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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, 2000

                                       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 IDENTIFICATION NO.)
        INCORPORATION OR ORGANIZATION)
</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:

                                      NONE
                             (TITLE OF EACH CLASS)

                                      NONE
                  (NAME OF EACH EXCHANGE ON WHICH REGISTERED)

          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 1, 2001, 16,687,816 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 $95,480,000. 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 for use in connection with the
Annual Meeting of Stockholders to be filed on or prior to April 30, 2001,
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. designs, develops, manufactures and
distributes semiconductor-based lasers and laser optics for a variety of
end-markets. Our nearly forty years of laser and optic experience has enabled us
to offer products to the telecommunications industry. Our telecommunications
products include passive and active optical components. Passive components are
used to mix, filter, and adjust the optical signals transmitted through a fiber
optic network. Active components generate and amplify optical signals, or light.
We have shipped commercial volumes of passive optical components to several
customers and have shipped prototype quantities of active and passive optical
components for testing to other customers. We have also been a leader in
developing laser products for a variety of other commercial markets, including
the computer and microelectronics manufacturing, industrial manufacturing,
medical, image recording and research and development markets. Our major
customers include JDS Uniphase/SDL, Applied Materials, Corning, Oplink, 3D
Systems, Becton Dickinson, ESI, GSI Lumonics, IBM, Matsushita, AGFA and Yaman.

     Voice and data traffic transmitted over communications networks such as the
Internet is growing rapidly. According to RHK, a leading telecommunications
market research and consulting firm, Internet carrying capacity will increase
from 350,000 terabytes, or trillions of bits, per month at the end of 1999, to
over 15 million terabytes per month in 2003. Network service providers have
historically relied on electronic signals for the generation, processing,
transmission and display of voice and data traffic. A significant amount of this
traffic is still transmitted by sending electronic signals through copper wires
or coaxial cables. However, because electronic signals are subject to
performance and transmission capacity limitations, they have proven to be
insufficient in handling the increasing volume of data and video traffic
travelling across the telecommunications infrastructure. These limitations have
caused network congestion and decreased network reliability.

     Communications service providers are investing significantly in optical
networks to address these issues, resulting in increased demand for laser and
optical components. According to RHK, the optical component market is expected
to grow at a 37% compound annual growth rate from $6.6 billion in 1999 to $23.0
billion in 2003.

     In addition to telecommunications applications, lasers are used in a number
of other commercial markets. High power lasers have been used for a variety of
materials processing and medical applications and for research and development.
Because semiconductor-based lasers offer lower operating costs, smaller size,
higher reliability and greater efficiency, the commercial laser industry is
undergoing a fundamental technology transition to high power semiconductor-based
lasers.

     We believe our products enable our customers to maintain technological
leadership, improve quality and increase functionality, while reducing the cost
per photon. Our goal is to continue to grow our business by becoming a leading
supplier of passive and active optical components to the telecommunications
industry and maintaining a leading position in selling semiconductor-based
lasers in other high growth markets. The key elements of our business strategy
are:

     - focus our research and development efforts on high revenue growth
       opportunities in selected markets;

     - continue to expand our manufacturing capacity and capabilities;

     - pursue strategic investments and acquisitions of businesses and
       technologies; and

     - leverage the benefits of our vertically integrated manufacturing
       processes.

     Thermo Electron Corporation, a company whose common stock is traded on the
New York Stock Exchange, indirectly owned approximately 78.1% of our outstanding
common stock at December 31, 2000, which common stock is subject to a
registration rights agreement in favor of a subsidiary of Thermo Electron
Corporation.

     In this report, "Spectra-Physics", "we", "us" and "our" refers to
Spectra-Physics Lasers, Inc. and its subsidiaries.

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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, as amended (the
"Securities Act") and Section 21E of the Securities Exchange Act of 1934, as
amended. 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. We
assume no obligation to update such information.

                                  RISK FACTORS

RISKS RELATED TO OUR FINANCIAL RESULTS

OUR OPERATING RESULTS FLUCTUATE, WHICH MAY CAUSE OUR STOCK PRICE TO DECLINE

     Our quarterly and annual financial results have fluctuated significantly in
the past as a result of a number of factors, many of which are beyond our
control. Our stock price may decline substantially if these fluctuations cause
our financial performance to fall below expectations of securities analysts and
investors.

     - In recent years, our fourth quarter net sales have represented a
       disproportionately high portion of our annual net sales, and our first
       quarter net sales have declined significantly compared to the preceding
       fourth quarter.

     - We believe the quarterly fluctuations have occurred in part because of
       seasonal sales patterns related to our customers' fiscal years and in
       part from our incentive compensation plan which compensates employees
       based on annual results.

     - The non-linear pattern of our product shipments has caused inefficiencies
       in asset and employee utilization. Despite the fluctuations in our
       quarterly sales patterns, our operating expenses have been incurred on an
       approximately ratable basis.

     - Results in any future period could be affected by these or similar
       factors, as well as more general risks including changes in market
       demand, the cost and availability of components, the mix of our customer
       base and sales channels and the mix of products sold.

     - Our annual sales and net income have fluctuated in the past and may
       fluctuate in the future, as described in the "Selected Financial Data"
       and the "Management's Discussion and Analysis of Financial Condition and
       Results of Operations."

IF WE ARE UNABLE TO DEVELOP OR ACQUIRE NEW PRODUCTS FOR THE TELECOMMUNICATIONS
INDUSTRY, OUR REVENUES MAY NOT GROW AND OUR STOCK PRICE MAY DECLINE

     Our current plan for growth depends upon our ability to develop or acquire
new products for the telecommunications industry. We intend to grow through a
combination of internally developed new products and acquisitions. If we are not
successful in developing and marketing optical component products, our financial
results would be adversely affected and our stock price may decline.

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     As part of our business strategy, we also expect to pursue acquisitions of
other companies, technologies and complementary product lines. Although we have
no current agreements to do so, acquisitions typically involve significant risks
that could impair the intended benefits of the acquisitions, such as:

     - difficulties in manufacturing and selling the products of the businesses
       acquired;

     - insufficient demand for these acquired products by our customers;

     - inability to integrate the acquired businesses' operations, products and
       personnel;

     - loss of key personnel of the acquired businesses;

     - difficulties in expanding our financial and management systems and other
       resources needed to manage growth effectively;

     - issuance of stock to pay for the acquisitions which may dilute existing
       stockholders' ownership; or

     - debt incurred or assumed to complete the acquisitions.

     Other factors that could adversely affect our stock price include the
effect of expenses for in-process research and development, and amortization of
goodwill and other intangible assets.

     If any of the intended benefits of the acquisitions are impaired by these
risks, our results of operations may be adversely affected and our stock price
may decline.

RISKS RELATED TO THE TELECOMMUNICATIONS INDUSTRY

WE HAVE NOT, TO DATE, GENERATED SIGNIFICANT REVENUES FROM OUR PRODUCT SALES TO
THE TELECOMMUNICATIONS INDUSTRY, AND IF WE DO NOT GROW REVENUES FROM THESE
PRODUCTS, OUR RESULTS OF OPERATIONS WOULD LIKELY BE ADVERSELY AFFECTED AND OUR
STOCK PRICE MAY DECLINE

     We began generating revenues from our product sales to the
telecommunications industry in 1999. To date, our revenues from these products
have not been a significant portion of our overall revenues and only represent
4% of net sales for the twelve months ended December 31, 2000. Because we have
only recently begun to sell telecommunications products, we may be unable to
accurately forecast our revenues from sales of these products, and we have
limited historical financial data upon which to plan future operating expenses.

     Many of our expenses are fixed in the short term, and we may not be able to
quickly reduce spending if our revenue is lower than we project. Major new
product introductions will also result in increased operating expenses in
advance of generating revenues, if any. Therefore, operating results in a given
quarter could be less than expected. We may not be able to address the risks
associated with our limited operating history in an emerging market and our
business strategy may not be sustainable. Failure to accurately forecast our
revenues and future operating expenses could cause quarterly fluctuations in our
operating results and may result in volatility or a decline in our stock price.

IF THE OPTICAL NETWORKING MARKET DOES NOT EXPAND AS WE ANTICIPATE, DEMAND FOR
OUR TELECOMMUNICATIONS PRODUCTS MAY DECLINE, WHICH WOULD ADVERSELY IMPACT OUR
TELECOMMUNICATIONS REVENUES AND RESULTS OF OPERATIONS

     We sell our telecommunications products to network equipment providers for
use in their optical networking systems. Therefore, our future success in the
telecommunications industry depends on continued increase in demand for
communications bandwidth coupled with continuing growth of optical networks to
meet that demand. The optical networking market is relatively new and
characterized by rapid technological change, frequent new product introductions,
changes in customer requirements and evolving industry standards.

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     Because this market is new, it is difficult to predict its potential size
or future growth rate, and the demand for our telecommunications products.
Widespread adoption of optical networks is critical to our future success in the
telecommunications market. Potential end-user customers who have invested
substantial resources in their existing copper lines or other systems may be
reluctant or slow to adopt a new approach, like optical networks. Our success in
generating revenues in this emerging market will depend on:

     - maintaining and enhancing our relationships with our customers;

     - educating potential end-user customers and network service providers
       about the benefits of optical components; and

     - accurately predicting and developing our telecommunications products to
       meet industry standards.

     If we fail to address these factors or changing market conditions, the
sales of our telecommunications products may decline, which would adversely
impact our revenues and results of operations.

IF WE CANNOT INCREASE OUR SALES VOLUMES, REDUCE OUR COSTS OR INTRODUCE HIGHER
MARGIN PRODUCTS TO OFFSET ANTICIPATED REDUCTIONS IN THE AVERAGE SELLING PRICE OF
OUR TELECOMMUNICATIONS PRODUCTS, OUR OPERATING RESULTS WILL SUFFER

     We have experienced decreases in the average selling prices of some of our
telecommunications products. We expect that the average selling price of our
products may continue to decrease in response to competitive pricing pressures,
new product introductions by us or our competitors and other factors. If we are
unable to offset the anticipated decrease in our average selling prices by
increasing our sales volumes or changing our product mix or by decreasing our
manufacturing costs, our net telecommunications revenues and gross margins will
likely decline. If we cannot maintain or improve our gross margins, our
financial position may be harmed and our stock price may decline.

SALES TO ANY SINGLE TELECOMMUNICATIONS CUSTOMER MAY VARY SIGNIFICANTLY FROM
QUARTER TO QUARTER, WHICH MAY CAUSE OUR OPERATING RESULTS TO FLUCTUATE

     Customers in the telecommunications industry tend to order large quantities
of products on an irregular basis. Telecommunications customers who account for
a significant portion of sales of our products in one quarter may not place any
orders in the succeeding quarter. These ordering patterns may result in
significant quarterly fluctuations in our revenues from the sale of our
telecommunications products and operating results.

     If current telecommunications customers do not continue to place
significant orders, we may not be able to replace these orders with new orders
from new customers. None of our current telecommunications customers have
minimum purchase obligations, and they may stop placing orders with us at any
time. For example, any downturn in our customers' businesses could significantly
decrease sales of our products to these customers. The loss of any of our key
telecommunications customers or a significant reduction in sales to these
customers could significantly reduce our net telecommunications revenues.

THE LONG SALES CYCLES FOR OUR TELECOMMUNICATIONS PRODUCTS MAY CAUSE OUR
OPERATING RESULTS TO FLUCTUATE

     The long, variable and unpredictable sales and implementation cycles for
our telecommunications products may also contribute to fluctuations in operating
results and uncertainty in achieving revenue growth from these products. We do
not recognize revenue until a product has been shipped to a customer and
collection is reasonably assured. Customers often view the purchase of our
telecommunications products as a significant and strategic decision. As a
result, these customers typically expend significant effort in evaluating,
testing and qualifying our products and our manufacturing processes.

     The telecommunications customer evaluation and qualification process
frequently results in a lengthy initial sales cycle of up to one year or more.
In addition, some of our customers require that our telecommunications products
be qualified under Telcordia requirements, which can exceed nine months. These
requirements are specifications based on documents published by Telcordia, a
successor to Bellcore, relating to testing communications equipment for
environmental, electrical and optical performance. While

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these customers are evaluating our products and before they place an order with
us, we may incur substantial expenses to customize our products to the
customer's needs. We may also expend significant management effort, increase
manufacturing capacity and order long lead time components or materials prior to
receiving an order. Even after this evaluation process, a potential customer may
not purchase our products.

IF ONE OR MORE OF OUR KEY TELECOMMUNICATIONS CUSTOMERS SUBSTANTIALLY REDUCED
ORDERS OF OUR PRODUCTS, SALES OF OUR TELECOMMUNICATIONS PRODUCTS WOULD SUFFER

     Our telecommunications customer base is highly concentrated. We sell
component products to these customers who in turn incorporate our products into
other products or systems for resale to their customers in the
telecommunications industry. Approximately 64% of our net sales from the sale of
telecommunications products for the twelve months ended December 31, 2000, was
obtained from four customers.

     We expect that, for the foreseeable future, sales to a limited number of
customers will continue to account for a high percentage of sales of our
telecommunications products. Sales to any single customer may vary significantly
from quarter to quarter. If current customers do not continue to place orders,
we may not be able to replace these orders with new orders from new customers.

     In the telecommunications market, our customers evaluate our products and
competitive products for deployment in their telecommunications systems. Our
failure to be selected by a customer for particular system projects could
adversely impact our business, operating results and financial condition. We
would be similarly affected adversely if our customers select us, but our
customers are not selected as the primary supplier for an overall system
installation.

OUR TELECOMMUNICATIONS PRODUCTS ARE DEPLOYED IN LARGE AND COMPLEX SYSTEMS AND
MAY CONTAIN DEFECTS THAT ARE NOT DETECTED UNTIL AFTER OUR PRODUCTS HAVE BEEN
INSTALLED, WHICH COULD RESULT IN LEGAL CLAIMS AGAINST US, DAMAGE OUR REPUTATION
AND CAUSE US TO LOSE CUSTOMERS

     Some of our telecommunications products are designed to be deployed in
large and complex optical networks. Because of the nature of these products,
they can only be fully tested for reliability when deployed in networks for long
periods of time. Our optical components may contain undetected defects when
first introduced or as new versions are released, and our customers may discover
defects in our products only after they have been deployed and operated under
peak stress conditions. In addition, our telecommunications products are
combined with products from other vendors. As a result, should problems occur,
it may be difficult to identify the source of the problem. If we are unable to
fix defects or other problems, we could experience, among other things:

     - loss of customers;

     - damage to our brand reputation;

     - failure to attract new customers or achieve market acceptance;

     - diversion of development and engineering resources; and

     - legal actions by our customers.

     The occurrence of any one or more of the foregoing factors could cause our
operating results to be negatively impacted.

RISKS RELATING TO OUR BUSINESS

IF WE ARE UNABLE TO COMMERCIALIZE NEW AND ENHANCED PRODUCTS FOR DIVERSE
APPLICATIONS THAT MEET THE NEEDS OF OUR CUSTOMERS IN A TIMELY MANNER, OUR NET
REVENUES MAY DECLINE

     Our future success depends on our ability to anticipate our customers'
needs and develop products that address those needs. Introduction of new
products and product enhancements will require that we effectively transfer
production processes from research and development to manufacturing and
coordinate our efforts with the efforts of our suppliers to rapidly achieve
volume production. If we fail to effectively transfer production

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processes, develop product enhancements or introduce new products that meet the
needs of our customers as scheduled, our net revenue may decline.

     As we target new product lines and markets, we will further increase our
sales and marketing, customer support and administrative functions to support
anticipated increased levels of operations from these new products and markets
as well as growth from our existing products. We may not be successful in
creating this infrastructure nor may we realize any increase in the level of our
sales and operations to offset the additional expenses resulting from this
increased infrastructure.

INTERRUPTIONS AFFECTING OUR KEY SUPPLIERS COULD DISRUPT PRODUCTION, COMPROMISE
OUR PRODUCT QUALITY AND ADVERSELY AFFECT OUR BUSINESS, OPERATING RESULTS AND
FINANCIAL CONDITION

     A number of components necessary for the manufacture and operation of many
of our products such as crystals, ceramic components and Q switches, which
control the release of energy in a laser, are obtained from a sole supplier or a
limited group of suppliers. We have experienced shortages of these supplies in
the past. We do not maintain long term supply agreements with any of our
suppliers. Our reliance on a 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 seriously harm our business, operating
results and financial condition. Any inability to obtain adequate deliveries or
any other circumstances that would require us to seek alternative sources of
supply or to manufacture the components internally could significantly delay our
ability to ship our products, which could damage relationships with current and
prospective customers and could seriously harm our business, operating results
and financial condition.

IF WE FAIL TO SUCCESSFULLY MANAGE OUR EXPOSURE TO THE WORLDWIDE FINANCIAL
MARKETS, OUR OPERATING RESULTS COULD SUFFER

     We are exposed to financial market risks relating to foreign currency
exchange rates. We utilize derivative financial instruments to mitigate these
risks. We do not use derivative financial instruments for speculative or trading
purposes. We hedge currency risks of a substantial portion of our sales and a
portion of our receivables denominated in foreign currencies with forward
currency contracts. Gains and losses on these foreign currency sales and
receivables are generally offset by corresponding gains and losses on the
related hedging instruments, resulting in negligible net exposure to us. Our
hedging programs reduce, but do not eliminate, the impact of foreign currency
exchange rate movements.

IF WE FAIL TO OBTAIN ADDITIONAL CAPITAL IN THE AMOUNTS AND UPON THE TERMS
REQUIRED, OUR BUSINESS COULD SUFFER

     We are devoting substantial resources for new facilities, including
expansion of our Oroville, California facility, and equipment for the production
of passive and active components used in the telecommunications industry and for
the development of semiconductor-based lasers. Although we believe existing cash
balances, cash flow from operations and available lines of credit will be
sufficient to meet our capital requirements at least for the next twelve months,
we may be required to seek additional equity or debt financing to compete
effectively in these markets. We cannot precisely determine the timing and
amount of our capital requirements, which will depend on several factors,
including potential acquisitions that we may identify in the future and the
demand for our existing and planned new products. Additional financing we may
need may not be available when needed, or, if available, may not be on terms
satisfactory to us, which could cause our business to suffer.

IF OUR BUSINESS OPERATIONS ARE INSUFFICIENT TO REMAIN COMPETITIVE IN OUR
INDUSTRY, OUR OPERATING RESULTS COULD SUFFER

     The laser and telecommunications markets in which we sell our products are
highly competitive. In each of the markets we serve, we face intense competition
from established competitors. Many of these competitors have financial,
engineering, manufacturing, marketing, service, and support resources
substantially greater than ours.

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     Many of our competitors may also have substantially greater name
recognition, manufacturing expertise and capability and longer standing customer
relationships than do we.

     In our telecommunications market, direct competitors include Aurora
Networks, Barr Associates, Corning, Harmonic Lightwave, IPG Photonics, JDS
Uniphase/SDL, Lucent, and MPB Technologies. In our other commercial markets,
direct competitors include Coherent, Continuum, a division of Hoya, JDS
Uniphase/SDL, Lightwave Electronics and Siemens. None of our competitors
competes in all of the product areas and industries currently served by us.
However, as existing or new markets continue to grow, we expect that new
competitors will emerge and present competitors will seek to increase their
market share.

     Some of our customers are companies with which we currently compete or in
the future may compete. In addition, some of our customers have been or could be
acquired by, or enter into strategic relations with, our competitors. We
anticipate that further consolidation will occur in our industry, thereby
possibly increasing competition in our target markets.

     To remain competitive, we believe we must maintain a substantial investment
in research and development, marketing, sales and customer service and support.
We may not compete successfully in all or some of our markets in the future. We
may not have sufficient resources to continue to make investments in new
products. We may not be able to achieve the technological advances needed to
make our products competitive. In addition, technological changes or development
efforts by our competitors may render our products or technologies obsolete or
less competitive.

     Our current or potential competitors may develop or acquire products
comparable or superior to those developed by us, or combine or merge to form
larger, more significant competitors. Consolidation in the laser and laser
optics industry could intensify the competitive pressures that we face. We
cannot predict the extent to which such transactions among industry participants
could adversely affect our business.

     In addition, we cannot assure that markets will develop for any new
products we may develop, or that our products will be competitive with other
technologies or products that may be developed by others. We expect that both
direct and indirect competition will increase in the future. We believe that
increased competition has caused, and is expected to cause in the future, price
reductions, reduced margins and loss of market share, any of which could
seriously harm our business, operating results and financial condition.

IF WE FAIL TO ATTRACT AND RETAIN KEY PERSONNEL, OUR BUSINESS COULD SUFFER

     We may not be successful in attracting, assimilating or retaining qualified
personnel to fulfill our current or future needs, which could adversely impact
our ability to manufacture and sell our products. Our future depends, in part,
on our ability to attract and retain key personnel. In order to implement our
business plan, we must hire a significant number of additional employees in the
next twelve months, particularly engineering, sales and manufacturing personnel.

     Competition for highly skilled engineers is extremely intense, especially
in the San Francisco Bay Area where we are primarily based. We are currently
experiencing difficulty in identifying and hiring qualified engineers in many
areas of our business. We may not be able to hire and retain such personnel at
compensation levels consistent with our existing compensation and salary
structure. Our future also depends on the continued contributions of our
executive officers and other key management and technical personnel, each of
whom would be difficult to replace.

     We do not maintain a key person life insurance policy on our chief
executive officer or any other officer. The loss of the services of one or more
of our executive officers or key personnel or the inability to continue to
attract qualified personnel could delay product development cycles or otherwise
materially harm our business, financial condition and operating results.

WE FACE RISKS RELATED TO OUR INTERNATIONAL OPERATIONS AND SALES, WHICH MAY
ADVERSELY AFFECT OUR BUSINESS

     International sales accounted for approximately 50% of our net sales in
2000, 55% of our net sales in 1999 and 46% of our net sales in 1998. We expect
that international sales will continue to account for a significant

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portion of our net sales. We may continue to expand our operations outside of
the United States and to enter additional international markets, both of which
will require significant management attention and financial resources.

     Since a significant portion of our foreign sales are denominated in U.S.
dollars, our products may also become less price competitive in countries in
which local currencies decline in value relative to the U.S. dollar, such as the
recent decline of the euro against the U.S. dollar. Furthermore, the sales made
by many of our original equipment manufacturer customers depend on international
sales, and consequently further expose us to the risks associated with
international sales.

     Other risks of international sales include:

     - unanticipated tax, regulatory, economic or political changes that could
       adversely affect our foreign sales;

     - tariffs and trade barriers;

     - seasonal reductions in business activities in the summer months in Europe
       and other overseas countries;

     - difficulties in staffing, management and integration of foreign
       operations due to language, cultural and logistical factors; and

     - potentially longer payment cycles from our foreign customers and
       increased difficulty in collecting from foreign accounts.

FAILURE TO COMPLY WITH DOMESTIC AND FOREIGN ENVIRONMENTAL AND EMPLOYEE SAFETY
LAWS COULD ADVERSELY IMPACT OUR BUSINESS OR RESULTS OF OPERATIONS

     Our operations are governed by laws relating to air emissions, wastewater
discharge, and chemical and hazardous waste management and disposal and
workplace safety and worker health, primarily the Occupational Safety and Health
Act. The nature of our operations exposes us to the risk of liabilities or
claims under these laws.

     Under some environmental laws, owners or operators of land or businesses
are liable for their own and for previous owners' or operators' releases of
hazardous or toxic substances. Our own operations and the long history of
industrial uses at some of our current or former facilities expose us to risk of
liabilities or claims under these environmental laws.

     Based on our experience to date, we believe 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 our business, operating results or financial
condition. However, future events, such as changes in existing laws or their
interpretation, or the discovery of previously unknown contamination, may give
rise to additional compliance costs or liabilities that could seriously harm our
business, operating results or financial condition.

ANY FAILURE OF THE CAPACITY, RELIABILITY AND SECURITY OF OUR INFORMATION
TECHNOLOGY HARDWARE AND SOFTWARE COULD ADVERSELY IMPACT OUR RESULTS OF
OPERATIONS

     If we grow our business, we will likely need to expand and adapt our
information technology systems. We may not successfully and in a timely manner
upgrade and maintain our information technology infrastructure. If future
demands on this infrastructure exceed our current forecasts or if we do not
upgrade these systems as needed, we could experience technical difficulties and
unexpected costs that could harm our results of operations. Upgrading the
infrastructure will require substantial financial, operational and management
resources, the expenditure of which could also adversely affect the results of
our operations.

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RISKS RELATED TO MANUFACTURING OUR PRODUCTS

IF WE DO NOT ACHIEVE ACCEPTABLE MANUFACTURING VOLUMES, YIELDS OR SUFFICIENT
PRODUCT RELIABILITY, OUR OPERATING RESULTS COULD SUFFER

     The manufacture of our products involves highly complex and precise
processes, requiring production in highly controlled and clean environments.
Changes in our manufacturing processes or those of our suppliers, or their
inadvertent use of defective or contaminated materials, could significantly
reduce our manufacturing yields and product reliability. Because the majority of
our manufacturing costs are relatively fixed, manufacturing yields are critical
to our results of operations. Some of our business units have in the past
experienced lower than expected production yields, which could delay product
shipments and impair gross margins. These business units or any of our other
manufacturing facilities may not maintain acceptable yields in the future. To
the extent we do not achieve acceptable manufacturing yields or experience
product shipment delays, our business, operating results and financial condition
would be seriously harmed.

     We rely on our production capability to manufacture our laser optics and
semiconductor lasers. Because we manufacture, package and test these products at
our own facilities, and such products 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 seriously harm our business, operating results and financial condition.

     As our customers' needs for our products increase, we must increase our
manufacturing volumes to meet these needs and satisfy customer demand. Failure
to do so may materially harm our business, operating results and financial
condition. In some cases, existing manufacturing techniques, which involve
substantial manual labor, may be insufficient to achieve the volume or cost
targets of our customers. As such, we will need to develop new manufacturing
processes and techniques, which are anticipated to involve higher levels of
automation, to achieve the targeted volume and cost levels. In addition, it is
frequently difficult at a number of our manufacturing facilities to hire
qualified manufacturing personnel in a timely fashion, if at all, when customer
demands increase over shortened time periods. While we continue to devote
research and development efforts to improvement of our manufacturing techniques
and processes, we may not achieve manufacturing volumes and cost levels in our
manufacturing activities that will fully satisfy customer demands.

IF WE FAIL TO ACCURATELY FORECAST OUR REQUIREMENTS FOR MATERIALS FOR
MANUFACTURING, WE MAY INCUR ADDITIONAL COSTS OR EXPERIENCE MANUFACTURING DELAYS
WHICH COULD ADVERSELY AFFECT OUR OPERATING RESULTS

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

IF OUR CUSTOMERS DO NOT QUALIFY OUR MANUFACTURING PROCESSES FOR VOLUME
SHIPMENTS, OUR OPERATING RESULTS COULD SUFFER

     Customers will not purchase any of our telecommunications products, other
than limited numbers of evaluation units, prior to qualification of the
manufacturing processes for the product. Each new manufacturing process must go
through varying levels of qualification with our customers. This qualification
process determines whether the manufacturing processes achieve the customers'
quality, performance and reliability standards. Delays in qualification can
cause a product to be dropped from a long term supply program and result in
significant lost revenue opportunity over the term of that program. If we fail
in the timely qualification

                                        9
<PAGE>   11

of these or other new manufacturing processes, our operating results and
customer relationships would be adversely affected.

RISKS RELATED TO OUR INTELLECTUAL PROPERTY

WE MAY NOT OBTAIN THE INTELLECTUAL PROPERTY RIGHTS WE REQUIRE, WHICH COULD
IMPAIR OUR COMPETITIVE POSITION

     Numerous patents in our industries are held by others, including academic
institutions and our competitors. In the past, we have acquired and in the
future we may seek to acquire license rights to these or other patents or other
intellectual property to the extent necessary for our business. Unless we are
able to obtain licenses on commercially reasonable terms, patents or other
intellectual property held by others could inhibit our development of new
products for our markets.

     We are a licensee of a number of third party technologies and intellectual
property rights and are required to pay royalties to these third party licensors
on some of our products. Generally, a license, if granted, includes payments by
us of up-front fees, ongoing royalties or a combination thereof. While in the
past licenses generally have been available to us where third party technology
was necessary or useful for the development or production of our products, in
the future, licenses to third party technology may not be available on
commercially reasonable terms, if at all. The inability to obtain such third
party technology on commercially reasonable terms could have a significant
adverse impact on our operating results.

OUR PRODUCTS AND PROCESSES MAY BE SUBJECT TO THE CLAIMS THAT THEY INFRINGE UPON
THE INTELLECTUAL PROPERTY RIGHTS OF OTHERS, WHICH COULD IMPAIR OUR COMPETITIVE
POSITION

     The industry in which we operate experiences periodic claims of patent
infringement or other intellectual property rights. We have in the past
received, and may from time to time in the future receive, notices from third
parties claiming that our products or processes infringe upon third party
proprietary rights.

     Any potential intellectual property litigation could also force us to do
one or more of the following, any of which could harm our business:

     - stop selling, incorporating or using our products or processes that use
       the disputed intellectual property;

     - obtain, if available, third party licenses to sell or use the disputed
       technology on reasonable terms; or

     - redesign our products or processes that use the disputed intellectual
       property.

     On June 19, 2000, Rockwell Technologies LLC filed a complaint against both
Spectra-Physics and our Opto Power subsidiary in the United States District
Court for the District of Delaware. The complaint alleges that both we and Opto
Power have infringed U.S. Patent No. 4,368,098 entitled "Epitaxial Composite and
Method of Making." Rockwell avers that Opto Power has infringed the patent by
performing the patented process and by using wafers manufactured by the patented
process and that we have infringed the patent by using and/or selling products
made by the patented process. Rockwell seeks damages, including increased
damages due to defendants' alleged willful infringement, plus costs and attorney
fees. Rockwell has not sought injunctive relief as the patent has already
expired. On January 9, 2001, the Court entered a Scheduling Order setting the
trial date for February 5, 2002. We believe that Rockwell's allegations are
without merit and we intend to vigorously defend this action.

     The resolution of this dispute is uncertain, in part because the issues
underlying the case depend upon discovery of many facts, some of which concern
inventions and related circumstances dating back many years, and in part because
our analysis of the case is ongoing. We cannot assure that Rockwell will not
ultimately prevail in this dispute. If Rockwell were to prevail, it is possible
that Rockwell could recover substantial monetary damages, based on past sales of
our products for a number of years. Our efforts to defend Rockwell's claim
against us may involve significant expense to us and could divert the attention
of our technical and management personnel. An adverse outcome in this case could
materially harm our business or results of operations.

                                        10
<PAGE>   12

OUR INTELLECTUAL PROPERTY RIGHTS MAY NOT BE ADEQUATELY PROTECTED, WHICH COULD
IMPAIR OUR COMPETITIVE POSITION

     Our future growth and competitive position depend in part upon our
intellectual property, including trade secrets, know-how, patents and continuing
technological innovation. We currently hold approximately 140 U.S. patents on
products or processes and corresponding foreign patents and have applications
for approximately 22 patents currently pending. Substantially all of these
patents and pending patent applications apply to our products and processes for
the other commercial markets, while only a few of our patents and pending patent
applications apply to our telecommunications products and processes.

     The steps taken by us to protect our intellectual property may not
adequately prevent misappropriation or ensure that others will not develop
competitive technologies or products. Other companies may be investigating or
developing other technologies that are similar to ours. It is possible that
patents may not be issued from our applications pending or filed by us and, if
patents do issue, the claims allowed may not be sufficiently broad to deter or
prohibit others from marketing similar products. Any patents issued to us may be
challenged, invalidated or circumvented. Further, the rights under our patents
may not provide a competitive advantage to us. In addition, the laws of some
foreign jurisdictions in which our products are or may be developed,
manufactured or sold, including Asia and Europe, may not protect our products
and intellectual property rights to the same extent as the laws of the United
States.

OTHER RISKS

THERMO ELECTRON CORPORATION CONTROLS US

     Thermo Electron Corporation beneficially owns, through its subsidiary
Spectra-Physics Holdings U.S.A., Inc., approximately 78% of our outstanding
common stock. So long as it holds a controlling interest, Thermo Electron
Corporation will be able to control all matters requiring stockholder approval,
including the election of directors and approval of significant corporate
transactions, which could delay or prevent an outside party from acquiring or
merging with us. The interests of this controlling stockholder may conflict with
the interests of other holders of our common stock. Currently, two of our six
directors are executive officers or directors of Thermo Electron Corporation or
one of its subsidiaries. Therefore, there may be various conflicts of interest
or conflicting duties for these individuals. These factors could adversely
affect the trading price of our common stock.

PROVISIONS OF OUR CHARTER DOCUMENTS AND DELAWARE LAW MAY HAVE ANTI-TAKEOVER
EFFECTS THAT COULD PREVENT A CHANGE IN CONTROL, WHICH MAY ADVERSELY AFFECT OUR
STOCK PRICE

     Provisions of our certificate of incorporation and bylaws may discourage,
delay or prevent a merger or acquisition that a stockholder may consider
favorable. These provisions include:

     - authorizing our board of directors to issue preferred stock without
       stockholder approval;

     - prohibiting cumulative voting in the election of directors;

     - permitting stockholder actions by written consent; and

     - establishing advance notice requirements for nominations for election to
       the board of directors or for proposing matters that can be acted on by
       stockholders at stockholder meetings.

     We are subject to the provisions of Section 203 of the Delaware General
Corporation Law prohibiting, under some circumstances, publicly-held Delaware
corporations from engaging in business combinations with some stockholders for a
specified period of time without the approval of the holders of substantially
all of its outstanding voting stock. These provisions could delay or impede the
removal of incumbent directors or our management and could make more difficult a
merger, tender offer or proxy contest involving us, even if such events could be
beneficial to the interests of the stockholders. In addition, such provisions
could limit the price that some investors might be willing to pay in the future
for shares of our common stock. These provisions also may have the effect of
deterring hostile takeovers or delaying changes in control or our management.

                                        11
<PAGE>   13

INDUSTRY BACKGROUND

  Telecommunications Markets

     Voice and data traffic transmitted over communications networks, in
particular the Internet, is growing rapidly. According to RHK, Internet carrying
capacity will increase from 350,000 terabytes per month at the end of 1999 to
over 15 million terabytes per month in 2003. Network service providers have
historically relied on electronic signals for the generation, processing,
transmission and display of voice and data traffic. A significant amount of this
traffic is still transmitted by sending electronic signals through copper wires
or coaxial cables. However, because electronic signals are subject to
performance and transmission capacity limitations, they have proven to be
inadequate to handle the increasing volume of data and video traffic travelling
across the telecommunications infrastructure. These limitations have caused
network congestion and decreased network reliability.

     To alleviate the capacity bottleneck caused by the limitations of
electronic signal transmission, network service providers are increasingly
deploying optical networks that provide more network bandwidth and increased
transmission speed. Optical networks, which transmit data by pulses of light
through an optical fiber, initially carried information using only one
wavelength or channel. As a result, satisfying the increasing demand for
bandwidth required the deployment of additional single channel optical networks,
a solution that was both costly and difficult to implement.

     In response, optical components have recently been developed that are
capable of separating light into different specified wavelengths, thereby
allowing for the transmission of multiple wavelengths within a single fiber
optic strand. Network system vendors are incorporating these components and
developing equipment such as wavelength division multiplexing, or WDM systems,
which greatly increase network capacity. WDM systems simultaneously transmit
multiple wavelengths instead of just one wavelength over the same optical fiber.
The combined optical signals travelling over different wavelengths are
consolidated at one end of the fiber using multiplexing devices and then
transmitted over a single fiber. At the other end of the fiber, the optical
signal is demultiplexed or separated much like a prism separating different
colors of light. This technology has been enhanced by the introduction of dense
wavelength division multiplexing, or DWDM, which permits wavelengths to be more
closely spaced, thereby allowing even more wavelengths to be transmitted
simultaneously.

     A typical DWDM system consists of a large number of complementary active
and passive components. Active components generate, amplify and modulate optical
signals, or light. Examples of active components include semiconductor-based
lasers, such as transmission lasers and pump lasers, used to generate and
amplify the light signal in a DWDM network. A laser uses energy from a power
source to stimulate a particular type of material, which creates and emits
photons or light. The light emitted by lasers is more intense and has higher
purity than the light emitted by conventional light sources, making them ideally
suited for telecommunications applications. Semiconductor-based lasers are
composed of two types of lasers: semiconductor lasers and solid state lasers. A
semiconductor laser creates light from the flow of an electric current through a
specially designed semiconductor device. Solid state lasers are lasers in which
the semiconductor laser pumps, or excites, a crystal or fiber to generate laser
light with enhanced beam quality.

     Passive components are used to mix, filter, adjust and stabilize the
optical signals transmitted through a fiber optic network. Examples of passive
components include thin film filters, isolators and etalons. Thin film filters
are made with microscopic layers of materials, such as silica, applied to the
surface of a substrate, such as glass, to alter its optical properties.
Isolators are fiber optic devices that transmit light in only one direction. An
isolator serves as a traffic cop, keeping reflected light from travelling the
wrong way through a fiber strand. Etalons are optical components that are used
to stabilize the wavelengths of lasers used in DWDM transmission systems.
Etalons ensure that the wavelength of a source laser does not interfere with an
adjacent wavelength signal.

                                        12
<PAGE>   14

  Other Commercial Markets

     In addition to telecommunications applications, lasers are used in a
variety of other applications in other commercial markets. High power lasers are
used for a variety of materials processing and medical applications and for
research and development. According to Laser Focus World, a leading laser
industry trade publication, the worldwide market for non-telecommunications
lasers, including both semiconductor-based and conventional lasers, is expected
to grow from approximately $1.1 billion in 1993 to an estimated $4.6 billion in
2001, which represents a compound annual growth rate of approximately 23%.

     Although a significant portion of the installed base of commercial lasers
is comprised of high power conventional lasers, the laser industry is undergoing
a fundamental technology transition to high power semiconductor-based lasers.
This transition is being driven by the advantages offered by semiconductor-based
lasers, including lower operating costs, smaller size, higher reliability and
greater efficiency. Conventional lasers include gas and liquid lasers, each of
which derives its classification from the lasing material it uses, and lamp
pumped lasers.

     Semiconductor-based lasers are being used in computers and microelectronics
manufacturing to drill holes, or vias, in personal computer boards, adjust the
electrical characteristics of resistors, inspect semiconductor wafers for
defects and repair semiconductor devices such as dynamic random access memory,
or DRAM, and static random access memory, or SRAM. Welding and soldering are two
applications where semiconductor-based lasers are displacing conventional lasers
due to their lower operating cost and higher reliability. In the medical market,
semiconductor-based lasers are increasingly used in a variety of therapeutic,
cosmetic and diagnostic applications. Finally, the commercial printing industry
is shifting to thermal-based materials, which require high power
semiconductor-based lasers in the film exposure process.

CHALLENGES FACING OUR CUSTOMERS

  Telecommunications Customers

     The development and enhancement of semiconductor-based laser and DWDM
component technologies have enabled improvements in optical network performance
and lowered the overall cost of building and maintaining optical networks.
Despite the advances in these technologies, several challenges still exist,
which prevent the widespread transition to an all-optical network, including the
following:

     Need for Higher Channel Count. Limiting factors within current DWDM
technology include the number of wavelengths that can be transmitted, or channel
count. Current DWDM technology requires that data be transmitted within a
defined range of wavelengths and with a large space between each channel. These
limitations constrain the channel count and the overall bandwidth of the
communications network. Future systems will require components that support
higher channel count and narrower channel spacing in order to handle the rapid
growth in data traffic.

     Need for Increased Power and Amplification. In order to reduce system
deployment costs, service providers are seeking optical networking systems that
are capable of extending the distance an optical signal can travel before it
requires regeneration. Service providers are beginning to deploy ultra-long haul
optical networking systems, which are capable of producing signal reaches two to
three times longer than optical systems currently available. As service
providers seek to transition to an all-optical network, very long reach optical
systems, which do not require any optical to electrical to optical signal
regeneration and that have high power optical amplification capabilities, will
be required.

     Need for Suppliers Capable of Volume Production and Shorter Lead Times. The
rapidly increasing demand for DWDM systems has resulted in a shortage of optical
components necessary to build them. Obtaining a reliable supply of high quality
DWDM components remains critical to the success of many of our
telecommunications customers. Rapid technological advances and high demand for
optical components has also reduced product lifecycles and shortened the time
for deployment within telecommunication networks. Optical component
manufacturers are increasingly required to achieve a significant ramp-up in
manufacturing capacity and reduce time to market for new component designs in
order to meet the demands of optical systems suppliers. Customers for high power
semiconductor-based lasers are seeking improved performance

                                        13
<PAGE>   15

and reliability with reduced costs. Faced with these challenges and market
pressures, customers are increasingly relying on third party technology
providers and manufacturers for innovation in lasers and laser optics.

     Desire for Suppliers with Passive and Active Products. Because we believe
customers will seek to reduce the number of suppliers for components for their
optical networks, the ability to offer a broad portfolio of passive and active
components becomes a critical differentiating factor in purchasing decisions.
Maintaining a broad product portfolio requires expertise in laser and optic
technology, a breadth of technology and engineering resources and the ability to
partner with technology leaders.

  Other Commercial Customers

     Customers in other commercial markets continue to require enhanced
performance from semiconductor-based lasers. These include higher power, shorter
wavelengths, higher repetition rates, longer life times, reduced size and lower
costs.

STRATEGY

     Our goal is to continue to grow our business by becoming a leading supplier
of passive and active optical components to the telecommunications industry and
maintaining a leading position in selling semiconductor-based lasers in other
high growth markets. The key elements of our business strategy are as follows:

     Focus our Research and Development Efforts on High Revenue Growth
Opportunities in Selected Markets. Through substantial investment in research
and development, we seek to expand our leadership position in various laser and
optic technologies. We intend to continue developing both active and passive
optical component products for the telecommunications market and products for
other semiconductor-based lasers applications. With respect to passive
components, we introduced lithium niobate components in June 2000, 200
gigahertz, or GHz, thin film filters in December 1999 and 100 GHz thin film
filters in December 2000. With respect to active components, we announced the
introduction of our multimode, pump and Raman laser modules for the
telecommunications industry in February 2000. With over 120 employees with PhDs
or other advanced degrees, we are well positioned to provide innovative
next-generation products to these high growth areas.

     Continue to Expand our Manufacturing Capacity and Capabilities. Our
customers in the telecommunications and other commercial markets are
increasingly demanding higher product volumes, shorter lead times, higher
reliability and lower prices. In 2000, we significantly expanded our
manufacturing capacity in key product areas. We manufacture our thin film
filters using ion beam sputtering machines, which are high volume deposition
machines used for manufacturing thin film filters, and large substrates, and we
have developed proprietary technology to control and measure the precise amounts
of materials laid down in the deposition process of manufacturing filters. We
believe our manufacturing processes will provide us with a cost advantage over
most filter competitors. In addition, our passive components are qualified to
Telcordia standards and we expect our active components to be similarly
qualified in 2001.

     Pursue Strategic Investments and Acquisitions of Businesses and
Technologies. In the telecommunications and our other commercial markets, time
to market of new products and improvements in existing products is critical. We
intend to pursue strategic investments and acquisitions of businesses and
technologies that can provide us with key intellectual property, strategic
products and highly qualified engineering personnel to rapidly increase our
technological expertise and expand the breadth of our product and patent
portfolio.

     Leverage the Benefits of our Vertically Integrated Manufacturing Processes.
 We believe that our vertically integrated manufacturing processes have enabled
us to reduce costs, improve quality and increase time to market of our products.
In our active component business, we operate a state-of-the-art, large volume
semiconductor laser manufacturing facility which performs all aspects of wafer
growth, device fabrication, packaging and Telcordia standards testing.
Additionally, for the active optical components segment, we have capitalized on
our vertical integration and experience in semiconductor lasers to become one of
only two

                                        14
<PAGE>   16

suppliers to develop multimode pump lasers for next generation, optical
amplifiers. We have also leveraged the benefits of vertical integration in our
passive components manufacturing process with state-of-the-art monitoring and
deposition technologies and a full range of fabrication, coating and automated
measuring capabilities.

PRODUCTS AND TECHNOLOGIES

  Telecommunications Products

     We sell both passive and active components to telecommunications customers.
We have developed our passive telecommunications products based on our
experience and capabilities in optical fabrication and thin film coating. We are
currently shipping commercial volumes of 100 GHz and 200 GHz thin film filters
and lithium niobate components for use in isolators and are shipping prototypes
of etalons. Thin film filters control the reflection, refraction, transmission
and absorption of light to achieve specific optical effects such as wavelength,
or channel, separation. Thin film filters are critical components of DWDM
systems due to their temperature stability, channel to channel isolation, broad
passband and ability to meet network system manufacturers' demands for
decreasing channel spacing. Thin film filters are made with microscopic layers
of materials, such as silica, applied to the surface of a substrate, such as
glass, to alter its optical properties. Isolators are fiber optic devices that
transmit light in only one direction. An isolator serves as a traffic cop,
keeping reflected light from travelling the wrong way through a fiber strand.
Etalons are components that are used to stabilize the wavelengths of lasers used
in DWDM transmission systems and ensure that the wavelength of a source laser
does not interfere with an adjacent channel.

                      PASSIVE TELECOMMUNICATIONS PRODUCTS

<TABLE>
<CAPTION>
            PRODUCTS                       FUNCTION                    BENEFIT                 STATUS
            --------                       --------                    -------                 ------
<S>                                <C>                          <C>                      <C>
200 GHz DWDM filters.............  - Provide up to 40           - Low cost               Shipping commercial
                                     DWDM channels              - High performance       volumes
                                                                - High reliability
100 GHz DWDM filters.............  - Provide up to 80           - High reliability       Shipping commercial
                                     DWDM channels              - Advanced               volumes
                                                                  performance
                                                                  characteristics
Lithium Niobate components.......  - Used in isolators which    - Precision tolerance    Shipping commercial
                                     maintain one-way             control                volumes
                                     transmission               - Low cost
Etalons..........................  - Ensure optical signal      - High flexibility       Shipping prototypes
                                     wavelength accuracy and    - Compact size
                                     stability for DWDM
</TABLE>

                                        15
<PAGE>   17

     Our active telecommunications products include high power
semiconductor-based multimode pump lasers used in waveguide metro amplifiers and
as pumps for Raman lasers and cladding pumped erbium-doped fiber amplifiers, or
EDFAs. Waveguide metro amplifiers are low cost amplifiers for metropolitan
markets. Our pump laser modules are available at wavelengths of 915 nanometers
and 975 nanometers and produce over 1 Watt of power. We also supply Raman fiber
lasers that provide 1.5 Watts of output at wavelengths of 1480 nanometers or
1455 nanometers. These fiber lasers incorporate cladding pumped fiber laser
technology, which pumps a cascaded Raman laser for use in Raman amplification
and high power pumping of EDFAs. EDFAs are optical amplifiers that use pump
lasers and fiber doped, or infused, with erbium to amplify a light signal across
a long-distance fiber network. Raman amplifiers differ from conventional
amplifiers in that they use installed optical fiber as the amplification medium
rather than erbium-doped fiber. We also manufacture high power, greater than 5
watts, Raman Lasers which are used for Telcordia testing of passive components
used in DWDM systems.

                       ACTIVE TELECOMMUNICATIONS PRODUCTS

<TABLE>
<CAPTION>
         PRODUCTS                      FUNCTION                       BENEFIT                     STATUS
         --------                      --------                       -------                     ------
<S>                         <C>                               <C>                        <C>
Multimode pump............  - Waveguide metro amplifiers      - Low cost                 Shipping prototypes
                            - Pumps for Raman                 - High power
                              lasers and cladding
                              pumped EDFAs

Raman fiber lasers........  - Pump cascaded Raman lasers      - High power               Shipping prototypes
                              for use in Raman
                              amplification
                            - Pumping EDFAs

High power Raman lasers...  - Reliability testing for         - High power               Shipping commercial
                              passive components                                         volumes
</TABLE>

  Other Commercial Products

     Our semiconductor-based laser products, which include high power
semiconductor lasers and solid state lasers, are used in multiple applications.
Our semiconductor lasers are available in wavelengths from 800 nanometers to
1900 nanometers and up to 1600 Watts of power. These products are available in
various forms, including bare diodes on heat sinks, fiber coupled single
emitters, multi-emitter bars, two-dimensional emitter arrays, and fully
integrated modules. These semiconductor lasers are extremely efficient
converters of electrical power to heat and light. 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.

                              SEMICONDUCTOR LASERS

<TABLE>
<CAPTION>
         TYPE           WAVELENGTH      POWER       PULSE WIDTHS         MAJOR APPLICATIONS
         ----           ----------      -----       ------------         ------------------
<S>                     <C>          <C>           <C>               <C>
Air-cooled single
  emitter.............  800 nm to    Up to 2 W     Continuous wave   Direct-to-press printing,
                          975 nm                                       hair removal
Air-cooled bar........  800 nm to    5 W to 50 W   Continuous wave   Pumping, soldering, dental,
                          1900 nm                                      plastic welding
Water-cooled multi-
  bar module..........  800 nm to    40 W to       Continuous wave   Pumping, welding
                          975 nm       1600 W
</TABLE>

                                        16
<PAGE>   18

     We also provide continuous wave, ultrafast and pulsed 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,
wavelength, optical noise or energy storage. Our solid state lasers are
available in a variety of wavelengths, output power, modes, repetition rates and
pulse widths. We have 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.

                               SOLID STATE LASERS

<TABLE>
<CAPTION>
        TYPE           WAVELENGTH    POWER         PULSE WIDTHS           MAJOR APPLICATIONS
        ----           ----------    -----         ------------           ------------------
<S>                    <C>          <C>        <C>                    <C>
Diode Pumped
  Solid State (DPSS)
  Continuous Wave....  266 nm to    .1 W to    Continuous wave        Graphics, inspection, R&D
                       1064 nm        >10 W                             spectroscopy
DPSS Ultrafast.......  250 nm to    .01 W to   10 picoseconds to 30   R&D spectroscopy, PC board
                       3000 nm        50 W       femtoseconds           direct imaging, 2 photon
                                                                        microscopy
DPSS Pulsed..........  266 nm to    .1 W to    4 ns to 200 ns         Via hole drilling,
                       1064 nm        100 W                           resistor
                                                                        trimming, rapid
                                                                        prototyping
</TABLE>

---------------
nm = nanometer
ns = nanosecond
R&D = research and development
W = Watt

     We also sell ion lasers and high-energy, lamp pump lasers.

                              CONVENTIONAL LASERS

<TABLE>
<CAPTION>
         TYPE            WAVELENGTH       POWER        PULSE WIDTHS         MAJOR APPLICATIONS
         ----            ----------       -----        ------------         ------------------
<S>                      <C>            <C>            <C>               <C>
Ion....................  Less than 300  .01 W to       Continuous wave   Medical diagnostics, laser
                           nm to          >20 W                           light shows
                           799 nm
High Energy
  Pulsed YAG...........  1060 nm &      .01 J to 3 J   10 ns to 15 ns    R&D spectroscopy
                           tunable        per pulse
                           from UV
                           to IR
</TABLE>

---------------
IR = infrared
J = Joule
nm = nanometer
ns = nanosecond
R&D = research and development
UV = ultraviolet
W = Watt
YAG = yttrium aluminum garnet

SALES AND MARKETING

     Spectra-Physics Distribution is our business unit responsible for selling
and servicing products directly in the United States, Japan, Germany, France,
the United Kingdom, and the Netherlands, and through approximately 30
independent distributors throughout the remainder of the world. Spectra-Physics
Distribution is organized into two groups. One group is responsible for selling
products to our worldwide telecommunications customers, while the other group
sells products to our other commercial customers throughout the world.

                                        17
<PAGE>   19

     Our sales strategy involves establishing long-term relationships with our
customers. For telecommunications and other industrial customers, this
relationship starts at the early design-in of our products into customer
applications. We support our industrial customers with on-site field service,
technical service engineers, training programs and telephone support. Each of
our direct sales units maintains an inventory of critical components,
replacement systems and sub-systems to help minimize customer down-time.

     As of December 31, 2000, we had 180 people performing sales, service
engineering, customer support and sales administrative functions. These
employees are responsible for the complete order fulfillment cycle, from
quotation through order placement to delivery. Spectra-Physics Distribution is
also responsible for applying appropriate marketing and technical resources to
focus on a customer's requirements and ensuring the customer receives
high-quality support.

     Our marketing activities include:

     - analyzing and understanding future product requirements of our target
       markets and translating those requirements into product specifications
       and cost targets by working closely with our customers and key
       technologists in industry and academia;

     - providing applications engineering support as part of the sales process
       to telecommunications and other industrial customers; and

     - product promotions, which includes participating in trade shows and
       conferences and advertising through trade journals, new product
       announcements and direct mailings.

BACKLOG

     Our 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, 2000, our backlog was approximately $103.2 million, compared
with approximately $66.24 million at December 31, 1999. 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 our sales will often not reflect
orders shipped in the same quarter that they are booked, our backlog at any
particular date is not necessarily indicative of actual sales for any succeeding
period.

RESEARCH AND DEVELOPMENT

     Our research and development activities are divided into two principal
areas: products for the telecommunications market and high power
semiconductor-based lasers for the other commercial markets. We conduct advanced
research in selected fields where new technology is required to meet next
generation customer needs, and we perform product engineering that focuses on
designing and developing products for known, quantified high-growth markets with
clearly defined performance goals and cost targets. We often develop new
products at the customer's design-in stage in order to maximize the
functionality of the product for the customer. In addition, interchangeability
of parts is a goal that has been achieved on a number of product lines through
the use of common power supplies and laser head platforms. This design feature
decreases inventory costs and increases the serviceability of our products.

     Research and development activities for the telecommunications market are
performed for both passive and active products. In the passive optical component
area, principal research and development activities have been focused on 200 GHz
and 100 GHz filters, lithium niobate components used in isolators and etalons
and include:

     - Thin film coatings -- ultra wide band coatings, very low loss, precision
       wave front control, high damage threshold, environmentally stable dense
       films, state-of-the-art optical monitoring and high adhesion for coatings
       for fiber optics;

     - Fabrication and assembly -- superpolishing, low and no defect surfaces,
       wave front control, angular tolerance to arc seconds, high precision
       glass to glass assemblies, high coupling efficiency, custom

                                        18
<PAGE>   20

       linear arrays and fiber configurations, single mode and polarization
       maintaining laser beam delivery systems;

     - Components -- improved glass technology; and

     - Process development -- stress control and uniformity management.

     In the active optical component area, the principal focus of our research
and development efforts has been in three areas:

     - developing manufacturing processes for high volume, high reliability
       multimode pump diodes meeting Telcordia qualification standards;

     - Raman lasers; and

     - integrated modules for amplifiers.

     For other commercial markets, the principal focus of our research and
development efforts has been on high power continuous wave, ultrafast and pulsed
ultraviolet solid state lasers and on high power semiconductor lasers.

     For the years ended December 31, 2000, 1999, and 1998, we expended
approximately $22.6 million, $17.0 million, and $16.7 million, respectively, on
internally funded research and development. We expect to continue to spend
substantial amounts on research and development activities. Our ability to
successfully compete will be substantially dependent on our ability to design,
develop and introduce new products on a timely basis.

     As of December 31, 2000, we had 149 employees engaged in advanced research
and product development and engineering, of whom 102 are professional engineers
or have master's or doctorate degrees, including 32 PhDs. We maintain 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.

MANUFACTURING OPERATIONS

     We concentrate our manufacturing efforts on strategic activities and
outsource production of other components. We are vertically integrated in the
following manufacturing operations: semiconductor wafer fabrication,
semiconductor lasers, laser optics fabrication and coating and very fine
mechanical parts. We believe that the vertical integration of these
manufacturing operations is essential to the rapid development of new products
and to maintaining a high level of product quality. We focus substantial efforts
on maintaining and enhancing the efficiency and quality of our manufacturing
operations. We use just-in-time product flow line techniques to reduce
manufacturing cycle times and inventory levels and to enable us to offer on-time
delivery and high quality products to our customers.

     We have manufacturing operations in Mountain View and Oroville, California,
Tucson, Arizona and Stahnsdorf, Germany. Our principal manufacturing operations
are:

     - Semiconductor laser manufacturing. Our 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. We have two large-scale deposition units,
       both of which are capable of handling three inch wafers;

     - Laser optics fabrication and coating. We fabricate and coat many of the
       optics used in our telecommunications products, as well as in many of our
       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.
       We currently have ten ion beam sputtering machines, which are high volume
       deposition machines used for manufacturing thin film filters;

                                        19
<PAGE>   21

     - 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 our laser
       and optical systems; and

     - Assembly, integration and test. As part of the manufacturing process, we
       assemble, integrate and test our systems, including laser, optic and
       power supply systems.

INTELLECTUAL PROPERTY

     We have approximately 140 active U.S. patents and approximately 22
additional patent applications pending, which expire from 2001 to 2020. We also
have a royalty-free license to all of SDL's patents applied for or issued prior
to June 25, 1993. Substantially all of these patents and pending patent
applications apply to our products and processes for the other commercial
markets, while only a few of our patents and pending patent applications apply
to our telecommunications products and processes.

COMPETITION

     Our various markets are highly competitive. Our overall competitive
position depends on a number of factors including the price, quality and
performance of our products, the level of customer service, the development of
new technology and our ability to participate in emerging markets. In our
telecommunications markets, direct competitors include Aurora Networks, Barr
Associates, Corning, Harmonic, IPG Photonics, JDS Uniphase/SDL, Lucent, and MPB
Technologies. In our other commercial markets, direct competitors include
Coherent, Continuum, a division of Hoya, JDS Uniphase/SDL, Lightwave Electronics
and Siemens. None of our competitors competes in all of the product areas and
industries currently served by us. However, as existing or new markets continue
to grow, we expect that new competitors will emerge and current competitors will
seek to increase their market share.

     Some of our customers are companies with which we currently compete or in
the future may compete. In addition, some of our customers and competitors have
been or could be acquired by, or enter into strategic relations with, our
competitors. We anticipate that further consolidation will occur in our
industry, thereby possibly increasing competition in our target markets.

EMPLOYEES

     As of December 31, 2000, we had 1,065 full time employees, including 149 in
research, development and engineering, 200 in sales, service and marketing, 596
in operations and 120 in general management, administration and finance. We also
had approximately 206 temporary workers and consultants. Our employees are not
represented by any collective bargaining organization, and we have never
experienced a general work stoppage, slowdown or strike. We consider our
employee relations to be good.

ITEM 2. PROPERTIES

     We conduct our business from office and manufacturing facilities at six
locations in Mountain View, California, two facilities in Oroville, California,
one facility in Tucson, Arizona and one facility in Stahnsdorf, Germany. In the
aggregate, we occupy approximately 46,100 square feet of owned space and 129,500
square feet of leased space in Mountain View, 70,000 square feet of leased space
in Oroville, 83,000 square feet of owned space in Tucson and 8,700 square feet
of leased space in Stahnsdorf, Germany. In addition, we lease sales and service
offices in Tokyo and Osaka, Japan; Darmstadt, Germany; Z.A. de Courtaboeuf,
France; Eindhoven, the Netherlands; and Hemel Hempstead, Great Britain. We are
constructing a 60,000 square foot manufacturing facility in Oroville,
California, which will be dedicated to the manufacture of our passive
telecommunications components. Our lease agreements have expiration dates
ranging from 2001 to 2008.

ITEM 3. LEGAL PROCEEDINGS

     Our facilities and operations are subject to various environmental laws and
employee safety laws. Further, compliance with environmental laws also may
require the acquisition of permits or other authorizations for

                                        20
<PAGE>   22

certain activities and compliance with various standards or procedural
requirements. Although we believe that our operations are in compliance in all
material respects with current requirements under environmental laws and
employee safety laws, the nature of our operations exposes us to the risk of
liabilities or claims with respect to such matters.

     Some environmental laws hold owners or operators of land or businesses
liable for their own and for previous owners' or operators' releases of certain
hazardous substances. These laws also provide for responses to and liability for
releases of certain hazardous substances into the environment. The nature of our
operations and the long history of industrial uses at some of our current or
former facilities expose us to risk of liabilities or claims under these laws.
In 1988, we were named on the General Notification List of the Environmental
Protection Agency stating that we may be a potentially responsible party under
the laws for hazardous substances which may have been generated by our former
operations at a former site. Since that time, we have not been named in the
Environmental Protection Agency's first or second tier lists, and have not been
pursued as a potentially responsible party by the Environmental Protection
Agency or any of the other potentially responsible parties. In 1991, we were
named by the California Regional Water Quality Control Board as a discharger of
solvents to soil and groundwater from our Mountain View facility.

     Since 1984, our facilities in Mountain View 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 Superfund List under federal environmental laws. We are subject to orders
that require us to perform remediation on-site and off-site and investigate
other potentially responsible parties. Pursuant to these orders and other orders
issued to other responsible parties, we and other responsible parties are
jointly performing and funding 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 these systems have been incurred.

     Based on our experience to date, we believe 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 our 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 our 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 us that may be material.

     On June 19, 2000, Rockwell Technologies LLC filed a complaint against both
Spectra-Physics and our Opto Power subsidiary in the United States District
Court for the District of Delaware. The complaint alleges that both we and Opto
Power have infringed U.S. Patent No. 4,368,098 entitled "Epitaxial Composite and
Method of Making." Rockwell avers that Opto Power has infringed the patent by
performing the patented process and by using wafers manufactured by the patented
process and that we have infringed the patent by using and/or selling products
made by the patented process. Rockwell seeks damages, including increased
damages due to defendants' alleged willful infringement, plus costs and attorney
fees. Rockwell has not sought injunctive relief as the patent has already
expired. On January 9, 2001, the Court entered a Scheduling Order setting the
trial date for February 5, 2002. We believe that Rockwell's allegations are
without merit and we intend to vigorously defend this action.

     The resolution of this dispute is uncertain, in part because the issues
underlying the case depend upon discovery of many facts, some of which concern
inventions and related circumstances dating back many years, and in part because
our analysis of the case is ongoing. We cannot assure that Rockwell will not
ultimately prevail in this dispute. If Rockwell were to prevail, it is possible
that Rockwell could recover substantial monetary damages, based on past sales of
our products for a number of years. Our efforts to defend Rockwell's claim
against us may involve significant expense to us and could divert the attention
of our technical and

                                        21
<PAGE>   23

management personnel. An adverse outcome in this case could materially harm our
business or results of operations.

     We are subject to various claims which arise in the normal course of
business. We believe the ultimate resolution of these claims will not have a
material adverse effect on our financial position or results of operations.

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

     None.

                                        22
<PAGE>   24

                                    PART II

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

     Spectra-Physics Lasers, Inc.'s Common Stock trades on the NASDAQ National
Market System under the symbol SPLI. The following table sets forth for the
periods indicated the high and low closing sale prices per share for the
Company's Common Stock as reported on the Nasdaq National Market System.

<TABLE>
<CAPTION>
                                                             HIGH       LOW
                                                            -------    ------
<S>                                                         <C>        <C>
Fiscal 2000:
  First quarter...........................................  $ 94.88    $31.38
  Second quarter..........................................    72.88     36.00
  Third quarter...........................................   100.00     46.69
  Fourth quarter..........................................    57.00     19.81
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
</TABLE>

     The number of stockholders of record as of February 28, 2001, was 26. No
cash dividends have been declared or paid and the Company has no present
intention to declare or pay cash dividends.

                                        23
<PAGE>   25

ITEM 6. SELECTED FINANCIAL DATA

<TABLE>
<CAPTION>
                                                            YEARS ENDED DECEMBER 31,
                                              ----------------------------------------------------
                                                2000       1999       1998       1997       1996
                                              --------   --------   --------   --------   --------
                                                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S>                                           <C>        <C>        <C>        <C>        <C>
STATEMENTS OF OPERATIONS DATA:
Net sales...................................  $186,190   $141,310   $169,016   $159,174   $135,434
Cost of products sold.......................   117,610     90,922    103,724     98,772     88,320
Cost of products sold -- inventory
  write-offs................................        --      3,700         --         --         --
                                              --------   --------   --------   --------   --------
          Total cost of products sold.......   117,610     94,622    103,724     98,772     88,320
                                              --------   --------   --------   --------   --------
     Gross margin...........................    68,580     46,688     65,292     60,402     47,114
Operating expenses:
  Research and development..................    22,629     17,044     16,728     14,365     12,005
  Selling, general and administrative.......    39,120     34,255     34,903     32,539     28,966
  Other.....................................     1,385      2,540         --     15,757      6,915
                                              --------   --------   --------   --------   --------
          Total operating expenses..........    63,134     53,839     51,631     62,661     47,886
                                              --------   --------   --------   --------   --------
     Operating income (loss)................     5,446     (7,151)    13,661     (2,259)      (772)
Other income (expense):
  Interest income (expense).................       515        857      1,335     (4,005)    (5,374)
  Foreign currency gain.....................       559         89         --      2,067      2,532
  Legal settlement..........................        --         --         --     17,010         --
                                              --------   --------   --------   --------   --------
          Total other income (expense)......     1,074        946      1,335     15,072     (2,842)
                                              --------   --------   --------   --------   --------
     Income (loss) before income taxes and
       cumulative effect of change in
       accounting method....................     6,520     (6,205)    14,996     12,813     (3,614)
Income tax expense (benefit)................     3,051     (2,357)     5,349    (21,048)       634
                                              --------   --------   --------   --------   --------
     Income (loss) before cumulative effect
       of change in accounting method.......     3,469     (3,848)     9,647     33,861     (4,248)
Cumulative effect of change in accounting
  method (net of taxes of $1,778)...........    (2,022)        --         --         --         --
                                              --------   --------   --------   --------   --------
     Net income (loss)......................  $  1,447   $ (3,848)  $  9,647   $ 33,861   $ (4,248)
                                              ========   ========   ========   ========   ========
Per share:
  Income (loss) before cumulative effect of
     change in accounting method:
     Basic..................................  $   0.21   $  (0.24)  $   0.60   $   2.57   $  (0.33)
     Diluted................................  $   0.20   $  (0.24)  $   0.59   $   2.57   $  (0.33)
  Cumulative effect of change in accounting
     method (net of taxes):
     Basic..................................  $  (0.12)  $     --   $     --   $     --   $     --
     Diluted................................  $  (0.12)  $     --   $     --   $     --   $     --
  Net income (loss) per share:
     Basic..................................  $   0.09   $  (0.24)  $   0.60   $   2.57   $  (0.33)
     Diluted................................  $   0.08   $  (0.24)  $   0.59   $   2.57   $  (0.33)
Shares used in computing net income (loss)
  per share:
     Basic..................................    16,576     16,169     16,168     13,162     13,000
     Diluted................................    17,416     16,169     16,473     13,191     13,000
</TABLE>

                                        24
<PAGE>   26

<TABLE>
<CAPTION>
                                                               AS OF DECEMBER 31,
                                              ----------------------------------------------------
                                                2000       1999       1998       1997       1996
                                              --------   --------   --------   --------   --------
                                                                 (IN THOUSANDS)
<S>                                           <C>        <C>        <C>        <C>        <C>
BALANCE SHEET DATA:
Working capital.............................  $ 55,032   $ 57,947   $ 72,277   $ 68,941   $ 27,531
Total assets................................   190,831    152,277    157,028    140,524     86,848
Long term liabilities.......................     8,214      1,093      1,983      1,677     71,584
Stockholders' equity (deficit)..............   112,816    105,462    110,068     96,324    (21,223)
</TABLE>

---------------
Our operating results for the years ended December 31, 2000, 1999, 1998, 1997
and 1996 include the following:

     - compensation expenses included in other operating expenses of $5,000,000
       associated with certain stock options in the year ended December 31,
       1996;

     - legal expenses included in other operating expenses of $1,915,000 in the
       year ended December 31, 1996 associated with a lawsuit which was settled
       in the second quarter of fiscal 1997;

     - net proceeds associated with the settlement of a lawsuit of $17,010,000
       in the year ended December 31, 1997;

     - legal expenses included in other operating expenses of $1,657,000
       associated with a lawsuit which was settled in the second quarter of
       fiscal 1997 and compensation expense included in other operating expenses
       of $14,100,000 associated with certain stock options in the year ended
       December 31, 1997;

     - restructuring expenses included in other operating expenses of $2,540,000
       in the year ended December 31, 1999;

     - inventory write-offs of $3,700,000 related to our discontinued hard drive
       disk texturing products and to our semiconductor lasers due to
       technological changes in the year ended December 31, 1999;

     - purchased in-process research and development expenses included in other
       operating expenses of $1,500,000 in the year ended December 31, 2000
       arising from the acquisition of Laser Analytical Systems GmbH, or LAS;
       and

     - reversal of unused restructuring reserves included in other operating
       expenses of $115,000 in the year ended December 31, 2000.

See Note 1 of the Notes to the 2000 Consolidated Financial Statements for an
explanation of shares used in computing net income (loss) per share, which are
incorporated by reference herein. See also Note 1 of the Notes to the 2000
Consolidated Financial Statements for a discussion of a change in accounting
method related to certain revenue transactions which was adopted in 2000.

                                        25
<PAGE>   27

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

OVERVIEW

     We design, develop, manufacture and distribute semiconductor-based lasers
and laser optics for a variety of end-markets. Our nearly forty years of laser
and optic experience has enabled us to offer passive and active optical
component products to the telecommunications industry. We began shipping optical
components for the telecommunications industry in 1999 and have been shipping
lasers for commercial applications since the early 1960s. Thermo Electron
Corporation, a company whose common stock is traded on the New York Stock
Exchange, indirectly owned approximately 78.1% of our outstanding common stock
at December 31, 2000. Prior to its acquisition by Thermo Electron Corporation in
February 1999, Spectra-Physics AB, a Swedish company, beneficially owned
approximately 80% of our outstanding common stock.

     We derive our revenue primarily from the sale of high power
semiconductor-based and conventional lasers. High power semiconductor-based
lasers are sold primarily into the telecommunications, computer and
microelectronics manufacturing, industrial manufacturing, medical, image
recording and research and development markets. Conventional lasers are
primarily sold into the medical and research and development markets.

     Over the last several years, a growing proportion of our total net sales
and most of our sales growth have been from high power semiconductor-based
lasers used primarily in commercial applications. We have also begun to sell
passive and active optical components to telecommunications customers. We have
developed our passive telecommunications products based on our experience and
capabilities in optical fabrication and thin film coating. Although these
products currently represent a small percentage of our total revenues, we are
focusing our efforts on increasing revenues to telecommunications customers.

     We recognize revenue when persuasive evidence of an arrangement exists,
delivery has occurred, the sales price is fixed or determinable and
collectibility is probable. Generally, these criteria are met at the time
product is shipped. Provision is made at the time the related revenue is
recognized for estimated product returns. We provide for the estimated cost of
product warranties upon shipment. We warrant our products for 12 to 24 months
depending on the product line. When other significant obligations remain after
products are delivered, revenue is recognized only after such obligations are
fulfilled. Revenue earned from services is recognized ratably over the
contractual period or as the services are performed. Shipping and handling costs
are included in cost of goods sold.

     Effective January 1, 2000, we adopted Staff Accounting Bulletin No. 101,
"Revenue Recognition in Financial Statements", as amended ("SAB 101"), issued by
the Securities and Exchange Commission in December 1999. Our adoption of SAB 101
resulted in a change in method of accounting for revenue related to certain
product shipments. The cumulative effect of this accounting change was $2.0
million (net of taxes). The accounting change did not have a material effect on
revenue and quarterly earnings during 2000. We restated our results for the
first three quarters of the year ended December 31, 2000, as reflected in
footnote 10 of the Notes to the 2000 Consolidated Financial Statements. Due to
the nature of SAB No. 101, it is not practicable to determine pro-forma results
for prior years.

     Our sales have shown a pattern in the last several years whereby the fiscal
fourth quarter net sales represent a large share of our annual net sales and
whereby our first quarter net sales decline significantly compared to the fourth
quarter of the prior fiscal year. We believe these sales patterns result in part
because of seasonal sales patterns related to customers' fiscal years and in
part from our incentive compensation plan, which compensates employees based on
annual results. We anticipate that this pattern is likely to continue.

     Our gross margin is affected by a number of factors, including product mix,
product pricing, cost of materials, the proportion of third party products
incorporated into our systems, foreign currency exchange rates and manufacturing
costs. For example, since high power semiconductor-based lasers generally have
higher gross margins than conventional lasers, absent other factors, a shift in
sales toward high power semiconductor-based lasers would lead to a gross margin
improvement for us. On the other hand, if market conditions in the highly
competitive conventional laser market forced us to lower unit prices, we would
suffer a decline in gross margin unless we were able to timely offset the price
reduction by a reduction in production

                                        26
<PAGE>   28

costs or by sales of other products with higher gross margins. Either of these
events could have a material effect on our business, operating results and
financial condition.

     We spend a significant amount of resources on research and development. In
1999 and 2000, we focused much of these resources on high power
semiconductor-based lasers and optics for the telecommunications market. We
expect to continue to spend substantial resources in developing high power
semiconductor-based lasers and optical components for the telecommunications
market while making focused research and development expenditures to maintain
our leadership position in our other markets.

     A significant proportion of our sales are to international customers and
are denominated in currencies other than the U.S. dollar. We also have sales and
support operations located in certain European countries and in Japan which
operate in local currencies. As a result, while we attempt to hedge our economic
risk of foreign currency fluctuations, we are 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 our results of operations.

     In 2000, we realigned our business units to support growth in
telecommunications and other strategic markets. Our new structure includes four
operating groups, the Passive Telecommunications Group, the Active
Telecommunications Group, the Laser Group, and Spectra-Physics Distribution. We
previously had five reportable segments: the Passive Components business unit;
the Industrial and Scientific Lasers business unit; the Original Equipment
Manufacturer business unit; Opto Power Corporation; and Spectra-Physics
Distribution business unit. Reference is made to the footnotes of our
consolidated financial statements incorporated by reference herein 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,
                                                              --------------------------
                                                               2000      1999      1998
                                                              ------    ------    ------
<S>                                                           <C>       <C>       <C>
Net sales...................................................  100.0%    100.0%    100.0%
Gross margin................................................   36.8      33.0      38.6
Operating expenses:
  Research and development..................................   12.2      12.1       9.9
  Selling, general and administrative.......................   21.0      24.2      20.7
  Other.....................................................    0.7       1.8        --
                                                              -----     -----     -----
          Total operating expenses..........................   33.9      38.1      30.5
                                                              -----     -----     -----
          Operating income (loss)...........................    2.9      (5.1)      8.1
Other income:
  Interest income...........................................    0.3       0.6       0.8
  Foreign currency gain.....................................    0.3       0.1        --
                                                              -----     -----     -----
          Total other income................................    0.6       0.7       0.8
                                                              -----     -----     -----
          Income (loss) before income taxes and cumulative
            effect of change in accounting method...........    3.5      (4.4)      8.9
Income tax expense (benefit)................................    1.6      (1.7)      3.2
                                                              -----     -----     -----
Income (loss) before cumulative effect of change in
  accounting method.........................................    1.9%     (2.7)%     5.7%
                                                              =====     =====     =====
</TABLE>

YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998

  Net sales

     Net sales were $186.2 million in 2000, $141.3 million in 1999, and $169.0
million in 1998, representing an increase of 31.8% from 1999 to 2000 and a
decrease of 16.4% from 1998 to 1999. Net sales for 2000, calculated

                                        27
<PAGE>   29

using foreign currency exchange rates for 1999, and for 1999, calculated using
foreign currency exchange rates for 1998, increased 33.6% from 1999 to 2000 and
decreased 18.2% from 1998 to 1999.

     Net sales in the following end user markets were:

<TABLE>
<CAPTION>
                                                         YEARS ENDED DECEMBER 31,
                                                     --------------------------------
                                                       2000        1999        1998
                                                     --------    --------    --------
                                                              (IN THOUSANDS)
<S>                                                  <C>         <C>         <C>
Telecommunications.................................  $  7,684    $    896    $     --
Computer and microelectronics manufacturing........    34,542      19,258      23,654
Industrial manufacturing...........................    25,504      18,038      27,462
Medical............................................    28,834      22,180      24,676
Image recording....................................    10,855       5,826      14,397
Research and development...........................    72,485      70,293      73,702
Other..............................................     6,286       4,819       5,125
                                                     --------    --------    --------
                                                     $186,190    $141,310    $169,016
                                                     ========    ========    ========
</TABLE>

     Sales of telecommunications, semiconductor-based lasers and conventional
products were 4.1%, 63.4% and 32.5% of total net sales in 2000, compared to
0.6%, 59.9% and 39.5% in 1999 and 0.0%, 60.1% and 39.9% in 1998.

     Net sales in the following geographic markets were:

<TABLE>
<CAPTION>
                                                         YEARS ENDED DECEMBER 31,
                                                     --------------------------------
                                                       2000        1999        1998
                                                     --------    --------    --------
                                                              (IN THOUSANDS)
<S>                                                  <C>         <C>         <C>
North America......................................  $ 93,804    $ 63,360    $ 91,545
Japan..............................................    41,032      35,731      32,834
Europe.............................................    35,967      32,812      33,707
Other Asia.........................................     6,975       5,143       6,508
Rest of the World..................................     8,412       4,264       4,422
                                                     --------    --------    --------
                                                     $186,190    $141,310    $169,016
                                                     ========    ========    ========
</TABLE>

     Net sales are attributed in the above table based on the location of our
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 our 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 percentage increase/(decrease)
were as follows:

<TABLE>
<CAPTION>
                                                             1999 TO    1998 TO
                                                              2000       1999
                                                             -------    -------
<S>                                                          <C>        <C>
North America..............................................   46.8%      (30.8)%
Japan......................................................   19.8%        8.8%
Europe.....................................................    6.8%       (2.7)%
Other Asia.................................................   35.6%      (21.0)%
Rest of World..............................................   97.3%       (3.6)%
Worldwide..................................................   31.8%      (16.4)%
</TABLE>

                                        28
<PAGE>   30

     Net sales at constant currency exchange rates percentage
increase/(decrease) were as follows:

<TABLE>
<CAPTION>
                                                             1999 TO    1998 TO
                                                              2000       1999
                                                             -------    -------
<S>                                                          <C>        <C>
North America..............................................   46.8%      (30.8)%
Japan......................................................   14.4%       (5.7)%
Europe.....................................................   20.4%        1.1%
Other Asia.................................................   35.6%      (21.0)%
Rest of World..............................................   97.3%       (3.6)%
Worldwide..................................................   33.6%      (18.2)%
</TABLE>

  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 our 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 us,
and manufacturing costs.

     Gross margin was $68.6 million in 2000, $46.7 million in 1999, and $65.3
million in 1998, representing an increase of 46.9% from 1999 to 2000, and a
decrease of 28.5% from 1998 to 1999. As a percentage of net sales, gross margin
was 36.8%, 33.0%, and 38.6% in 2000, 1999, and 1998, respectively. Included in
cost of sales in 1999 was $3.7 million of inventory write-offs. A portion of
these inventory write-offs related to our hard drive disk texturing system
products. We exited our disk texturing system business in 1999. We also recorded
inventory write-offs as a result of technology changes for high power
semiconductor-based lasers. Without the $3.7 million inventory write-offs, gross
margin for 1999 was 35.7% of sales and decreased 22.8% from 1998. The principal
reason for the increase in gross margin in 2000 compared to 1999, in both dollar
terms and as a percentage of net sales, was the increase in sales. This
favorable impact on gross margins in 2000 was offset to a large extent by the
effect of excess capacity as we ramp up our production of telecommunication
products. The principal reason for the decrease in gross margin in 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.

     We anticipate that our gross margins for telecommunications products will
continue for the foreseeable future to reflect the impact of excess capacity as
we ramp up our production of telecommunications products.

  Operating expenses

     Operating expenses totaled $63.1 million in 2000, $53.8 million in 1999,
and $51.6 million in 1998, representing an increase of 17.3% from 1999 to 2000
and 4.3% from 1998 to 1999. As a percentage of net sales, operating expenses
were 33.9%, 38.1%, and 30.5% in 2000, 1999, and 1998, respectively. Included in
operating expenses in 2000 were purchased in-process research and development
expenses of $1.5 million resulting from the acquisition of Laser Analytical
Systems GmbH ("LAS") and the reversal of excess restructuring reserves of $0.1
million and in 1999, restructuring expense of $2.5 million. Excluding such
purchased in-process research and development and restructuring expenses,
operating expenses increased 20.4% from 1999 to 2000 and decreased 0.6% from
1998 to 1999 and were 33.2% and 36.3% of net sales, in 2000 and 1999,
respectively.

     Research and development expenses represent expenses associated with our
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 $22.6 million in 2000, $17.0
million in 1999 and $16.7 million in 1998, representing an increase of 32.9%
from 1999 to 2000 and 1.9% from 1998 to 1999. As a percentage of net sales,
research and development expenses were 12.2%, 12.1% and 9.9% in 2000, 1999 and

                                        29
<PAGE>   31

1998, respectively. The increase in research and development expenses in 2000
was focused on products for the telecommunications market. We expect that our
spending for research and development will continue at a significant level for
the foreseeable future.

     Selling, general and administrative expenses include the expenses of our
sales and support subsidiaries in Europe, Japan and North America, and other
marketing and administrative expenses.

     Selling, general and administrative expenses totaled $39.1 million in 2000,
$34.3 million in 1999, and $34.9 million in 1998, representing an increase of
14.0% from 1999 to 2000 and a decrease of 1.9% from 1998 to 1999. As a
percentage of net sales, selling, general and administrative expenses were
21.0%, 24.2%, and 20.7% in 2000, 1999, and 1998, respectively. The principal
reasons for the increase in selling, general and administrative expenses in
dollar terms in 2000 compared to 1999 were increased expenses associated with
penetrating the industrial/OEM markets.

  Purchased In-Process Research and Development

     In September 2000, we acquired LAS, a German based developer and
manufacturer of solid state ultraviolet lasers for the telecommunications,
computer and microelectronics manufacturing and research markets. This
acquisition has been accounted for as a purchase; accordingly, the accompanying
financial statements include Laser Analytical Systems GmbH's results of
operations since the date of acquisition. Pro forma results of operations have
not been presented because the effects of this acquisition are not material. The
amount allocated to purchased in-process research and development was determined
through established valuation techniques in the industry and was expensed upon
acquisition because technological feasibility had not been established and no
future alternative uses existed. Amounts allocated to goodwill and other
intangibles will be amortized over five years.

     The total purchase price was $3.9 million, consisting of cash paid of $0.9
million and debt assumed of $3.0 million, and was allocated among the acquired
assets as follows:

<TABLE>
<CAPTION>
                                                    (DOLLARS IN THOUSANDS)
<S>                                                 <C>
Net working capital deficit, including acquisition
  costs of $200...................................          $ (119)
Property, plant and equipment.....................             325
Purchased in-process research and development.....           1,500
Intangible assets:
  Goodwill........................................           1,031
  Existing technology.............................           1,000
  Workforce.......................................             130
                                                            ------
          Total purchase price....................          $3,867
                                                            ======
</TABLE>

     The purchase price allocation and intangible assets valuation were based on
management's estimates of the after-tax net cash flows and gave explicit
consideration to the Securities and Exchange Commission's views on purchased
in-process research and development as set forth in its September 9, 1998 letter
to the American Institute of Certified Public Accountants. Specifically, the
valuation gave consideration to the following: (i) the employment of a fair
market value premise excluding any considerations specific to us which could
result in estimates of investment value for the subject assets; (ii)
comprehensive due diligence concerning all potential intangible assets including
trademarks/tradenames, patents, copyrights, non-compete agreements, assembled
workforce, customer relationships and sales channel; (iii) the value of existing
technology was specifically addressed, with a view toward ensuring the relative
allocations to existing technology and in-process research and development were
consistent with the relative contributions of each to the final product; and
(iv) the allocation to in-process research and development was based on a
calculation that considered only the efforts completed as of the transaction
date, and only the cash flow associated with said completed efforts for one
generation of the products currently in process. As indicated above, we recorded
a one-time charge of $1.5 million for purchased in-process research and
development related to several development projects. The cost to complete these
projects is estimated to be $1.0 million to $2.0 million. The

                                        30
<PAGE>   32

charge related to the portion of these products, excluding existing technology,
that had not reached technological feasibility, had no alternative future use
and for which successful development was uncertain. Management's conclusion that
the in-process development effort had no alternative future use was reached in
consultation with the engineering personnel from both us and Laser Analytical
Systems GmbH. We will begin to benefit from the acquired research and
development of these products once they begin shipping. Failure to reach
successful completion of these projects could result in impairment of the
associated capitalized intangible assets and could require us to accelerate the
time period over which the intangibles are being amortized. Significant
assumptions used to determine the value of in-process research and development
included several factors, including the following: (i) forecast of net cash
flows that were expected to result from the development effort using projections
prepared by management; and (ii) percentage complete for the projects estimated
by considering a number of factors, including the costs invested to date
relative to total cost of the development effort and the amount of progress
completed as of the acquisition date, on a technological basis, relative to the
overall technological achievements required to achieve the functionality of the
eventual product. The technological issues were addressed by engineering
representatives from both companies, and when estimating the value of the
technology, the projected financial results of the acquired assets were
estimated on a stand-alone basis without any consideration to potential
synergistic benefits or "investment value" related to the acquisition.
Accordingly, separate projected cash flows were prepared for both the existing
as well as the in-process projects. These projected results were based on the
number of units sold times average selling price less the associated costs.
After preparing the estimated cash flows from the products being developed, a
portion of these cash flows were attributed to the existing technology, which
was embodied in the in-process product lines and enabled a quicker and more
cost-effective development of these products. When estimating the value of the
existing and in-process technologies, discount rates of 22% were used. The
discount rates considered both the stat us and risks associated with the
respective cash flows at the acquisition date.

  Interest income (expense)

     Net interest income totaled $0.5 million in 2000, $0.9 million in 1999 and
$1.3 million in 1998. Interest income was earned on our invested cash and cash
equivalents and we incurred interest expense under our credit facilities.

  Foreign currency gain (loss)

     Effective October 1, 1998, we 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 us.

     At December 31, 2000, we had contracts for the sale of foreign currencies
and the purchase of U.S. dollars totaling $53.0 million. At December 31, 2000,
we had deferred gains relating to our foreign currency contracts of
approximately $1.2 million, which is all expected to be recognized in income
over the next twelve months.

  Income tax expense (benefit)

     Prior to February 2000, we filed consolidated tax returns with certain
members of Thermo Electron Corporation's consolidated tax group. Income tax
expense was provided in the financial statements as if we were a separate
taxable entity. Effective February 2000, we are no longer a member of such
consolidated tax group for federal income tax purposes. As a result of our no
longer filing consolidated tax returns with the Thermo Electron Corporation
consolidated group, in the third quarter of 2000 we received approximately

                                        31
<PAGE>   33

$5.5 million from Thermo Electron Corporation in settlement of the use by Thermo
Electron Corporation in its consolidated tax return of certain of our net
operating loss carryforwards. These net operating loss carryforwards are no
longer available to us to reduce future taxable income.

     We recorded income tax expense of $3.1 million and $5.3 million in the
years ended December 31, 2000 and 1998, respectively. We recorded income tax
benefit of $2.4 million in the year ended December 31, 1999.

     For the year ended December 31, 2000, our effective tax rate of 46.8%
represented our statutory rate adjusted for certain tax reserves no longer
needed and for non-deductible in-process research and development expenses
associated with the acquisition of LAS.

LIQUIDITY AND CAPITAL RESOURCES

     At December 31, 2000, we had working capital of $55.0 million, including
cash and cash equivalents of $22.6 million, compared to working capital at
December 31, 1999 of $57.9 million, including cash and cash equivalents of $23.3
million.

     Cash provided by operating activities was $8.2 million, $1.1 million, and
$8.8 million in the years ended December 31, 2000, 1999, and 1998, respectively.
Substantially all the net cash provided by operating activities in 2000
represented the net income for the year ($1.4 million) adjusted for the non-cash
impact of depreciation, amortization, purchased in-process research and
development, and deferred income taxes ($14.3 million) offset by the use of cash
for operating assets and liabilities ($7.5 million). 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
write-offs ($8.6 million) offset by the use of cash for operating assets and
liabilities ($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).

     Cash used in investing activities, mostly purchases of property, plant and
equipment, was $26.1 million, $13.7 million and $15.7 million in the years ended
December 31, 2000, 1999, and 1998, respectively.

     Cash provided by financing activities was $18.1 million, $2.0 million and
$7.7 million in the years ended December 31, 2000, 1999 and 1998, respectively.
During the year ended December 31, 2000, financing activities were net
borrowings under credit facilities of $13.4 million and exercises of employee
stock options of $4.7 million. 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 our initial public offering of $3.2 million and
increases in net borrowings under our credit facilities of $4.4 million.

     The effect of foreign currency exchange rate changes on cash was a $0.9
million loss, $0.7 million loss and $0.4 million gain in the years ended
December 31, 2000, 1999 and 1998, respectively.

     These activities resulted in decreases in cash and cash equivalents of $0.6
million and $11.3 million in the years ended December 31, 2000 and December 31,
1999, respectively, and an increase in cash and cash equivalents of $1.1 million
in the year ended December 31, 1998.

     We have a short-term credit facility in Japan. The credit facility is with
several banks, is unsecured, allows aggregate borrowings of 2.8 billion Yen
($24.3 million), bears interest at 1.75% per annum and expires at various times
through December 2001. At December 31, 2000, there were approximately $14.1
million of borrowings outstanding under this facility. Our foreign subsidiaries
other than in Japan have credit facilities aggregating $4.7 million, of which
$0.7 million was outstanding as of December 31, 2000. From time to time, the
amount available under credit facilities will be reduced by the amount of
performance bonds outstanding guaranteed by the applicable bank to our
customers, foreign currency contracts outstanding with the applicable bank and
similar arrangements.

                                        32
<PAGE>   34

     At December 31, 2000, we had outstanding a two year, $15.0 million term
loan with a bank. The term loan is repayable in eight equal quarterly
installments through December 2002. The loan bears interest at LIBOR (6.2% at
December 31, 2000) plus 1.75%.

     In March 2001, we entered into a credit agreement with Thermo Electron
Corporation. The agreement provides for a one year, $20.0 million revolving
credit facility. The facility bears interest at 2.75% above the prevailing LIBOR
rate.

     We have reviewed our short- and long-term liquidity needs. Our liquidity
needs for at least the next twelve months will be met by cash flows from
operations, existing cash balances and borrowings available under our credit
facilities.

QUALITATIVE AND QUANTITATIVE DISCLOSURE ABOUT MARKET RISK

     The fair value of our 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 our portfolio.

     We regularly hedge our 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, 2000. Our
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, 2000, a 10% unfavorable
movement in foreign exchange rates would not expose us to significant losses in
earnings or cash flows or significantly diminish the fair value of our foreign
currency financial instruments, primarily due to the short lives of the affected
financial instruments that effectively hedge substantially all of our 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. Our 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)".

EUROPEAN MONETARY UNION (EMU)

     The euro is the new currency introduced by certain European countries
collectively known as the European Monetary Union, or EMU. The euro was
introduced on January 1, 1999 and the eleven participating EMU members
established fixed conversion rates between their existing currencies, or legacy
currencies, and the euro. The legacy currencies have no value of their own but
are 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.

     The introduction of the euro could have an adverse impact on our
information systems, our markets and the economies in which we operate.

     With regard to information systems, the euro had no material impact on our
information systems through December 31, 2000. Furthermore, our review indicates
that our information systems can operate when the legacy currencies are
withdrawn in 2002. As that date gets closer, we expect to conduct another survey
concerning the euro's impact on our information systems.

     With regard to our markets, we have reviewed our customer list and current
selling practices and expect no material adverse impact from the introduction of
the euro.

     We are currently unable to determine the ultimate long term financial
impact of the exclusive use of the euro on our markets and on the economies of
the countries in which we operate. This impact will be dependent upon the
evolving competitive situations and macro-economic impact of the introduction of
the euro.

                                        33
<PAGE>   35

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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

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

     Not applicable.

                                        34
<PAGE>   36

                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

     Information regarding our 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 2001 (the "2001 Proxy Statement"), and is incorporated herein by
reference. The 2001 Proxy Statement will be filed with the Securities and
Exchange Commission within 120 days after the end of our fiscal year end.

ITEM 11. EXECUTIVE COMPENSATION

     Information concerning compensation of our 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 our 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 our 2001 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 our 2001 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:

          Reports of Independent Public Accountants

          Consolidated Balance Sheets -- December 31, 2000 and 1999

          Consolidated Statements of Operations -- Years ended December 31,
     2000, 1999, and 1998

          Consolidated Statements of Cash Flows -- Years Ended December 31,
     2000, 1999, and 1998

          Consolidated Statements of Stockholders' Equity -- Years Ended
     December 31, 2000, 1999, and 1998

          Notes to Consolidated Financial Statements

         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, 2000.

                                        35
<PAGE>   37

     (c) EXHIBITS

<TABLE>
<CAPTION>
    EXHIBIT
    NUMBER                        EXHIBIT DESCRIPTION
    -------                       -------------------
    <C>       <S>
     2.1      Plan of Reorganization of Spectra-Physics (Incorporated by
              reference to exhibit 2.1 of Spectra-Physics' Registration
              Statement on Form S-1 (No. 333-38329))
     3.1      Certificate of Incorporation of Spectra-Physics, as amended
              (Incorporated by reference to exhibit 3.1 of
              Spectra-Physics' Registration Statement on Form S-1 (No.
              333-38329))
     3.2      Bylaws of Spectra-Physics (Incorporated by reference to
              exhibit 3.2 of Spectra-Physics' 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
              Spectra-Physics' Registration Statement on Form S-1 (No.
              333-38329))
    10.1      Agreement by and between Spectra-Physics USA and
              Spectra-Physics, dated as of August 29, 1997 (Incorporated
              by reference to exhibit 10.1 of Spectra-Physics'
              Registration Statement on Form S-1 (No. 333-38329))
    10.2      Registration Rights Agreement between Spectra-Physics USA
              and Spectra-Physics (Incorporated by reference to exhibit
              10.2 of Amendment No. 2 of Spectra-Physics' Registration
              Statement on Form S-1 (No. 333-38329))
    10.3      Form of Executive Employment Agreement with certain officers
              of Spectra-Physics (Incorporated by reference to exhibit
              10.3 of Amendment No. 2 of Spectra-Physics' 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 Spectra-Physics'
              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 Spectra-Physics' Registration Statement on Form S-1
              (No. 333-38329))
    10.6      2000 Spectra-Physics Lasers, Inc. Stock Incentive Plan
              (Incorporated by reference to exhibit 10.1 of Form 10-Q (No.
              000-23461))
    10.7      Patent License Agreement dated as of October 4, 1997 by and
              between Spectra-Physics, as licensor, and Spectra Precision,
              Inc., as licensee (Incorporated by reference to exhibit 10.7
              of Amendment No. 1 of Spectra-Physics' Registration
              Statement on Form S-1 (No. 333-38329))
    10.8      Patent License Agreement dated as of October 4, 1997 by and
              between Spectra Precision, Inc., as licensor, and
              Spectra-Physics, as licensee (Incorporated by reference to
              exhibit 10.8 of Amendment No. 1 of Spectra-Physics'
              Registration Statement on Form S-1 (No. 333-38329))
    10.9      Tradename and Trademark License Agreement dated as of August
              29, 1997 by and between Spectra-Physics, Spectra-Physics AB
              and certain Spectra-Physics AB subsidiaries (Incorporated by
              reference to exhibit 10.9 of Amendment No. 1 of
              Spectra-Physics' Registration Statement on Form S-1 (No.
              333-38329))
    10.10     Employment Agreement dated January 1, 1998, between
              Spectra-Physics and Patrick L. Edsell (Incorporated by
              reference to exhibit 10.10 of Spectra-Physics' Form 10-K for
              the year ended December 31, 1998)
    21.1      List of Subsidiaries (Incorporated by reference to exhibit
              21.1 of Spectra-Physics' Registration Statement on Form S-1
              (No. 333-38329))
    23.1      Consent of PricewaterhouseCoopers LLP
    23.2      Report of PricewaterhouseCoopers LLP (included on page 62)
    23.3      Consent of Arthur Andersen LLP
    23.4      Report of Arthur Andersen LLP (included on page 61)
    24.1      Powers of Attorney (included on signature page)
</TABLE>

                                        36
<PAGE>   38

                                   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 1, 2001.

                                          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 S. 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
                   ----                                       -----                         ----
<C>                                         <C>                                         <S>

          /s/ PATRICK L. EDSELL                   (Director, Chairman, President        March 1, 2001
------------------------------------------         and Chief Executive Officer)
            Patrick L. Edsell

            /s/ SETH S. HALIO                      (Vice President -- Finance)          March 1, 2001
------------------------------------------           (Principal Financial and
              Seth S. Halio                            Accounting Officer)

          /s/ MARIJN E. DEKKERS                             (Director)                  March 1, 2001
------------------------------------------
            Marijn E. Dekkers

         /s/ LAWRENCE C. KARLSON                            (Director)                  March 1, 2001
------------------------------------------
           Lawrence C. Karlson

            /s/ EARL R. LEWIS                               (Director)                  March 1, 2001
------------------------------------------
              Earl R. Lewis

            /s/ DENIS A. HELM                               (Director)                  March 1, 2001
------------------------------------------
              Denis A. Helm

        /s/ POLYVIOS C. VINTIADIS                           (Director)                  March 1, 2001
------------------------------------------
          Polyvios C. Vintiadis
</TABLE>

                                        37
<PAGE>   39

                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

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

     We have audited the accompanying consolidated balance sheets of
Spectra-Physics Lasers, Inc. (a Delaware Corporation) and Subsidiaries as of
December 31, 2000 and 1999, and the related consolidated statements of
operations, cash flows and stockholders' equity for the years then ended. 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 Subsidiaries as of December 31, 2000 and 1999,
and the results of their operations and their cash flows for the years then
ended in conformity with accounting principles generally accepted in the United
States.

     As explained in Note 1 to the consolidated financial statements, effective
January 1, 2000 the Company changed its method of accounting for revenue
recognition on certain product shipments through the adoption of Staff
Accounting Bulletin No. 101 "Revenue Recognition in Financial Statements".

/s/ ARTHUR ANDERSEN LLP

San Jose, California
January 19, 2001

                                        38
<PAGE>   40

                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

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

     We have audited the accompanying consolidated statements of operations, of
cash flows and of stockholders' equity for the year ended December 31, 1998 of
Spectra-Physics Lasers, Inc. and its subsidiaries. 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 auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.

     In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the results of operations and cash
flows of Spectra-Physics Lasers, Inc. and its subsidiaries for the year ended
December 31, 1998, in conformity with accounting principles generally accepted
in the United States of America. We have not audited the consolidated financial
statements of Spectra-Physics Lasers, Inc. and its subsidiaries for any period
subsequent to December 31, 1998.

/s/ PRICEWATERHOUSECOOPERS LLP

San Jose, California
January 22, 1999

                                        39
<PAGE>   41

                          SPECTRA-PHYSICS LASERS, INC.

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

                                     ASSETS

<TABLE>
<CAPTION>
                                                                  DECEMBER 31,
                                                              --------------------
                                                                2000        1999
                                                              --------    --------
<S>                                                           <C>         <C>
Current assets:
  Cash and cash equivalents.................................  $ 22,639    $ 23,278
  Accounts receivable, including $0 and $68, respectively,
     due from affiliated companies, less allowance for
     doubtful accounts of $842 and $1,253, respectively.....    42,725      38,246
  Inventories...............................................    47,498      26,582
  Deferred tax assets.......................................     5,046       9,657
  Prepaid expenses and other current assets.................     6,925       5,906
                                                              --------    --------
          Total current assets..............................   124,833     103,669
Property, plant and equipment, net..........................    57,746      42,015
Goodwill and other intangible assets, net of accumulated
  amortization of $2,989 and $2,487, respectively...........     4,140       1,794
Other assets................................................     4,112       4,799
                                                              --------    --------
          Total assets......................................  $190,831    $152,277
                                                              ========    ========

                       LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Accounts payable..........................................  $ 17,561    $ 10,015
  Borrowings under credit facilities........................    22,311      13,655
  Accrued and other current liabilities, including $1,294
     and $170, respectively due to affiliated companies.....    29,929      22,052
                                                              --------    --------
          Total current liabilities.........................    69,801      45,722
Long term debt..............................................     7,500          --
Other long term liabilities.................................       714       1,093
Commitments and contingencies
Stockholders' equity:
  Common stock, par value $0.01:
     Authorized -- 60,000,000 shares
     Outstanding -- 16,642,000 in 2000 and 16,176,543 in
      1999..................................................       167         162
  Additional paid-in capital................................   102,976      98,320
  Retained earnings.........................................    10,875       9,428
  Accumulated other comprehensive loss......................    (1,202)     (2,448)
                                                              --------    --------
          Total stockholders' equity........................   112,816     105,462
                                                              --------    --------
          Total liabilities and stockholders' equity........  $190,831    $152,277
                                                              ========    ========
</TABLE>

                See Notes to Consolidated Financial Statements.

                                        40
<PAGE>   42

                          SPECTRA-PHYSICS LASERS, INC.

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

<TABLE>
<CAPTION>
                                                                 YEARS ENDED DECEMBER 31,
                                                             --------------------------------
                                                               2000        1999        1998
                                                             --------    --------    --------
<S>                                                          <C>         <C>         <C>
Net sales..................................................  $186,190    $141,310    $169,016
Cost of products sold......................................   117,610      90,922     103,724
Cost of products sold -- inventory write-offs..............        --       3,700          --
                                                             --------    --------    --------
          Total cost of products sold......................   117,610      94,622     103,724
                                                             --------    --------    --------
     Gross margin..........................................    68,580      46,688      65,292
Operating expenses:
  Research and development.................................    22,629      17,044      16,728
  Selling, general and administrative......................    39,120      34,255      34,903
  Purchased in-process research and development............     1,500          --          --
  Restructuring............................................      (115)      2,540          --
                                                             --------    --------    --------
          Total operating expenses.........................    63,134      53,839      51,631
                                                             --------    --------    --------
     Operating income (loss)...............................     5,446      (7,151)     13,661
Other income:
  Interest income..........................................       515         857       1,335
  Foreign currency gain....................................       559          89          --
                                                             --------    --------    --------
          Total other income...............................      1074         946       1,335
                                                             --------    --------    --------
     Income (loss) before income taxes and cumulative
       effect of change in accounting method...............     6,520      (6,205)     14,996
Income tax expense (benefit)...............................     3,051      (2,357)      5,349
                                                             --------    --------    --------
     Income (loss) before cumulative effect of change in
       accounting method...................................     3,469      (3,848)      9,647
Cumulative effect of change in accounting method (net of
  taxes of $1,778).........................................    (2,022)         --          --
                                                             --------    --------    --------
     Net income (loss).....................................  $  1,447    $ (3,848)   $  9,647
                                                             ========    ========    ========
Per share:
  Income (loss) before cumulative effect of change in
     accounting method:
       Basic...............................................  $   0.21    $  (0.24)   $   0.60
       Diluted.............................................  $   0.20    $  (0.24)   $   0.59
  Cumulative effect on prior years of change in accounting
     method (net of taxes):
       Basic...............................................  $  (0.12)   $     --    $     --
       Diluted.............................................  $  (0.12)   $     --    $     --
  Net income (loss) per share:
       Basic...............................................  $   0.09    $  (0.24)   $   0.60
       Diluted.............................................  $   0.08    $  (0.24)   $   0.59
Shares used in computing net income (loss) per share:
       Basic...............................................    16,576      16,169      16,168
       Diluted.............................................    17,416      16,169      16,473
</TABLE>

                See Notes to Consolidated Financial Statements.

                                        41
<PAGE>   43

                          SPECTRA-PHYSICS LASERS, INC.

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                 YEARS ENDED DECEMBER 31,
                                                             --------------------------------
                                                               2000        1999        1998
                                                             --------    --------    --------
<S>                                                          <C>         <C>         <C>
OPERATING ACTIVITIES
Net income (loss)..........................................  $  1,447    $ (3,848)   $  9,647
Adjustments to reconcile net income (loss) to cash provided
  by (used in) operating activities:
  Depreciation and amortization............................     8,186       6,562       5,821
  Purchased in process research and development............     1,500          --          --
  Deferred income taxes....................................     4,611      (2,357)        600
  Non-cash portion of restructuring charge.................        --         655          --
  Inventory write-offs.....................................        --       3,700          --
  Changes in operating assets and liabilities, net of
     acquisition:
     Accounts receivable, including non-current portion....    (2,272)      5,078      (6,313)
     Inventories...........................................   (20,618)     (4,716)        291
     Prepaid expenses and other current assets.............      (995)     (1,962)        465
     Accounts payable......................................     7,287         753      (1,191)
     Accrued and other liabilities.........................     9,095      (2,775)       (484)
                                                             --------    --------    --------
          Total cash provided by operating activities......     8,241       1,090       8,836
                                                             --------    --------    --------
INVESTING ACTIVITIES
Purchases of property, plant and equipment.................   (23,075)    (13,719)    (15,159)
Payment for intangible asset...............................      (600)         --          --
Acquisition of LAS.........................................      (900)         --          --
Other......................................................    (1,487)         22        (583)
                                                             --------    --------    --------
          Total cash used in investing activities..........   (26,062)    (13,697)    (15,742)
                                                             --------    --------    --------
FINANCING ACTIVITIES
Net borrowings under credit facilities.....................    13,431       1,899       4,435
Exercise of common stock options...........................     4,661          85          --
Net proceeds from initial public offering of common
  stock....................................................        --          --       3,248
                                                             --------    --------    --------
          Total cash provided by financing activities......    18,092       1,984       7,683
                                                             --------    --------    --------
Effect of changes in foreign currency exchange rates.......      (910)       (719)        356
                                                             --------    --------    --------
       Increase (decrease) in cash and cash equivalents....      (639)    (11,342)      1,133
Cash and cash equivalents at beginning of year.............    23,278      34,620      33,487
                                                             --------    --------    --------
Cash and cash equivalents at end of year...................  $ 22,639    $ 23,278    $ 34,620
                                                             ========    ========    ========
Non-cash financing activities:
  Reversal of accrual for options of a subsidiary which
     lapsed................................................              $  1,000
                                                                         ========
  Debt assumed on acquisition of LAS.......................  $  2,967
                                                             ========
</TABLE>

                See Notes to Consolidated Financial Statements.

                                        42
<PAGE>   44

                          SPECTRA-PHYSICS LASERS, INC.

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

<TABLE>
<CAPTION>
                                                                                          ACCUMULATED
                                                                                             OTHER
                                              COMMON STOCK       ADDITIONAL              COMPREHENSIVE
                                           -------------------    PAID-IN     RETAINED      INCOME
                                             SHARES     AMOUNT    CAPITAL     EARNINGS      (LOSS)        TOTAL
                                           ----------   ------   ----------   --------   -------------   --------
<S>                                        <C>          <C>      <C>          <C>        <C>             <C>
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
                                           ----------    ----     --------    -------       -------      --------
  Exercise of common stock options.......     465,457       5        4,656         --            --         4,661
  Other comprehensive income:
    Foreign currency translation.........          --      --           --         --          (921)         (921)
    Realized gains on forward
      contracts..........................          --      --           --         --         1,729         1,729
    Unrealized gains on forward
      contracts..........................          --      --           --         --           438           438
    Net income...........................          --      --           --      1,447            --         1,447
                                           ----------    ----     --------    -------       -------      --------
         Total comprehensive income......          --      --           --      1,447         1,246         2,693
                                           ----------    ----     --------    -------       -------      --------
BALANCE -- DECEMBER 31, 2000.............  16,642,000    $167     $102,976    $10,875       $(1,202)     $112,816
                                           ==========    ====     ========    =======       =======      ========
</TABLE>

                See Notes to Consolidated Financial Statements.

                                        43
<PAGE>   45

                          SPECTRA-PHYSICS LASERS, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

     Thermo Electron Corporation, a company whose common stock is traded on the
New York Stock Exchange, indirectly owned approximately 78.1% of the Company's
outstanding common stock at December 31, 2000.

  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 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. Cost of inventories includes all manufacturing
materials and labor and a proportionate share of manufacturing overhead.

  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.

  Intangible Assets:

     Intangible assets, principally goodwill and other intangibles related to
the acquisition of LAS and patent rights, are stated at cost and amortized on a
straight-line basis over their estimated useful lives of generally 5 to 17
years.

  Foreign Currency Translation:

     The local currency of the Company's subsidiaries located in Europe 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.

                                        44
<PAGE>   46
                          SPECTRA-PHYSICS LASERS, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

     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:

     The Company recognizes revenue when persuasive evidence of an arrangement
exists, delivery has occurred, the sales price is fixed or determinable and
collectibility is probable. Generally, these criteria are met at the time
product is shipped. Provision is made at the time the related revenue is
recognized for estimated product returns. The Company provides for the estimated
cost of product warranties upon shipment. The Company in general warrants its
products for 12 to 24 months depending on the product line. When other
significant obligations remain after products are delivered, revenue is
recognized only after such obligations are fulfilled. Revenue earned from
services is recognized ratably over the contractual period or as the services
are performed. Shipping and handling costs are included in cost of goods sold.

     Effective January 1, 2000, the Company adopted Staff Accounting Bulletin
No. 101, "Revenue Recognition in Financial Statements", as amended ("SAB 101"),
issued by the Securities and Exchange Commission in December 1999. The Company's
adoption of SAB 101 resulted in a change in method of accounting for revenue
related to certain product shipments. The cumulative effect of this accounting
change was $2.0 million (net of taxes). The accounting change did not have a
material effect on revenue and quarterly earnings during 2000. The Company has
restated its results for the first three quarters of the year ended December 31,
2000, as reflected in footnote 10. Due to the nature of SAB No. 101, it is not
practicable to determine pro-forma results for prior years.

  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
ongoing 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

                                        45
<PAGE>   47
                          SPECTRA-PHYSICS LASERS, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

of these sources could have a material adverse effect on the Company's business,
operating results and financial condition.

  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 $1.9 million, $1.5 million, and $1.8 million in the years ended
December 31, 2000, 1999, and 1998, 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.

  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, 2000, 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 sheets 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

                                        46
<PAGE>   48
                          SPECTRA-PHYSICS LASERS, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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.

     The following table provides information about the Company's foreign
currency derivative financial instruments outstanding as of December 31, 2000.
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.........................................  $32,727       103.2717
British Pound Sterling...............................    4,104         0.6815
Euro Dollar..........................................   16,150         1.0978
                                                       -------
                                                       $52,981
                                                       =======
Estimated fair value.................................  $ 1,241*
                                                       =======
</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.

     Prior 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

                                        47
<PAGE>   49
                          SPECTRA-PHYSICS LASERS, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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.

  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 2000, 1999, and
1998 weighted average shares were 16,576,000, 16,169,000, and 16,168,000,
respectively, and in 2000 and 1998 the shares used in the diluted calculation
included 840,000 and 305,000 incremental shares, respectively, due to grants of
options to purchase shares of common stock. 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.

  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.

                                        48
<PAGE>   50
                          SPECTRA-PHYSICS LASERS, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

 2. 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,
                                                          -------------------
                                                            2000       1999
                                                          --------    -------
<S>                                                       <C>         <C>
Inventories:
  Raw material..........................................  $ 19,519    $15,277
  Work in process.......................................     9,533      3,482
  Finished goods (including $5,600 at customer locations
     at December 31, 2000)..............................    18,446      7,823
                                                          --------    -------
                                                          $ 47,498    $26,582
                                                          ========    =======
Property, plant and equipment:
  Land, buildings and leasehold improvements............  $ 31,072    $30,534
  Machinery and office equipment........................    84,903     62,975
                                                          --------    -------
                                                           115,975     93,509
  Less accumulated depreciation and amortization........    58,229     51,494
                                                          --------    -------
                                                          $ 57,746    $42,015
                                                          ========    =======
Accrued and other current liabilities:
  Salaries, wages, benefits, bonus and commissions......  $ 12,932    $ 6,933
  Warranty..............................................     2,047      2,348
  Deferred revenue......................................     4,792      5,697
  Other.................................................    10,158      7,074
                                                          --------    -------
                                                          $ 29,929    $22,052
                                                          ========    =======
</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 2.8 billion
Yen ($24.3 million), bears interest at 1.75% per annum and expires at various
times through December 2001. At December 31, 2000, there were approximately
$14.1 million of borrowings outstanding under this facility. The Company's
foreign subsidiaries other than Japan have credit facilities aggregating $4.7
million, of which $0.7 million was outstanding as of December 31, 2000. From
time to time, the amount available under credit facilities will be reduced by
the amount of performance bonds outstanding guaranteed by the applicable bank to
our customers, foreign currency contracts outstanding with the applicable bank
and similar arrangements.

     At December 31, 2000, the Company had outstanding a two year, $15.0 million
term loan with a bank. The term loan is repayable in eight equal quarterly
installments through December 2002. The loan bears interest at LIBOR (6.2% at
December 31, 2000) plus 1.75%.

     In March 2001, the Company entered a credit agreement with Thermo Electron
Corporation. The agreement provides for a one year, $20.0 million revolving
credit facility. The facility bears interest at 2.75% above the prevailing LIBOR
rate.

 3. ACQUISITION OF LAS

     In September 2000, the Company acquired Laser Analytical Systems GmbH
("LAS"), a German based developer and manufacturer of solid state ultraviolet
lasers for the telecommunications, computer and microelectronics manufacturing
and research markets. This acquisition has been accounted for as a purchase;

                                        49
<PAGE>   51
                          SPECTRA-PHYSICS LASERS, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

and accordingly, the accompanying financial statements include Laser Analytical
Systems GmbH's results of operations since the date of acquisition. Pro forma
results of operations have not been presented because the effects of this
acquisition are not material. The amount allocated to purchased in-process
research and development was determined through established valuation techniques
in the industry and was expensed upon acquisition because technological
feasibility had not been established and no future alternative uses existed.
Amounts allocated to goodwill and other intangibles will be amortized over five
years.

     The total purchase price was $3.9 million, consisting of cash paid of $0.9
million and debt assumed of $3.0 million and was allocated among the acquired
assets as follows (in thousands):

<TABLE>
<S>                                                           <C>
Net working capital deficit, including acquisition costs of
  $200......................................................  $ (119)
Property, plant and equipment...............................     325
Purchased in-process research and development...............   1,500
Intangible assets:
  Goodwill..................................................   1,031
  Existing technology.......................................   1,000
  Workforce.................................................     130
                                                              ------
          Total purchase price..............................  $3,867
                                                              ======
</TABLE>

     The purchase price allocation and intangible assets valuation were based on
management's estimates of the after-tax net cash flows and gave explicit
consideration to the Securities and Exchange Commission's views on purchased
in-process research and development as set forth in its September 9, 1998 letter
to the American Institute of Certified Public Accountants. Specifically, the
valuation gave consideration to the following: (i) the employment of a fair
market value premise excluding any considerations specific to us which could
result in estimates of investment value for the subject assets; (ii)
comprehensive due diligence concerning all potential intangible assets including
trademarks/tradenames, patents, copyrights, non-compete agreements, assembled
workforce, customer relationships and sales channel; (iii) the value of existing
technology was specifically addressed, with a view toward ensuring the relative
allocations to existing technology and in-process research and development were
consistent with the relative contributions of each to the final product; and
(iv) the allocation to in-process research and development was based on a
calculation that considered only the efforts completed as of the transaction
date, and only the cash flow associated with said completed efforts for one
generation of the products currently in process. As indicated above, the Company
recorded a one-time charge of $1.5 million for purchased in-process research and
development related to several development projects. The cost to complete these
projects is estimated to be $1.0 million to $2.0 million. The charge related to
the portion of these products, excluding existing technology, that had not
reached technological feasibility, had no alternative future use and for which
successful development was uncertain. Management's conclusion that the
in-process development effort had no alternative future use was reached in
consultation with the engineering personnel from both us and Laser Analytical
Systems GmbH. The Company will begin to benefit from the acquired research and
development of these products once they begin shipping. Failure to reach
successful completion of these projects could result in impairment of the
associated capitalized intangible assets and could require us to accelerate the
time period over which the intangibles are being amortized. Significant
assumptions used to determine the value of in-process research and development
included several factors, including the following: (i) forecast of net cash
flows that the Company expected to result from the development effort using
projections prepared by management; and (ii) percentage complete for the
projects estimated by considering a number of factors, including the costs
invested to date relative to total cost of the development effort and the amount
of progress completed as of the acquisition date, on a technological basis,
relative to the overall technological achievements required to achieve the
functionality of the eventual product. The technological issues were addressed
by engineering representatives from both companies, and when estimating the
value of the technology, the projected financial results of the acquired assets
were estimated on a stand-alone basis without any consideration to potential

                                        50
<PAGE>   52
                          SPECTRA-PHYSICS LASERS, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

synergistic benefits or "investment value" related to the acquisition.
Accordingly, separate projected cash flows were prepared for both the existing
as well as the in-process projects. These projected results were based on the
number of units sold times average selling price less the associated costs.
After preparing the estimated cash flows from the products being developed, a
portion of these cash flows were attributed to the existing technology, which
was embodied in the in-process product lines and enabled a quicker and more
cost-effective development of these products. When estimating the value of the
existing and in-process technologies, discount rates of 22% were used. The
discount rates considered both the status and risks associated with the
respective cash flows at the acquisition date.

 4. STOCKHOLDERS' EQUITY

  Preferred Stock:

     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 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:

     The Company has adopted the 1997 Spectra-Physics Lasers, Inc. Stock Option
Plan ("the 1997 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 Company has adopted the 2000 Spectra-Physics Lasers, Inc. Stock
Incentive Plan (the "2000 Plan") which provides for the granting of awards to
certain officers, employees and non-employee directors of the Company. Awards of
incentive stock options, non-qualified options, stock appreciation rights and
restricted stock are available under the 2000 Plan. The aggregate maximum number
of shares of common stock available for award under the 2000 Plan is 2,500,000
shares, subject to adjustment to reflect changes in the Company's
capitalization. No awards can be made under the 2000 Plan more than 10 years
after the date the plan was adopted. In the case of awards of stock options, the
exercise price of the options will be determined by a committee of 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. During 2000,
1,447,900 non-qualified options to purchase common stock were granted under the
2000 Plan. These options vest 25% upon the first anniversary of the grant date
and monthly thereafter. No other awards were made under the 2000 Plan.

                                        51
<PAGE>   53
                          SPECTRA-PHYSICS LASERS, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

     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, 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
Shares reserved 2000 Stock Option Plan............   2,500,000
Granted...........................................  (1,752,900)   1,752,900     $53.20
Exercised.........................................          --     (465,457)    $10.01
Cancelled.........................................     261,987     (261,987)    $27.54
                                                    ----------    ---------     ------
Balance -- December 31, 2000......................   1,193,188    3,142,576     $32.58
                                                    ==========    =========     ======
</TABLE>

     Exercise prices of outstanding options at December 31, 2000 were:

<TABLE>
<S>                                                         <C>
$ 8.00 - $10.00...........................................  1,437,041
$10.88 - $11.88...........................................     27,000
$14.50 - $17.25...........................................     32,375
$25.25 - $49.00...........................................    757,660
$53.13 - $70.13...........................................    888,500
                                                            ---------
                                                            3,142,576
                                                            =========
</TABLE>

     The number of options exercisable at weighted average exercise prices at
December 31, 2000, 1999 and 1998 were as follows:

<TABLE>
<CAPTION>
                                                           2000        1999      1998
                                                         --------    --------    ----
<S>                                                      <C>         <C>         <C>
Number of options......................................   936,204     916,684    --
Weighted average exercise price........................  $   9.97    $  10.05    --
</TABLE>

     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 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>
                                                           2000       1999       1998
                                                          -------    -------    -------
<S>                                                       <C>        <C>        <C>
Risk-free interest rate.................................      6.0%       5.0%       4.6%
Dividend yield..........................................      0.0%       0.0%       0.0%
Volatility..............................................    134.5%     107.2%      93.0%
Average life............................................  4 years    4 years    4 years
Fair value of option grants.............................  $ 51.88    $  8.39    $  5.74
</TABLE>

                                        52
<PAGE>   54
                          SPECTRA-PHYSICS LASERS, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

     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 $(3.9) million, $(5.3) million, and $8.9 million in 2000, 1999, and 1998,
respectively, and net income (loss) per share basic and diluted of $(0.23) in
2000, $(0.33) in 1999, and $0.55 and $0.54, respectively, in 1998.

     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 related to these options to additional paid in
capital.

 5. 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 $0.8 million in the years ended
December 31, 2000, 1999, and 1998, 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 $1.1 million, $0.0 million, $0.1 million in the years ended
December 31, 2000, 1999, and 1998, respectively, under these plans.

     In May 2000, the board of directors approved the 2000 Employee Stock
Purchase Plan (the "Purchase Plan"), of which 500,000 shares of common stock are
reserved for issuance to eligible employees. The Purchase Plan permits employees
to purchase common stock through payroll deductions, which may not exceed 15
percent of an employee's compensation, at 85% of the lower of the fair market
value of the Company's common stock on the first or the last day of each
offering period. As of December 31, 2000, no shares were issued and 500,000
shares were reserved for future issuance under the Purchase Plan.

 6. INCOME TAXES

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

<TABLE>
<CAPTION>
                                                           YEARS ENDED DECEMBER 31,
                                                         ----------------------------
                                                          2000      1999       1998
                                                         ------    -------    -------
<S>                                                      <C>       <C>        <C>
U.S....................................................  $4,998    $(7,024)   $12,410
Foreign................................................   1,522        819      2,586
                                                         ------    -------    -------
                                                         $6,520    $(6,205)   $14,996
                                                         ======    =======    =======
</TABLE>

                                        53
<PAGE>   55
                          SPECTRA-PHYSICS LASERS, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

     Income tax expense (benefit) for the years ended December 31, 2000, 1999,
and 1998 consisted of the following (in thousands):

<TABLE>
<CAPTION>
                                                           YEARS ENDED DECEMBER 31,
                                                         ----------------------------
                                                          2000       1999       1998
                                                         -------    -------    ------
<S>                                                      <C>        <C>        <C>
U.S. Federal and state:
  Current..............................................  $(2,145)   $  (208)   $3,994
  Deferred.............................................    4,611     (2,357)      572
                                                         -------    -------    ------
                                                           2,466     (2,565)    4,566
                                                         -------    -------    ------
Foreign:
  Current..............................................      585        208       755
  Deferred.............................................       --         --        28
                                                         -------    -------    ------
                                                             585        208       783
                                                         -------    -------    ------
          Total........................................  $ 3,051    $(2,357)   $5,349
                                                         =======    =======    ======
</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,
                                                          ---------------------------
                                                           2000      1999       1998
                                                          ------    -------    ------
<S>                                                       <C>       <C>        <C>
Income tax expense (benefit) at U.S. statutory rate.....  $2,282    $(2,110)   $5,099
Non-deductible purchased in-process research and
  development charge....................................     525         --        --
Foreign taxes...........................................      52        (71)      189
State taxes, net of Federal benefit.....................     381       (255)      451
Other...................................................    (189)        79      (390)
                                                          ------    -------    ------
Income tax expense (benefit)............................  $3,051    $(2,357)   $5,349
                                                          ======    =======    ======
</TABLE>

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

<TABLE>
<CAPTION>
                                                           AS OF DECEMBER 31,
                                                           ------------------
                                                            2000       1999
                                                           -------    -------
<S>                                                        <C>        <C>
Deferred tax assets:
  Inventory valuation....................................  $ 2,400    $ 2,480
  Accrued expenses.......................................    3,535      2,380
  Other..................................................      927        502
  Net operating loss carryforwards.......................       --      5,510
                                                           -------    -------
          Total deferred tax assets......................    6,862     10,872
Deferred tax liabilities:
  Property, plant and equipment..........................   (1,416)      (805)
  Other..................................................     (100)      (110)
                                                           -------    -------
          Total deferred tax liabilities.................   (1,516)      (915)
                                                           -------    -------
Net deferred tax assets..................................  $ 5,346    $ 9,957
                                                           =======    =======
</TABLE>

     Prior to February 2000, the Company filed consolidated tax returns with
certain members of Thermo Electron Corporation's consolidated tax group. Income
tax expense was provided in the financial statements as if the Company was a
separate taxable entity. Effective February 2000, the Company is no longer a
member of such consolidated tax group for federal income tax purposes. As a
result of no longer filing consolidated tax returns with the Thermo Electron
Corporation consolidated group, in the third quarter of 2000 the Company

                                        54
<PAGE>   56
                          SPECTRA-PHYSICS LASERS, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

received approximately $5.5 million from Thermo Electron Corporation in
settlement of the use by Thermo Electron Corporation in its consolidated tax
return of certain net operating loss carryforwards of which $4.6 million was
credited against deferred tax assets. As a result, these net operating loss
carryforwards are no longer available to the Company to reduce future taxable
income.

 7. COMMITMENTS

     The Company leases manufacturing, research and development and office
facilities under non-cancellable operating leases which expire in 2001 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>
       2001................................................  $ 5,120
       2002................................................    5,133
       2003................................................    4,576
       2004................................................    4,230
       2005................................................    1,956
       Thereafter..........................................      213
                                                             -------
                                                             $21,228
                                                             =======
</TABLE>

     Rent expense was $4.4 million, $3.6 million and $3.2 million in the years
ended December 31, 2000, 1999, and 1998, respectively.

 8. 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. 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.

     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, 2000 the remediation process will be completed at
a cost ranging from approximately $1.2 million to $4.1 million. It is possible
that the Company's recorded estimate of its obligation may change. At December
31, 2000, and 1999, the Company had accrued its best estimate of the liability
of approximately $1.2 million (of which $1.1 million was included in long term
liabilities) and $1.4 million (of which $1.2 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,
2000, 1999, and

                                        55
<PAGE>   57
                          SPECTRA-PHYSICS LASERS, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

1998, the Company paid approximately $0.2 million, $0.6 million, and $0.1
million, respectively, for remediation of this site.

 9. 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

     In 2000, the Company realigned its business units to support growth in
telecommunications and other strategic markets. The Company's new structure
includes four operating groups, the Passive Telecommunications Group, the Active
Telecommunications Group, the Laser Group, and Spectra-Physics Distribution
(SPD). Prior to 2000, the Company had five reportable segments: the Passive
Components (PC) business unit; the Industrial and Scientific Lasers (ISL)
business unit; the Original Equipment Manufacturer (OEM) business unit; Opto
Power Corporation (OPC); and SPD. It was not practical to restate 1999 and 1998
to conform to the 2000 presentation as the Company did not report its operations
internally in this manner.

     The Passive Telecommunications Group (PTG) which consists primarily of the
Passive Components business unit produces passive components for sale to
telecommunications customers and for use by the Laser Group in the Company's
laser products. The Laser Group (LG) which consists of ISL, OEM and LAS
primarily produces high power solid state and conventional lasers for sale in
all of the Company's principal markets. The Active Telecommunications Group
(ATG) which consists principally of OPC primarily produces semiconductor lasers
for sale to telecommunication, medical, industrial manufacturing and image
recording customers and for use by the Laser Group in the Company's solid state
laser products.

  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.

     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 identified by Group. The reportable
segments are each managed separately because they manufacture and distribute
distinct products with different production methods.

                                        56
<PAGE>   58
                          SPECTRA-PHYSICS LASERS, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

     Information about segments (in thousands):

<TABLE>
<CAPTION>
                                                                                    ALL
                                          ATG       PTG        LG        SPD      OTHERS     TOTAL
                                        -------   -------   --------   --------   -------   --------
<S>                                     <C>       <C>       <C>        <C>        <C>       <C>
Year ended December 31, 2000
  Net sales to external customers.....  $ 3,123   $    15   $    975   $181,069   $ 1,008   $186,190
  Intersegment net sales..............   32,418    20,599    135,025         --        --    188,042
  Depreciation and amortization
     expense..........................    2,995     1,435      2,502        281       973      8,186
  Segment EBIT........................      198    (3,403)    26,294     (8,873)   (1,157)    13,059
  Segment assets......................   44,284    26,529     58,882     88,381        --    218,076
  Expenditures for long-lived
     assets...........................    7,419    10,418      4,345        186       707     23,075
</TABLE>

<TABLE>
<CAPTION>
                                                                                      ALL
                                   PC        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
</TABLE>

                                        57
<PAGE>   59
                          SPECTRA-PHYSICS LASERS, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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

<TABLE>
<CAPTION>
                                                    2000         1999         1998
                                                  ---------    ---------    ---------
<S>                                               <C>          <C>          <C>
NET SALES
Total external sales for reportable segments....  $ 185,182    $ 139,542    $ 163,979
Intersegment sales for reportable segments......    188,042      146,894      142,094
Other sales.....................................      1,008        1,768        5,037
Elimination of intersegment sales...............   (188,042)    (146,894)    (142,094)
                                                  ---------    ---------    ---------
          Total consolidated net sales..........  $ 186,190    $ 141,310    $ 169,016
                                                  =========    =========    =========
INCOME (LOSS) BEFORE INCOME TAXES AND CUMULATIVE
  EFFECT OF CHANGE IN ACCOUNTING METHOD
Total EBIT for reportable segments..............  $  14,216    $   6,889    $  20,363
Other EBIT......................................     (1,157)      (1,869)        (925)
Corporate expenses..............................     (6,110)      (4,954)      (5,003)
Other operating expenses:
  Purchased in-process research and development
     expenses...................................     (1,500)          --           --
  Restructuring expenses........................        115       (2,540)          --
  Inventory charges.............................         --       (3,700)          --
  Other items not allocated to segments.........       (118)        (977)        (774)
Interest income.................................        515          857        1,335
Foreign currency gain...........................        559           89           --
                                                  ---------    ---------    ---------
          Total consolidated income (loss)
            before income taxes and cumulative
            effect of change in accounting
            method..............................  $   6,520    $  (6,205)   $  14,996
                                                  =========    =========    =========
ASSETS
Total assets for reportable segments............  $ 218,076    $ 162,759    $ 130,948
Other assets....................................         --           --        2,520
Corporate assets................................     93,502       80,067       71,917
Eliminations....................................   (120,747)     (90,549)     (48,357)
                                                  ---------    ---------    ---------
          Total consolidated assets.............  $ 190,831    $ 152,277    $ 157,028
                                                  =========    =========    =========
</TABLE>

                                        58
<PAGE>   60
                          SPECTRA-PHYSICS LASERS, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

<TABLE>
<CAPTION>
                                                                NET       LONG-LIVED
                                                               SALES        ASSETS
                                                              --------    ----------
<S>                                                           <C>         <C>
GEOGRAPHIC INFORMATION:
2000
  North America.............................................  $ 93,804     $63,694
  Japan.....................................................    41,032       1,360
  Europe....................................................    35,967         944
  Other Asia................................................     6,975          --
  Rest of the World.........................................     8,412          --
                                                              --------     -------
          Total.............................................  $186,190     $65,998
                                                              ========     =======
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
                                                              ========     =======
</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.

                                        59
<PAGE>   61
                          SPECTRA-PHYSICS LASERS, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

10. 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>
2000 AS RESTATED:
  Net sales...................................  $39,368     $43,849      $45,844         $57,129
  Gross margin................................   16,135      16,972       14,644          20,829
  Income (loss) before cumulative effect of
     change in accounting method..............    1,632       1,409       (1,630)          2,058
  Cumulative effect of change in accounting
     method (net of taxes)....................   (2,022)         --           --              --
  Net income (loss)...........................     (390)      1,409       (1,630)          2,058
Per share:
  Income (loss) before cumulative effect of
     change in accounting method:
     Basic....................................     0.10        0.08        (0.10)           0.12
     Diluted..................................     0.09        0.08        (0.10)           0.12
  Cumulative effect of change in accounting
     method (net of taxes):
     Basic....................................    (0.12)         --           --              --
     Diluted..................................    (0.12)         --           --              --
  Net income (loss) per share:
     Basic....................................    (0.02)       0.08        (0.10)           0.12
     Diluted..................................    (0.02)       0.08        (0.10)           0.12
2000 AS REPORTED:
  Net sales...................................  $37,268     $42,349      $47,444              --
  Gross margin................................   14,635      16,572       15,844              --
  Net income (loss)...........................      702       1,161         (825)             --
  Net income (loss) per share:
     Basic....................................     0.04        0.07        (0.05)             --
     Diluted..................................     0.04        0.07        (0.05)             --
1999:
  Net sales...................................  $31,081     $34,901      $34,149         $41,179
  Gross margin................................    9,921      13,150        8,104          15,513
  Net income (loss)...........................   (1,880)        255       (3,775)          1,552
  Net income (loss) 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
</TABLE>

The 2000 amounts above have been restated from previously reported amounts to
conform to the requirements of SAB No. 101 (See Note 1.)

                                        60
<PAGE>   62

                  REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON
                          FINANCIAL STATEMENT SCHEDULE

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

     We have audited, in accordance with auditing standards generally accepted
in the United States, the consolidated financial statements of Spectra-Physics
Lasers, Inc. (a Delaware Corporation) and Subsidiaries as of and for the years
ended December 31, 2000 and 1999 included in this Form 10-K and have issued our
report thereon dated January 19, 2001. Our audits were 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 information has been subjected to the
auditing procedures applied in our audits of the basic consolidated financial
statements and, in our opinion, is fairly stated in all material respects as of
and for the years ended December 31, 2000 and 1999 in relation to the basic
consolidated financial statements taken as a whole.

/s/ ARTHUR ANDERSEN LLP

San Jose, California
January 19, 2001

                                        61
<PAGE>   63

                      REPORT OF INDEPENDENT ACCOUNTANTS ON
                          FINANCIAL STATEMENT SCHEDULE

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

     Our audit 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 year ended December
31, 1998. In our opinion, this financial statement schedule presents fairly, in
all material respects, the information set forth therein for the year ended
December 31, 1998 when read in conjunction with the related consolidated
financial statements. We have not audited the financial statement schedule of
Spectra-Physics Lasers, Inc. for any period subsequent to December 31, 1998.

/s/  PRICEWATERHOUSECOOPERS LLP

San Jose, California
January 22, 1999

                                        62
<PAGE>   64

                                  SCHEDULE II

                       VALUATION AND QUALIFYING ACCOUNTS
              FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
                                 (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, 2000................................   $1,253       $  276       $  (687)     $  842
  December 31, 1999................................      405        1,408          (560)      1,253
  December 31, 1998................................      540           --          (135)        405
Warranty Reserves:
  December 31, 2000................................   $2,348       $1,225       $(1,525)     $2,048
  December 31, 1999................................    2,997        2,968        (3,617)      2,348
  December 31, 1998................................    2,802        2,980        (2,785)      2,997
</TABLE>

                                        63
<PAGE>   65

                                 EXHIBIT INDEX

<TABLE>
<CAPTION>
EXHIBIT
NUMBER                       DESCRIPTION OF DOCUMENT
-------                      -----------------------
<C>        <S>
 23.1      Consent of PricewaterhouseCoopers LLP
 23.3      Consent of Arthur Andersen LLP
</TABLE>

                                        64