations are reasonable.
However, the financial information included herein may not necessarily reflect
the consolidated financial position, results of operations, and cash flows of
the Company in the future or what they would have been had the Company been a
separate entity during the periods presented.

     In connection with the Reorganization, the Company entered into several
agreements with SPAB that provide for (1) certain tax sharing matters, (2)
registration rights in favor of SPAB, (3) the use of the Spectra-Physics name
and trademark, (4) cross licensing of certain patents, (5) certain distribution
arrangements, and (6) various indemnification arrangements. In addition, certain
subsidiaries of the Company and certain subsidiaries of SPAB entered into
agreements providing for the continuation of certain ongoing service and
facilities leasing arrangements.

 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

  Principles of Consolidation:

     The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries. All significant intercompany balances and
transactions have been eliminated.

  Use of Estimates:

     The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Such estimates relate to the useful lives of property, plant
and

                                       42
<PAGE>   43
                          SPECTRA-PHYSICS LASERS, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

equipment, allowances for doubtful accounts and customer returns, inventory
realizability, potential accruals relating to litigation matters, warranty and
other accruals, and contingent assets and liabilities. Actual results could
differ from those estimates, and such differences may be material to the
financial statements.

  Cash Equivalents:

     The Company considers all highly liquid investments with a maturity of 90
days or less when purchased to be cash equivalents. Cash equivalents (which are
classified as available for sale) are stated at cost, which approximates fair
value, and consist of bankers' acceptances, repurchase agreements, commercial
paper, time deposits, and money market funds of major banks and other
institutions.

  Inventories:

     Inventories are stated at the lower of cost (determined on a first-in,
first-out basis) or market.

  Property, Plant and Equipment:

     Property, plant and equipment are stated at cost and are depreciated on a
straight-line basis over the estimated useful lives of the related assets of 3
to 25 years.

     The Company adopted Statement of Financial Accounting Standards ("SFAS")
No. 121, "Accounting for Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of" effective as of the beginning of fiscal 1997. The
adoption of this statement had no material effect on the Company's financial
statements.

  Intangible Assets:

     Intangible assets, principally patent rights, are stated at cost and
amortized on a straight-line basis over their estimated useful lives of
generally 7 to 17 years.

  Foreign Currency Translation:

     The local currency of the Company's subsidiaries in the United Kingdom,
Germany, the Netherlands, France and Japan are the functional currencies for
each entity. The assets and liabilities and sales and expense accounts of these
foreign subsidiaries have been translated using the exchange rate at the balance
sheet date and the weighted average exchange rate for the period, respectively.

     The net effect of the translation of the accounts of the Company's
subsidiaries has been included in stockholders' equity as foreign currency
translation adjustments. The net effect of adjustments that arise from exchange
rate changes on transactions denominated in a currency other than the local
currency are included in operations as incurred.

  Environmental Matters:

     Accruals for remediation costs are recognized when management determines
that it is probable that a liability has been incurred and such costs can be
reasonably estimated. Such accruals are recorded at undiscounted amounts and are
recorded even if significant uncertainties exist over the ultimate cost of the
remediation. Ongoing environmental compliance costs, including maintenance and
monitoring costs, are charged against the accrual.

  Sales Recognition:

     Net sales and related cost of sales for products are recognized upon
shipment.

                                       43
<PAGE>   44
                          SPECTRA-PHYSICS LASERS, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

  Concentrations:

     Cash is invested in deposits with banks in the United States and in
countries where subsidiaries operate. Deposits in these banks may exceed the
amount of insurance provided on such deposits; however, the Company is exposed
to loss only to the extent of the amount of cash reflected on its balance sheet.
The Company has not experienced any losses on its deposits of cash.

     The Company markets its products on both a direct and an OEM basis
principally in North America, Europe and Japan to companies for use in
telecommunications, image recording, computer and microelectronics
manufacturing, industrial manufacturing, medical applications, as well as
universities and other entities involved in research. No individual customer
accounts for more than 10% of net sales. The Company has adopted credit policies
and standards to accommodate growth into these markets. The Company performs
continuing credit evaluations of its customers' financial condition and although
the Company generally does not require collateral, letters of credit may be
required from its customers in certain circumstances. Bad debt losses to date
have been insignificant.

     A number of components necessary for the manufacture and operation of many
of the Company's products are obtained from a sole supplier or a limited group
of suppliers. The disruption or termination of any of these sources could have a
material adverse effect on the Company's business, operating results and
financial condition.

  Warranty Costs:

     Upon shipment of product, the Company accrues the estimated cost of
warranty. The Company in general warrants its products for twelve to twenty-four
months depending on the product line.

  Advertising and Promotion Costs:

     The Company's policy is to expense advertising and promotion costs as they
are incurred. The Company's advertising and promotion expenses were
approximately $1.5 million, $1.8 million, and $1.9 million in the years ended
December 31, 1999, 1998, and 1997, respectively.

  Income Taxes:

     The accompanying financial statements reflect the provisions of SFAS No.
109, "Accounting for Income Taxes." Accordingly, the Company uses the liability
method to calculate deferred taxes. The realization of deferred tax assets is
based on historical tax positions and expectations about future taxable income.
Deferred income tax assets and liabilities are computed for differences between
the financial statement and tax basis of assets and liabilities based on enacted
tax laws and rates applicable to the period in which differences are expected to
affect taxable income. Valuation allowances are established, when necessary, to
reduce deferred tax assets to amounts that are more likely than not to be
realized.

     Income taxes have been provided as if the Company were a separate taxable
entity. Under the Company's tax sharing agreement with SPAB prior to the
Reorganization, however, the consolidated tax liability of the tax group for a
given year was allocated only to companies in the group which had separate
taxable income for that year. The tax liability was allocated pro-rata based on
each company's relative separate taxable income. Companies with losses were not
allocated any of the tax liability and were not given any benefit for their
losses. Any differences between the Company's method for providing income tax
expense (benefit) in the historical financial statements and the tax sharing
arrangement it had with SPAB were reflected in Parent equity (deficit) as
contributions or dividends. Effective October 1997, the Company and SPAB entered
into a new tax sharing arrangement that generally requires the Company to
determine its U.S. tax liability as a separate consolidated group.

                                       44
<PAGE>   45
                          SPECTRA-PHYSICS LASERS, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

  Derivative Instruments and Hedging:

     Effective October 1, 1998, the Company adopted SFAS No. 133 "Accounting for
Derivative Instruments and Hedging Activities." SFAS No. 133 requires that all
derivatives, including foreign currency exchange contracts, be recognized on the
balance sheet at fair value. Derivatives that are not hedges must be recorded at
fair value through earnings. If a derivative is a hedge, depending on the nature
of the hedge, changes in the fair value of the derivative are either offset
against the change in fair value of assets, liabilities or firm commitments
through earnings or recognized in other comprehensive income until the hedged
item is recognized in earnings. The ineffective portion of a derivative's change
in fair value is to be immediately recognized in earnings. The adoption of SFAS
No. 133 resulted in no cumulative effect on income or other comprehensive income
for the Company.

     Forward foreign exchange contracts are used primarily by the Company to
hedge certain operational ("cash-flow" hedges) and balance sheet ("fair value"
hedges) exposures resulting from changes in foreign currency exchange rates.
Such exposures primarily result from portions of the Company's operations and
assets that are denominated in currencies other than the U.S. dollar, primarily
the Japanese Yen and certain European currencies. These foreign exchange
contracts are entered into to hedge anticipated product sales and recorded
accounts receivable made in the normal course of business, and accordingly, are
not speculative in nature. As part of its overall strategy to manage the level
of exposure to the risk of foreign currency exchange rate fluctuations, the
Company hedges a portion of its foreign currency exposures anticipated over the
ensuing twelve-month period. At December 31, 1999, the Company had effectively
hedged approximately 75% of its estimated foreign currency exposures that
principally relate to anticipated cash flows to be remitted to the U.S. over the
ensuing twelve month period, using foreign exchange contracts that generally
have maturities of twelve months or less. The Company does not hold or transact
in financial instruments for purposes other than risk management.

     The Company records its foreign currency exchange contracts at fair value
in its consolidated balance sheet as accrued and other current liabilities and
the related gains or losses on these contracts are deferred as a component of
other comprehensive income. These deferred gains and losses are recognized in
income in the period in which the underlying anticipated transaction occurs.
Unrealized gains and losses resulting from the impact of currency exchange rate
movements on forward foreign exchange contracts designated to offset certain
non-U.S. dollar denominated assets are recognized as other income or expense in
the period in which the exchange rates change and offset the foreign currency
losses and gains on the underlying exposures being hedged.

     The Company discontinues hedge accounting prospectively when (1) it is
determined that the derivative is no longer effective in offsetting changes in
fair value or cash flows of a hedged item (including forecasted transactions);
(2) the derivative is sold or terminated; (3) the derivative is dedesignated as
a hedge instrument, because it is unlikely that a forecasted transaction will
occur or a balance sheet exposure ceases to exist; or (4) management determines
that designation of the derivative as a hedge instrument is no longer
appropriate.

     When hedge accounting is discontinued because it is determined that the
derivative no longer qualifies as an effective fair value hedge, the derivative
will continue to be carried on the balance sheet at its fair value until it
settles, and the hedged asset will no longer be adjusted for changes in fair
value. When hedge accounting is discontinued because it is probable that a
forecasted transaction will not occur, the derivative will continue to be
carried on the balance sheet at its fair value until it settles, and gains and
losses that were accumulated in other comprehensive income will be recognized
immediately in income. In all other situations in which hedge accounting is
discontinued, the derivative will be carried at its fair value on the balance
sheet until it settles, with changes in its fair value recognized in current
period earnings.

                                       45
<PAGE>   46
                          SPECTRA-PHYSICS LASERS, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

     The following table provides information about the Company's foreign
currency derivative financial instruments outstanding as of December 31, 1999.
The information is provided in U.S. dollar amounts, as presented in the
Company's consolidated financial statements. The table presents the notional
amount (at contract exchange rates) and the weighted average contractual foreign
currency exchange rates. All contracts mature within twelve months.

     Foreign currency spot/forward contracts (in thousands, except average
contract rates):

<TABLE>
<CAPTION>
                                                       NOTIONAL       AVERAGE
                                                        AMOUNT     CONTRACT RATE
                                                       --------    -------------
<S>                                                    <C>         <C>
Japanese Yen.........................................  $29,234       106.0404
British Pound Sterling...............................    3,099         0.6274
German Marks.........................................    7,382         1.8568
Netherlands Guilder..................................    1,952         2.0826
French Franc.........................................    3,318         6.2199
                                                       -------
                                                       $44,985
                                                       =======
Estimated fair value.................................  $  (925)*
                                                       =======
</TABLE>

---------------

* The estimated fair value is based on the estimated amount at which the
  contracts could be settled based on forward exchange rates.

     The cash requirements of the above described financial instruments
approximate their fair value. Cash flows associated with these financial
instruments are classified consistent with the cash flows from the transactions
being hedged. The Company's forward foreign exchange contracts contain market
and credit risk not recognized in the consolidated financial statements. The
market risk associated with these instruments resulting from currency exchange
rate movements is expected to offset the market risk of the underlying
transactions and assets being hedged. The credit risk is that the Company's
banking counterparties may be unable to meet the terms of the agreements. The
Company minimizes such risk by limiting its counterparties to major financial
institutions with credit ratings of A/A-2 or better. In addition, the potential
risk of loss with any one party resulting from this type of credit risk is
monitored. Management does not expect any loss as a result of default by other
parties. However, there can be no assurances that the Company will be able to
mitigate market and credit risks described above.

     For the period from the fourth quarter of 1997 to the adoption of SFAS No.
133, the Company followed SFAS No. 52, "Foreign Currency Translation," and used
forward exchange contracts to hedge only assets and firm commitments that
exposed the Company to enterprise risk as a result of fluctuations in foreign
currency exchange rates. Gains and losses on forward exchange contracts that
were designated as hedges of firm orders were deferred in other current
liabilities and were included in the measurement of the underlying transaction.
Hedge accounting was only applied if the derivative reduced the risk of the
underlying hedged item and was designated at inception as a hedge. Derivatives
were measured for effectiveness both at inception and on an ongoing basis.
During this period, no derivative ceased to meet the criteria for deferral and
all expected firm commitments occurred. No contract was sold or terminated prior
to maturity.

     Prior to the fourth quarter of 1997, the Company entered into forward
foreign exchange contracts with SPAB. These contracts were entered into in
anticipation of product sales made in the normal course of business, and
accordingly, did not qualify for hedge accounting under SFAS No. 52. Since the
forward foreign exchange contracts were not designated as hedges of firm,
identifiable foreign currency commitments, the unrealized gains and losses
resulting from the impact of foreign currency exchange rate movements on these
contracts were recognized in the periods in which the exchange rates changed.
Such gains and losses were recorded as other income or expense.

                                       46
<PAGE>   47
                          SPECTRA-PHYSICS LASERS, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

  Net Income (Loss) Per Share:

     The Company has adopted SFAS No. 128, "Earnings Per Share" effective
December 31, 1997. SFAS No. 128 requires the presentation of basic and diluted
net income (loss) per share. Basic net income (loss) per share is computed by
dividing net income (loss) by the weighted average number of common shares
outstanding during the period. Diluted net income (loss) per share is computed
giving effect to all diluted potential common shares that were outstanding
during the period. Dilutive potential common shares consist of the incremental
common shares issuable upon the exercise of stock options. In 1999, 1998 and
1997 weighted average shares were 16,169,000, 16,168,000, and 13,162,000
respectively, and in 1998 and 1997 the shares used in the diluted calculation
included 305,000 and 29,000 incremental shares, respectively, due to grants of
options to purchase shares of common stock. The shares used in the diluted net
income per share calculation in the fourth quarter of 1998 excluded the effects
of 2,113,645 options as these options had exercise prices greater than the
average market price of the Company's common stock for that quarter, and
accordingly, were anti-dilutive. In 1999, the shares used in the diluted
calculation did not include any shares due to grants of options to purchase
shares of common stock as such shares were anti-dilutive. Stock options granted
by subsidiaries of the Company were not included in the calculation of net
income (loss) per share as they were anti-dilutive.

  Stock Based Compensation:

     In 1995, the Financial Accounting Standards Board ("FASB") issued SFAS No.
123, "Accounting for Stock-Based Compensation," which establishes a fair value
based method of accounting for stock-based compensation plans and is effective
for fiscal years beginning after December 15, 1995. SFAS No. 123 allows a
company to continue to follow the provisions of Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" and disclose the pro
forma impact of SFAS No. 123 on results of operations and earnings per share.
The Company has elected to continue to account for its stock-based compensation
plans in accordance with the provisions of APB 25. As the terms of certain
stock-based compensation plans obligated the Company to settle the options in
cash in certain instances, the Company has reflected compensation expense
relating to these stock-based compensation plans in the statement of operations.

  Recent Accounting Pronouncement:

     In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin (SAB) 101, "Revenue Recognition in Financial Statements."
SAB 101 includes requirements for when shipments may be recorded as revenue when
the terms of the sale include customer acceptance provisions or an obligation of
the seller to install the product. In such instances, SAB 101 generally requires
that revenue recognition occur at completion of installation and/or upon
customer acceptance. SAB 101 requires that companies conform their revenue
recognition practices to the requirements therein during the first quarter of
calendar 2000 through recording a cumulative net of tax effect of the change in
accounting. The Company has not yet completed the analysis to determine the
effect that SAB 101 will have on its financial statements.

  Claims:

     The Company is subject to various claims which arise in the normal course
of business. In the opinion of management, the ultimate resolution of these
claims will not have a material adverse effect on the Company's financial
position or results of operations.

  Reclassifications:

     Certain 1998 and 1997 amounts have been reclassified to conform to the 1999
presentation.

                                       47
<PAGE>   48
                          SPECTRA-PHYSICS LASERS, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

 3. TRANSACTIONS WITH SPAB

     Prior to the Reorganization, SPAB allocated certain expenses relating to
cash management and treasury, legal, employee benefits, insurance, income taxes
and corporate overhead services. Charges were allocated to the Company based on
actual amounts incurred on behalf of the Company or agreed upon amounts or
percentages based on the Company's headcount and sales that management of the
Company believes were reasonable. Amounts charged to operations were $0.3
million for the year ended December 31, 1997.

     SPAB used a centralized cash management program to finance its operations.
Cash deposits from the Company's operations were transferred to SPAB on a
periodic basis and SPAB funded the Company's disbursement bank account as
required. Prior to the Reorganization, the Company and SPAB had an agreement
whereby SPAB charged the Company interest based on certain of the Company's net
balance payable to SPAB calculated using SPAB cost of related borrowed funds.
Certain borrowings from SPAB were not subject to interest charges; however,
interest expense has been imputed in the accompanying statement of operations at
rates consistent with actual rates charged to the Company. Beginning in October
1997, the Company ceased participating in SPAB's centralized cash management
program.

     The activity in the net transfers (to) from SPAB account, is summarized
below (in thousands):

<TABLE>
<CAPTION>
                                                               YEAR ENDED
                                                              DECEMBER 31,
                                                                  1997
                                                              ------------
<S>                                                           <C>
SPAB service and other charges..............................    $    249
Income taxes owed by SPAB, net..............................     (10,863)
Cash transfers to SPAB......................................     (17,702)
Interest expense imputed on non-interest bearing loans......         573
                                                                --------
          Net transfers to SPAB.............................    $(27,743)
                                                                ========
</TABLE>

                                       48
<PAGE>   49
                          SPECTRA-PHYSICS LASERS, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

 4. BALANCE SHEET ACCOUNTS

     Inventories, property, plant and equipment, and accrued and other current
liabilities consisted of the following (in thousands):

<TABLE>
<CAPTION>
                                                            AT DECEMBER 31,
                                                           ------------------
                                                            1999       1998
                                                           -------    -------
<S>                                                        <C>        <C>
Inventories:
  Raw material...........................................  $15,277    $ 9,866
  Work in process........................................    3,482      7,582
  Finished goods.........................................    7,823      8,118
                                                           -------    -------
                                                           $26,582    $25,566
                                                           =======    =======
Property, plant and equipment:
  Land, buildings and leasehold improvements.............  $30,534    $28,843
  Machinery and office equipment.........................   62,975     55,763
                                                           -------    -------
                                                            93,509     84,606
  Less accumulated depreciation and amortization.........   51,494     49,450
                                                           -------    -------
                                                           $42,015    $35,156
                                                           =======    =======
Accrued and other current liabilities:
  Salaries, wages, benefits, bonus and commissions.......  $ 6,933    $ 7,912
  Warranty...............................................    2,348      3,001
  Deferred revenue.......................................    5,697      4,929
  Other..................................................    7,074      8,117
                                                           -------    -------
                                                           $22,052    $23,959
                                                           =======    =======
</TABLE>

  Credit facilities:

     The Company has a short-term credit facility in Japan. The credit facility
is with several banks, is unsecured, allows aggregate borrowings of 2.4 billion
Yen ($23.4 million), bears interest at 1.625% per annum and expires at various
times through June 2000. At December 31, 1999, there were approximately $13.5
million of borrowings outstanding under this facility. The Company's foreign
subsidiaries other than Japan have credit facilities aggregating $3.9 million,
none of which was outstanding as of December 31, 1999. The Company also has
available in the U.S. a committed, unsecured credit facility aggregating $10.0
million with a bank which expires in April 2000. From time to time, the amount
available under all credit facilities will be reduced by the amount of
performance bonds outstanding guaranteed by the applicable bank to the Company's
customers, foreign currency contracts outstanding with the applicable bank and
similar arrangements.

     At December 31, 1999, the Company was in technical default of certain
financial covenants of its U.S. credit facility. Because the Company had no
outstanding borrowings from the bank at December 31, 1999, the Company has not
applied for a waiver of default from the bank. The credit agreement expires in
April 2000 and the Company does not expect to make any borrowings under the
facility prior to the scheduled maturity date. Through December 31, 1999, the
Company has not been required to borrow, and has not borrowed, under its U.S.
credit facility.

 5. STOCKHOLDERS' EQUITY

  Preferred Stock:

     After the Reorganization, the Company's authorized preferred stock was
10,000,000 shares with a par value of $0.01 per share. The Board of Directors
may, at its discretion, designate one or more series of

                                       49
<PAGE>   50
                          SPECTRA-PHYSICS LASERS, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

preferred stock and establish the voting, dividend, liquidation, and other
rights and preferences of the shares of each series, and provide for the
issuance of shares of any series.

  Stock Options:

     Spectra-Physics Lasers, Inc. The Company has adopted the 1997
Spectra-Physics Lasers, Inc. Stock Option Plan which provides for the granting
of non-qualified stock options ("options") to certain officers, key employees
and non-employee directors of the Company. The aggregate maximum number of
shares of common stock available for award under the 1997 Plan is 2,309,721
shares, subject to adjustment to reflect changes in the Company's
capitalization. No awards can be made under the 1997 Plan more than 10 years
after the date the plan was adopted. The exercise price of the options will be
determined by the Board of Directors, provided that the exercise price must be
at least 100% of the fair market value of a share of common stock on the date
the option is granted. An option's term shall not exceed ten years from the date
of grant. No option may be exercised sooner than six months from the date of
grant.

     Options vest 25% upon the first anniversary of the grant date and 6.25% at
the end of each three-month period thereafter. These options may not be
exercised following termination of the grantee's employment with the Company,
except that in the event that a grantee's employment terminates due to death,
disability or retirement, options held by such grantee or his estate shall be
exercisable, to the extent vested at the time of termination of employment, for
a period of three (3) months after termination of employment. The weighted
average fair value of options granted in 1999, 1998 and 1997 were $8.39 per
share, $5.74 per share and $4.33 per share, respectively. A summary of option
activity follows:

<TABLE>
<CAPTION>
                                                           OPTIONS OUTSTANDING
                                                          ---------------------
                                                                       WEIGHTED
                                             OPTIONS                   AVERAGE
                                            AVAILABLE                  EXERCISE
                                            FOR GRANT      OPTIONS      PRICE
                                            ----------    ---------    --------
<S>                                         <C>           <C>          <C>
Balance -- December 31, 1996..............          --           --         --
Shares reserved...........................   2,309,721           --         --
Granted...................................  (2,087,145)   2,087,145     $10.00
                                            ----------    ---------     ------
Balance -- December 31, 1997..............     222,576    2,087,145     $10.00
Granted...................................     (52,750)      52,750     $13.05
Cancelled.................................      26,250      (26,250)    $10.00
                                            ----------    ---------     ------
Balance -- December 31, 1998..............     196,076    2,113,645     $10.08
Granted...................................    (263,000)     263,000     $ 9.02
Exercised.................................          --       (8,500)    $10.00
Cancelled.................................     251,025     (251,025)    $10.17
                                            ----------    ---------     ------
Balance -- December 31, 1999..............     184,101    2,117,120     $ 9.93
                                            ==========    =========     ======
</TABLE>

     Exercise prices of outstanding options at December 31, 1999 were:

<TABLE>
<S>                                                 <C>
$ 8.00 -- $10.00..................................  2,039,870
$10.88 -- $11.88..................................     31,000
$14.50 -- $17.25..................................     46,250
                                                    ---------
                                                    2,117,120
                                                    =========
</TABLE>

     At December 31, 1999, 916,684 options were exercisable at a weighted
average exercise price per share of $10.05.

     As permitted under SFAS No. 123, the Company has elected to follow APB No.
25, in accounting for stock awards to employees. Under APB No. 25, the Company
generally recognizes no compensation expense

                                       50
<PAGE>   51
                          SPECTRA-PHYSICS LASERS, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

with respect to such awards under fixed plans. Pro forma information regarding
net income (loss) and earnings (loss) per share is required by SFAS 123 which
also requires that the information be determined as if the Company has accounted
for its employee stock options under the fair value method of SFAS 123. The fair
value for these options was estimated at the date of grant using the
Black-Scholes option-pricing model with the following weighted average
assumptions:

<TABLE>
<CAPTION>
                                                   1999       1998       1997
                                                  -------    -------    -------
<S>                                               <C>        <C>        <C>
Risk-free interest rate.........................     5.0%       4.6%       5.7%
Dividend yield..................................     0.0%       0.0%       0.0%
Volatility......................................   107.2%      93.0%      47.0%
Average life....................................  4 years    4 years    4 years
</TABLE>

     The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in
these subjective input assumptions can materially affect the fair value
estimate, in management's opinion, the existing models do not provide a reliable
single measure of the fair value of its employee stock options.

     The effect of applying SFAS No. 123 resulted in pro forma net income (loss)
of $(5.3) million, $8.9 million and $33.8 million in 1999, 1998 and 1997,
respectively, and net income (loss) per share basic and diluted of $(0.33) in
1999, $0.55 and $0.54, respectively, in 1998, and $2.56 in 1997.

     Other. In 1996, a subsidiary of the Company, granted certain of its
employees options to purchase up to 20% of the subsidiary's total common stock
outstanding. In 1997, the Company recognized $1.0 million of compensation
expense associated with these options. In 1999, the options lapsed and the
employees of the subsidiary were terminated. The Company reversed $1.0 million
of accrued compensation expense to additional paid in capital.

 6. BENEFIT AND INCENTIVE PLANS

     The Company sponsors a defined contribution plan covering substantially all
U.S. employees. The plan provides for limited Company matching of participants'
contributions. Contributions to the plan by the Company and charged to
operations were $0.8 million, $0.8 million and $0.6 million in the years ended
December 31, 1999, 1998 and 1997, respectively.

     The Company's Executive Incentive Plan and Employee Bonus Plan provides
certain officers and employees of the Company with annual incentive cash bonus
awards based on the achievement of certain pre-established quantitative and
qualitative goals, including overall Company profitability. The Company charged
to operations $0.0 million, $0.1 million and $2.4 million in the years ended
December 31, 1999, 1998 and 1997, respectively, under these plans.

 7. INCOME TAXES

     Income (loss) before income taxes consisted of the following (in
thousands):

<TABLE>
<CAPTION>
                                                  YEARS ENDED DECEMBER 31,
                                                -----------------------------
                                                 1999       1998       1997
                                                -------    -------    -------
<S>                                             <C>        <C>        <C>
U.S...........................................  $(7,024)   $12,410    $ 9,169
Foreign.......................................      819      2,586      3,644
                                                -------    -------    -------
                                                $(6,205)   $14,996    $12,813
                                                =======    =======    =======
</TABLE>

                                       51
<PAGE>   52
                          SPECTRA-PHYSICS LASERS, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

     Income tax expense (benefit) for the years ended December 31, 1999, 1998
and 1997 consisted of the following (in thousands):

<TABLE>
<CAPTION>
                                                  YEARS ENDED DECEMBER 31,
                                                -----------------------------
                                                 1999       1998       1997
                                                -------    ------    --------
<S>                                             <C>        <C>       <C>
U.S. Federal and state:
  Current.....................................  $  (208)   $3,994    $     --
  Deferred....................................   (2,357)      572       1,213
                                                -------    ------    --------
                                                 (2,565)    4,566       1,213
                                                -------    ------    --------
Foreign:
  Current.....................................      208       755       2,651
  Deferred....................................       --        28        (816)
                                                -------    ------    --------
                                                    208       783       1,835
                                                -------    ------    --------
Decrease in valuation allowance...............       --        --     (24,096)
                                                -------    ------    --------
          Total...............................  $(2,357)   $5,349    $(21,048)
                                                =======    ======    ========
</TABLE>

     The following table summarizes the significant differences between the U.S.
Federal statutory rate and the Company's income tax expense (benefit) for
financial statement purposes (in thousands):

<TABLE>
<CAPTION>
                                                  YEARS ENDED DECEMBER 31,
                                                -----------------------------
                                                 1999       1998       1997
                                                -------    ------    --------
<S>                                             <C>        <C>       <C>
Tax expense (benefit) at statutory rate.......  $(2,110)   $5,099    $  4,485
Foreign taxes.................................      (71)      189         666
State taxes, net of Federal benefit...........     (255)      451         316
Decrease in valuation allowance...............       --        --     (26,704)
Other.........................................       79      (390)        189
                                                -------    ------    --------
Income tax expense (benefit)..................  $(2,357)   $5,349    $(21,048)
                                                =======    ======    ========
</TABLE>

     The Company's net deferred tax assets are comprised of the following (in
thousands):

<TABLE>
<CAPTION>
                                                            AS OF DECEMBER 31,
                                                            -------------------
                                                              1999       1998
                                                            --------    -------
<S>                                                         <C>         <C>
Deferred tax assets:
  Inventory valuation accounts............................  $ 2,480     $3,477
  Accrued expenses........................................    2,380      3,817
  Other...................................................      502        926
  Net operating loss carryforward.........................    5,510         --
                                                            -------     ------
          Total deferred tax assets.......................   10,872      8,220
Deferred tax liabilities:
  Property, plant and equipment...........................     (805)      (510)
  Other...................................................     (110)      (110)
                                                            -------     ------
          Total deferred tax liabilities..................     (915)      (620)
                                                            -------     ------
Net deferred tax assets...................................  $ 9,957     $7,600
                                                            =======     ======
</TABLE>

     Income taxes have been provided as if the Company were a separate taxable
entity. For periods prior to September 30, 1997, income tax expense reflected
foreign taxes only due to the expectation by the Company at that time of
continuing losses in the U.S. Deferred tax assets were established relating to:
(i) net operating loss carryforwards, which included interest expense from SPAB;
(ii) accrued compensation associated with employee stock options; (iii)
inventory valuation reserves; and (iv) other accruals. These deferred tax assets

                                       52
<PAGE>   53
                          SPECTRA-PHYSICS LASERS, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

were offset in total by a valuation allowance due to the expectation of
continued losses in the U.S. During the quarter ended September 30, 1997, the
Company decreased the tax valuation allowance and recognized a tax benefit
relating to the above items (net of foreign taxes) totaling $23.3 million. The
decrease of the valuation allowance and the recognition of the tax benefit in
the quarter was based on management's expectations regarding future taxable
income for the Company. Management's expectations included the consideration of
the conversion of loans and advances from SPAB to equity in October 1997 which
will eliminate related interest charges in the future.

     For U.S. income tax return purposes, the Company was part of a U.S.
consolidated group pursuant to a tax sharing agreement among SPAB affiliated
companies through September 1997. Under this tax sharing agreement, the
Company's net operating loss carryovers referred to above were used to offset
the taxable income of other members of the tax filing group with no benefit to
the Company. Accordingly, the deferred tax asset arising from the net operating
loss carryforwards (amounting to $10.2 million) was recorded as a dividend to
SPAB.

 8. COMMITMENTS

     The Company leases manufacturing, research and development and office
facilities under non-cancellable operating leases which expire in 2000 through
2008. The Company is responsible for taxes, insurance and maintenance expenses
related to the leased facilities. Under the terms of certain lease agreements,
the leases may be extended, at the Company's option, and certain of the leases
provide for adjustments of the minimum monthly rent.

     Future minimum annual lease payments under the leases are as follows (in
thousands):

<TABLE>
<CAPTION>
             YEAR ENDING DECEMBER 31,
             ------------------------
<S>                                                  <C>
     2000..........................................  $ 3,911
     2001..........................................    3,095
     2002..........................................    3,147
     2003..........................................    2,824
     2004..........................................    2,140
     Thereafter....................................      929
                                                     -------
                                                     $16,046
                                                     =======
</TABLE>

     Rent expense was $3.6 million, $3.2 million and $2.5 million in the years
ended December 31, 1999, 1998 and 1997, respectively.

 9. ENVIRONMENTAL MATTERS

     Since 1984, the Company has been identified by federal and state
authorities as one of several potentially responsible parties ("PRPs") in
conjunction with past releases of industrial solvents to soil and groundwater at
one of the Company's facilities. The site has been listed on the National
Priorities List, or "Superfund List," and the Company is subject to orders
requiring it to perform remediation on- and off-site. Applicable federal law
imposes joint and several liability on each PRP for the cleanup of this site.
Pursuant to these orders, the Company and other PRPs are jointly performing and
funding remediation that includes soil treatment, on-site and off-site
groundwater extraction, treatment and monitoring. All of the required soil and
groundwater remediation and monitoring systems currently required by the order
are in place, and consequently the initial capital expenditures for such systems
have been incurred. Generally, the Company has determined its share of total
estimated clean up and remediation costs and has accrued the amount that it
believes to be its share of the total cost. As of December 31, 1999, the Company
has been granted approval by the Regional Water

                                       53
<PAGE>   54
                          SPECTRA-PHYSICS LASERS, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Quality Control Board to shut down two of its extraction wells in the North
Bayshore Extraction System and to shut down two soil vapor extraction systems.

     Measurement of environmental accruals is subject to uncertainties,
including the evolving nature of environmental regulations and their
enforcement, the amount of time required to complete remediation, and the extent
to which other PRPs will bear their share of the remediation costs. The Company
estimates that at December 31, 1999 the remediation process will be completed at
a cost ranging from approximately $1.4 million to $4.3 million. It is possible
that the Company's recorded estimate of its obligation may change. At December
31, 1999 and 1998, the Company had accrued its best estimate of the liability of
approximately $1.4 million (of which $1.2 million was included in long term
liabilities) and $2.0 million (of which $1.5 million was included in long term
liabilities), respectively, for anticipated future remediation costs associated
with the Superfund site referred to above. During the years ended December 31,
1999, 1998 and 1997, the Company paid approximately $0.6 million, $0.1 million
and $0.1 million, respectively, for remediation of this site.

     In October 1997, the Company was served with a complaint that had been
filed on behalf of five individuals in the Superior Court of the State of
California seeking an unspecified amount of damages for personal injuries and
property damage incurred by residents of a single location alleged to have
resulted from the Company's and others' negligent and/or intentional handling of
toxic chemicals. As of December 1999, there has been a summary judgement ruling
in the case in favor of the Company and its co-defendants in regards to the four
adults involved in the case. The fifth plaintiff has agreed to settle for a
nominal amount. There can be no assurances that other parties will not come
forward and claim personal injury or property damage.

10. SEGMENT REPORTING

     Effective December 31, 1998, the Company adopted SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information." Statement No. 131
requires enterprises to report information about operating segments in annual
financial statements and selected information about reportable segments in
interim financial reports issued to shareholders. It also establishes standards
for related disclosures about products and services, geographic areas and major
customers.

  Description of the types of products and services from which each of the
  reportable segment derives its revenues

     Spectra-Physics Lasers, Inc. has five reportable segments: the Commercial
Systems Group (CSG) business unit; the Industrial and Scientific Lasers (ISL)
business unit; the Original Equipment Manufacturer (OEM) business unit; Opto
Power Corporation (OPC); and Spectra-Physics Distribution (SPD) business unit.
CSG designs and manufactures optics, thin films, fabricated parts, plasma tubes,
and subsystems for all operating units within the Company and external
customers. CSG also designs, manufactures, and markets low power laser sources
and beam delivery systems for OEM products in the industrial manufacturing and
medical markets. ISL designs, markets and manufactures high power
semiconductor-based and conventional lasers for the industrial and scientific
markets. OEM designs, markets and manufactures high power semiconductor-based
lasers for various OEM markets. OPC designs, markets and manufactures high power
semiconductor-based laser diodes, components and systems. SPD is the Company's
worldwide sales, service and support organization.

  Measurement of segment profit or loss and segment assets

     The Company evaluates performance and allocates resources based on Earnings
Before Interest and Taxes (EBIT). The accounting policies of the reportable
segments are the same as those described in the summary of significant
accounting policies.

                                       54
<PAGE>   55
                          SPECTRA-PHYSICS LASERS, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

     Intersegment sales and transfers are recorded at intercompany transfer
prices which approximate sales as if conducted on an arm's length basis.

  Factors management used to identify the Company's reportable segments

     The Company's reportable segments are business units that are, except for
SPD, organized primarily by technology (for example, high power
semiconductor-based lasers, solid state lasers, optics, air cooled lasers,
etc.). The reportable segments are each managed separately because they
manufacture and distribute distinct products with different production methods.

     Information about segments (in thousands):

<TABLE>
<CAPTION>
                                                                                               ALL
                                             CSG       ISL       OEM       OPC       SPD      OTHERS    TOTAL
                                           -------   -------   -------   -------   --------   ------   --------
<S>                                        <C>       <C>       <C>       <C>       <C>        <C>      <C>
Year ended December 31, 1999
  Net sales to external customers........  $   662   $    --   $    --   $ 5,609   $133,271   $1,768   $141,310
  Intersegment net sales.................   29,948    62,533    36,402    18,011         --       --    146,894
  Depreciation and amortization
    expense..............................    2,192       546       633     2,380        423      388      6,562
  Segment EBIT...........................     (629)   11,412     6,576    (3,075)    (7,395)  (1,869)     5,020
  Segment assets.........................   18,877    25,779    12,545    35,449     70,109       --    162,759
  Expenditures for long-lived assets.....    3,970       839       474     7,262        430      744     13,719
Year ended December 31, 1998
  Net sales to external customers........  $ 1,125   $    --   $    --   $26,961   $135,893   $5,037   $169,016
  Intersegment net sales.................   32,864    65,477    33,924     9,829         --       --    142,094
  Depreciation and amortization
    expense..............................    1,876       500       610     1,971        405      459      5,821
  Segment EBIT...........................    1,222    10,532     4,332     8,687     (4,410)    (925)    19,438
  Segment assets.........................   14,600    17,410     6,716    37,497     54,725    2,520    133,468
  Expenditures for long-lived assets.....    2,799       429       472    10,255        441      763     15,159
Year ended December 31, 1997
  Net sales to external customers........  $ 1,048   $    --   $    --   $24,694   $128,440   $4,992   $159,174
  Intersegment net sales.................   34,314    62,622    31,055     5,990         --       --    133,981
  Depreciation and amortization
    expense..............................    1,659       486       438     1,592        302      362      4,839
  Segment EBIT...........................    3,824     8,884     4,173     7,450         21     (826)    23,526
  Segment assets.........................   13,725    18,194     8,830    23,371     43,273    3,288    110,681
  Expenditures for long-lived assets.....    2,496       404     1,173     3,776        333      490      8,672
</TABLE>

                                       55
<PAGE>   56
                          SPECTRA-PHYSICS LASERS, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

     Reconciliations of segments information to financial statements (in
thousands):

<TABLE>
<CAPTION>
                                                    1999         1998         1997
                                                  ---------    ---------    ---------
<S>                                               <C>          <C>          <C>
NET SALES
Total external sales for reportable segments....  $ 139,542    $ 163,979    $ 154,182
Intersegment sales for reportable segments......    138,364      142,094      133,981
Other sales.....................................      1,768        5,037        4,992
Elimination of intersegment sales...............   (138,364)    (142,094)    (133,981)
                                                  ---------    ---------    ---------
          Total consolidated net sales..........  $ 141,310    $ 169,016    $ 159,174
                                                  =========    =========    =========
INCOME (LOSS) BEFORE INCOME TAXES
Total EBIT for reportable segments..............  $   6,889    $  20,363    $  24,352
Other EBIT......................................     (1,869)        (925)        (826)
Corporate expenses..............................     (4,954)      (5,003)      (4,896)
Other operating expenses:
  Stock options.................................         --           --      (14,100)
  Legal expenses................................         --           --       (1,657)
  Incentive and bonus plans expenses............         --           --       (2,400)
  Restructuring expenses........................     (2,540)          --           --
  Special inventory charges.....................     (3,700)          --           --
  Other items not allocated to segments.........       (977)        (774)      (2,732)
Interest income (expense).......................        857        1,335       (4,005)
Foreign currency gain...........................         89           --        2,067
Legal settlement................................         --           --       17,010
                                                  ---------    ---------    ---------
          Total consolidated income (loss)
            before income taxes.................  $  (6,205)   $  14,996    $  12,813
                                                  =========    =========    =========
ASSETS
Total assets for reportable segments............  $ 162,759    $ 130,948
Other assets....................................         --        2,520
Corporate assets................................     80,067       71,917
Eliminations....................................    (90,549)     (48,357)
                                                  ---------    ---------
          Total consolidated assets.............  $ 152,277    $ 157,028
                                                  =========    =========
</TABLE>

                                       56
<PAGE>   57
                          SPECTRA-PHYSICS LASERS, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

<TABLE>
<CAPTION>
                                                   NET       LONG-LIVED
                                                  SALES        ASSETS
                                                 --------    ----------
<S>                                              <C>         <C>
GEOGRAPHIC INFORMATION:
1999
  North America................................  $ 63,360     $43,743
  Japan........................................    35,731       3,849
  Europe.......................................    32,812       1,016
  Other Asia...................................     5,143          --
  Rest of the World............................     4,264          --
                                                 --------     -------
          Total................................  $141,310     $48,608
                                                 ========     =======
1998
  North America................................  $ 91,545     $37,240
  Japan........................................    32,834       1,261
  Europe.......................................    33,707       1,273
  Other Asia...................................     6,508          --
  Rest of the World............................     4,422          --
                                                 --------     -------
          Total................................  $169,016     $39,774
                                                 ========     =======
1997
  North America................................  $ 87,262
  Japan........................................    31,334
  Europe.......................................    31,536
  Other Asia...................................     4,673
  Rest of the World............................     4,369
                                                 --------
          Total................................  $159,174
                                                 ========
</TABLE>

Net sales are attributed in the above table based on the location of the
Company's customer. Substantially all sales in North America, Other Asia, and
Rest of the World are denominated in U.S. dollars. Europe and Japan in the above
table include sales from the Company's European and Japan sales subsidiaries,
respectively. Export sales to countries not located in Asia are included in Rest
of the World.

     For all years presented, no one customer accounted for 10% or more of total
net sales.

11. OTHER STATEMENT OF OPERATIONS ITEMS

     In 1999, the Company recorded $2.5 million of restructuring expense
associated with severance and other direct costs of terminating 65 employees
($1.8 million) and non-cash charges related to exiting the disk texturing system
business ($0.7 million). At December 31, 1999, approximately $0.2 million of the
severance and other direct costs had not been paid.

     Included in other operating expenses in the year ended December 31, 1997,
was $1.7 million of legal expenses associated with a lawsuit which was settled
in the second quarter of 1997. As a result of the settlement, the Company
received $17.0 million of net proceeds which was included as other income in the
year ended December 31, 1997.

     Also included in other operating expenses in the year ended December 31,
1997, was $14.1 million of compensation expense associated with certain stock
options of two subsidiaries. The stock options for one subsidiary were modified
so as to establish the measurement date and the amount of compensation expense
the Company is required to record and, for the other subsidiary, were cancelled
for a combination of cash and common stock of the Company. Accordingly, the
Company does not expect to incur additional compensation

                                       57
<PAGE>   58
                          SPECTRA-PHYSICS LASERS, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

expense relating to these stock options in the future. In the fourth quarter of
1997, the Company paid approximately $14.9 million and issued 408,043 shares of
common stock to cancel the stock options of the second subsidiary. The cash
payments were funded through an equity contribution by SPAB.

12. UNAUDITED QUARTERLY FINANCIAL DATA

     The following is a summary of quarterly financial results (in thousands
except per share amounts):

<TABLE>
<CAPTION>
                                                  QUARTER ENDED
                                --------------------------------------------------
                                MARCH 31    JUNE 30    SEPTEMBER 30    DECEMBER 31
                                --------    -------    ------------    -----------
<S>                             <C>         <C>        <C>             <C>
1999:
  Net sales...................  $31,081     $34,901      $34,149         $41,179
  Gross margin................    9,921      13,150        8,104          15,513
  Net income..................   (1,880)        255       (3,775)          1,552
  Net income per share:
     Basic....................    (0.12)      (0.02)       (0.23)           0.10
     Diluted..................    (0.12)      (0.02)       (0.23)           0.09
1998:
  Net sales...................  $43,606     $40,227      $39,731         $45,452
  Gross margin................   16,586      15,739       15,157          17,810
  Net income..................    2,116       1,937        2,261           3,333
  Net income per share:
     Basic....................     0.13        0.12         0.14            0.21
     Diluted..................     0.13        0.12         0.14            0.21
1997:
  Net sales...................  $35,080     $38,368      $39,613         $46,113
  Gross margin................   12,545      14,618       14,720          18,519
  Net income (loss)...........   (3,963)     13,470       20,725           3,629
  Pro forma net income (loss)
     per share:
     Basic....................    (0.30)       1.04         1.59            0.27
     Diluted..................    (0.30)       1.04         1.59            0.26
</TABLE>

                                       58
<PAGE>   59

       REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE

To the Board of Directors and Stockholders
Spectra-Physics Lasers, Inc.

     We have audited, in accordance with generally accepted auditing standards,
the consolidated financial statements of Spectra-Physics Lasers, Inc. as of and
for the year ended December 31, 1999 included in this Form 10-K and have issued
our report thereon dated January 18, 2000. Our audit was made for the purpose of
forming an opinion on the basic consolidated financial statements taken as a
whole. The schedule listed in Item 14(a)2 herein is the responsibility of the
Company's management and is presented for purposes of complying with the
Securities and Exchange Commission's rules and is not part of the basic
consolidated financial statements. This schedule has been subjected to the
auditing procedures applied in our audit of the basic consolidated financial
statements and, in our opinion, fairly states in all material respects the
financial data required to be set forth therein as of and for the year ended
December 31, 1999 in relation to the basic consolidated financial statements
taken as a whole.

ARTHUR ANDERSEN LLP
San Jose, California
January 18, 2000

                                       59
<PAGE>   60

       REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE

To the Board of Directors and Stockholders
Spectra-Physics Lasers, Inc.:

     Our audits of the consolidated financial statements of Spectra-Physics
Lasers, Inc. referred to in our report dated January 22, 1999 appearing in this
Annual Report on Form 10-K also included an audit of the financial statement
schedule listed in Item 14(a)(2) of this Form 10-K for the years ended December
31, 1998 and 1997. In our opinion, this financial statement schedule presents
fairly, in all material respects, the information set forth therein for the
years ended December 31, 1998 and 1997 when read in conjunction with the related
consolidated financial statements.

PricewaterhouseCoopers LLP
San Jose, California
January 22, 1999

                                       60
<PAGE>   61

                                  SCHEDULE II

                       VALUATION AND QUALIFYING ACCOUNTS
              FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                      BALANCE                                BALANCE
                                                        AT                                     AT
                                                     BEGINNING                               END OF
                                                      OF YEAR     ADDITIONS    DEDUCTIONS     YEAR
                                                     ---------    ---------    ----------    -------
<S>                                                  <C>          <C>          <C>           <C>
Allowance for Doubtful Accounts:
  December 31, 1999................................   $  405       $1,408       $  (560)     $1,253
  December 31, 1998................................      540           --          (135)        405
  December 31, 1997................................      361          179            --         540
Warranty Reserves:
  December 31, 1999................................   $2,997       $2,968       $(3,617)     $2,348
  December 31, 1998................................    2,802        2,980        (2,785)      2,997
  December 31, 1997................................    2,433        3,437        (3,068)      2,802
</TABLE>

                                       61
<PAGE>   62

                                 EXHIBIT INDEX

<TABLE>
<CAPTION>
EXHIBIT
NUMBER                       DESCRIPTION OF DOCUMENT
-------                      -----------------------
<C>        <S>
 23.1      Consent of PricewaterhouseCoopers LLP
 23.2      Consent of Arthur Andersen L.L.P.
 27.1      Financial Data Schedule
</TABLE>

                                       62