<PAGE>

                                   Form 10-Q


                      SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C. 20549

     [X]  Quarterly Report pursuant to Section 13 or 15(d) of the Securities 
            Exchange Act of 1934

            For the quarterly period ended OCTOBER 3, 1998

                                      OR

     [_]  Transition Report pursuant to Section 13 or 15(d) of the Securities
            Exchange Act of 1934


                          Commission File No. 0-26646

                                   ---------

                             GENERAL SCANNING INC.
            (Exact name of registrant as specified in its charter)

       MASSACHUSETTS                                           04-2445884
   (State of incorporation)                               (I.R.S. Employer No.)


                              500 ARSENAL STREET
                        WATERTOWN, MASSACHUSETTS 02472
                   (Address of principal executive offices)

                           TELEPHONE: (617) 924-1010


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 [_]

As of November 6, 1998, there were 12,651,626 shares of Common Stock, $.01 par
value, outstanding.

<PAGE>


                             GENERAL SCANNING INC.
                               Table of Contents

<TABLE> 
<CAPTION> 
                                                                        Page
                                                                        ----
<S>                                                                     <C> 
Part I - Financial Information:

    Item 1.  Financial Statements

               Consolidated Balance Sheets..........................      3

               Consolidated Statements of Income....................      4

               Consolidated Statements of Cash Flows................      5

               Notes to Consolidated Financial Statements...........    6-7

    Item 2.  Management's Discussion and Analysis of Financial
               Condition and Results of Operations..................   8-14

Part II - Other Information.........................................  15-17

Signatures..........................................................     18
</TABLE> 
<PAGE>
                    GENERAL SCANNING INC. AND SUBSIDIARIES
                          CONSOLIDATED BALANCE SHEETS
                       (IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE> 
<CAPTION> 
                                                                                   Oct. 3,            Dec. 31,
                                                                                     1998               1997
                                                                                     ----               ----
                                                                                 (unaudited)
<S>                                                                              <C>               <C> 
ASSETS
Current assets:
  Cash and cash equivalents...................................................... $   4,423        $      8,418
  Accounts receivable, less allowance of $2,420 in 1998 and $1,203 in 1997.......    38,659              44,425
  Inventories....................................................................    37,848              34,051
  Deferred tax and other current assets..........................................    10,220               9,374
                                                                                    -------             -------
     Total current assets........................................................    91,150              96,268
                                                                                   

Property, plant and equipment, net of accumulated depreciation
   of $30,609 in 1998 and $27,478 in 1997........................................    15,428              14,611

Other assets.....................................................................     3,450                 437

Intangible assets, net of amortization of $2,161 in 1998 and $1,863 in 1997......     3,429               3,726
                                                                                    -------             -------
                                                                                  $ 113,457        $    115,042
                                                                                    =======             =======

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Notes payable to banks and current portion of long-term debt................... $   6,997        $      4,169
  Current portion of deferred compensation.......................................       136                 582
  Accounts payable...............................................................     8,822              12,775
  Accrued expenses and income taxes..............................................    15,527              16,079
                                                                                    -------             -------
     Total current liabilities...................................................    31,482              33,605
                                                                                    -------             -------

Long-term debt due after one year................................................     1,516               1,530
Deferred compensation, less current portion......................................     1,906               1,678

Stockholders' equity:
  Preferred stock, $.01 par value; authorized 1,000,000
     shares; issued and outstanding - none.......................................        -                   -
  Common stock, $.01 par value; authorized 30,000,000
     shares; issued 13,017,301 in 1998 and 12,791,796 in 1997....................       130                 128
  Additional paid-in capital.....................................................    50,040              48,788
  Retained earnings..............................................................    30,052              30,794
  Cumulative translation adjustment..............................................      (579)               (892)
  Unrealized (loss) on marketable equity securities, net.........................      (501)                  -
  Treasury stock, at cost;  366,073 shares in 1998 and 1997......................      (589)               (589)
                                                                                    -------             -------
     Total stockholders' equity..................................................    78,553              78,229
                                                                                   
                                                                                  $ 113,457        $    115,042
                                                                                    =======             =======
</TABLE> 

             The accompanying notes are an integral part of these 
                      consolidated financial statements.

                                       3
<PAGE>
                    GENERAL SCANNING INC. AND SUBSIDIARIES
                 CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
                       (IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE> 
<CAPTION> 
                                                      THREE MONTHS ENDED                    NINE MONTHS ENDED
                                                -----------------------------       ------------------------------
                                                   Oct. 3,          Sept. 27,           Oct. 3,          Sept. 27,
                                                    1998              1997               1998              1997
                                                -----------        ----------         -------------    -----------
<S>                                             <C>                <C>                <C>              <C> 
Sales:                                
     Laser systems and components............   $   31,877         $   40,515         $    116,134     $   109,128
     Printers................................       10,163              7,041               25,550          18,859
                                                ----------         ----------         ------------     -----------
          Total sales........................       42,040             47,556              141,684         127,987
                                                ----------         ----------         ------------     -----------
                                      
                                      
Cost of sales:                        
     Laser systems and components............       18,316             20,705               61,439          56,779
     Printers................................        5,761              4,010               14,419          10,476
                                                ----------         ----------         ------------     -----------
          Total cost of sales................       24,077             24,715               75,858          67,255
                                                ----------         ----------         ------------     -----------
                                      
Gross profit:                         
     Laser systems and components............       13,561             19,810               54,695          52,349
     Printers................................        4,402              3,031               11,131           8,383
                                                ----------         ----------         ------------     -----------
          Total gross profit.................       17,963             22,841               65,826          60,732
                                                ----------         ----------         ------------     -----------
                                      
Operating expenses:                   
     Research and product developmentment....        6,139              6,126               20,869          16,056
     Selling, general and administrative.....       12,211             11,357               39,031          32,781
     Restructuring, litigation settlement....          717                  -                6,789               -
                                                ----------         ----------         ------------     -----------
          Total operating expenses...........       19,067             17,483               66,689          48,837
                                                ----------         ----------         ------------     -----------
                                      
                                      
Income (loss) from operations................       (1,104)             5,358                 (863)         11,895
Interest income (expense), net...............         (104)               135                 (378)            398
Foreign exchange transaction gains (losses)..          115               (227)                  95            (326)
                                                ----------         ----------         ------------     -----------
Income (loss) before income taxes............       (1,093)             5,266               (1,146)         11,967
Income taxes provision (benefit).............         (382)             1,685                 (404)          4,030
                                                ----------         ----------         ------------     -----------
Net income (loss)............................   $     (711)        $    3,581         $       (742)    $     7,937
                                                ==========         ==========         ============     ===========
                                      
Foreign currency translation adjustments.....          718                (71)                 312            (193)
Change in unrealized gain (loss) on 
marketable equity securities, net............         (351)                 -                 (501)              -
                                                ----------         ----------         ------------     -----------
Comprehensive income (loss)..................   $     (344)        $    3,510         $       (931)    $     7,937
                                                ==========         ==========         ============     ===========
Net income (loss) per common share:   
     Basic                                      $    (0.06)        $     0.30         $      (0.06)    $      0.66
     Diluted                                    $    (0.06)        $     0.28         $      (0.06)    $      0.63
                                                ==========         ==========         ============     ===========
Weighted average common shares outstanding      12,637,478         12,081,869           12,559,869      11,983,945
                                                ==========         ==========         ============     ===========
Weighted average common shares outstanding
     and dilutive potential common shares....   12,637,478         12,738,534           12,559,869      12,585,418
                                                ==========         ==========         ============     ===========
</TABLE> 




             The accompanying notes are an integral part of these 
                      consolidated financial statements.
                  
                                       4





<PAGE>

                    GENERAL SCANNING INC. AND SUBSIDIARIES
               CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
                                (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                                           Nine months ended 
                                                                                        ------------------------
                                                                                         Oct. 3,        Sept. 27,
                                                                                          1998            1997
                                                                                        ---------      ---------
<S>                                                                                     <C>            <C>    
CASH FLOWS FROM OPERATING ACTIVITIES:

Net income (loss)..............................................................          $  (742)      $   7,937
Adjustments to reconcile net income (loss) to net cash provided by (used in)
    operating activities:
    Depreciation and amortization..............................................            3,353           2,748
    Deferred compensation and income taxes.....................................               42             320
    Subordinated note and equity securities received for non-competition
        agreement and technology license pursuant to litigation settlement.....           (3,750)              -
Changes in current assets and liabilities:
    Accounts receivable........................................................            5,885         (12,413)
    Inventories................................................................           (3,748)         (3,981)
    Other current assets.......................................................             (456)           (278)
    Accounts payable, accrued expenses, and taxes payable......................           (4,510)          5,214
    Deferred compensation......................................................             (588)              -
                                                                                        --------       ---------
Net cash provided by (used in) operating activities............................           (4,514)           (453)

CASH FLOWS FROM INVESTING ACTIVITIES:

Additions to property, plant, and equipment....................................           (3,848)         (3,143)
Decrease in other assets.......................................................               27              41
                                                                                        --------       ---------
Net cash (used in) investing activities........................................           (3,821)         (3,102)
                                                                                        --------       ---------
CASH FLOWS FROM FINANCING ACTIVITIES:

Proceeds from notes payable to banks and others................................           30,059          14,619
Payments on notes payable to banks and others..................................          (27,059)        (13,023)
Payments on long-term debt.....................................................              (14)            (13)
Proceeds from exercise of stock options, including tax effects.................            1,254           1,212
                                                                                        --------       ---------
Net cash provided by (used in) financing activities............................            4,240           2,795
                                                                                        --------       ---------

Effect of exchange rate changes on cash and cash equivalents...................              100             632
                                                                                        --------       ---------

Increase (decrease) in cash and cash equivalents...............................           (3,995)           (128)
Cash and cash equivalents, beginning of period.................................            8,418          17,655
                                                                                        --------       ---------
Cash and cash equivalents, end of period.......................................          $ 4,423       $  17,527  
                                                                                        ========       =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:

 Cash paid during the period for :
     Interest..................................................................          $   525      $      317
     Income taxes..............................................................          $   502      $    4,101
</TABLE> 

The accompanying notes are an integral part of these consolidated financial
statements.

                                       5
<PAGE>
 
                    GENERAL SCANNING INC. AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1.   BASIS OF PRESENTATION
     ---------------------

     The unaudited interim financial statements presented herein have been
prepared in accordance with generally accepted accounting principles for interim
financial statements and with the instructions to Form 10-Q and Regulation S-X
pertaining to interim financial statements. Accordingly, these interim financial
statements do not include all information and footnotes required by generally
accepted accounting principles for complete financial statements. The financial
statements reflect all adjustments and accruals which management considers
necessary for a fair presentation of financial position and results of
operations for the periods presented. The financial statements should be read in
conjunction with the consolidated financial statements and notes thereto
included in the Company's Form 10-K for the year ended December 31, 1997. The
results for the interim periods are not necessarily indicative of results to be
expected for the year or any future periods.

     The consolidated financial statements include the accounts of General
Scanning Inc. and its wholly owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated in consolidation.

2.   NET INCOME (LOSS) PER SHARE OF COMMON STOCK
     -------------------------------------------

     In 1997, the Company adopted Statement of Financial Accounting Standards
No. 128, Earnings per Share, effective December 15, 1997. The amount reported
herein for 1997 as diluted net income per common share is the same as that
reported prior as net income per common and common equivalent share outstanding.
Basic net income (loss) per common share was computed by dividing net income
(loss) by the weighted average number of common shares outstanding during the
year. For diluted net income (loss) per common share, the denominator also
includes dilutive outstanding stock options and warrants determined using the
treasury stock method.

Common and diluted common shares calculations are:

<TABLE>
<CAPTION>
           (in thousands)                       Three months ended
                                              -----------------------
                                                 Oct. 3,    Sept. 27, 
                                                  1998        1997  
                                              -----------------------
           <S>                                <C>           <C>  
           Weighted average common              12,637         12,082
           shares outstanding                            
           Dilutive potential common               -0-            657
           shares                                        
                                              -----------------------
           Diluted common shares                12,637         12,739
                                              =======================
                                                         
           Weighted options and                          
           warrants excluded from                        
           diluted income per common                     
           share as their effect would                   
           be anti-dilutive                      1,314            -0-
                                              =======================

<CAPTION> 
           (in thousands)                       Nine months ended    
                                              -----------------------  
                                                 Oct. 3,    Sept. 27,    
                                                  1998        1997 
                                              -----------------------  
        <S>                                   <C>           <C>  
        Weighted average common                    12,560      11,984  
        shares outstanding                                             
        Dilutive potential common                       0         601  
        shares                                                         
                                              -----------------------  
        Diluted common shares                      12,560      12,585  
                                              =======================  
                                                                       
        Weighted options and                                           
        warrants excluded from                                         
        diluted income per common                                      
        share as their effect would be                                 
        anti-dilutive                                 926         126  
                                              =======================   
</TABLE>

                                       6
<PAGE>
 
3.   CASH EQUIVALENTS
     ----------------

     Cash equivalents, which consist of investments in money market funds, are
highly liquid investments with original maturity dates of less than three
months.

4.   INVENTORIES
     -----------

     Inventories, which include materials, labor, and manufacturing overhead,
are stated at the lower of cost (first-in, first-out) or market. The components
of inventory are:

               (thousands)        Oct. 3,  Dec. 31,
                                   1998      1997
                                  -------  --------
               Materials          $16,396   $14,992
               Work-in-process      9,855     8,127
               Finished goods      11,597    10,932
                                  -------  --------
                                  $37,848   $34,051
                                  =======  ========

5.   COMPREHENSIVE INCOME
     --------------------

     Statement of Financial Accounting Standards (S.F.A.S.) No. 130, Reporting
Comprehensive Income, establishes standards for reporting and displaying
comprehensive income and its components in a full set of general- purpose
financial statements.  The statement is effective for fiscal years beginning
after December 15, 1997 and the Company has adopted the statement in its fiscal
quarter ending April 4, 1998.

     The Company considers the RVSI (ROBV) common stock received as part of
litigation settlement during June, to be available-for-sale and, accordingly, is
recording changes in its fair market value, net of tax effects, as a component
of stockholders' equity and comprehensive income (loss) for the reporting
periods.

6.   NEW ACCOUNTING PRONOUNCEMENT
     ----------------------------

     In June 1998, the Financial Accounting Standards Board issued S.F.A.S. No.
133, Accounting for Derivative Instruments and Hedging Activities.  The
Statement establishes accounting and reporting standards requiring that every
derivative instrument (including certain derivative instruments embedded in
other contracts) be recorded in the balance sheet as either an asset or
liability measured at its fair value.  The Statement requires that changes in
the derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met.  Special accounting for qualifying hedges
allows a derivative's gains and losses to offset related results on the hedged
item in the income statement, and requires that a company must formally
document, designate and assess the effectiveness of transactions that receive
hedge accounting.  S.F.A.S. No.133 is effective for fiscal years beginning after
June 15, 1999.  The Company has not yet quantified the impact of adopting
S.F.A.S. No. 133 on its financial statements and have not determined the timing
of or method of adoption of S.F.A.S. No. 133.  However, S.F.A.S. No. 133 could
increase volatility in earnings and other comprehensive income.
 
7.   RESTRUCTURING, LITIGATION SETTLEMENT AND OTHER CHARGES
     ------------------------------------------------------

     A charge of $0.7 million was taken during the three months ended October 3,
1998 to accrue employee severance costs associated with the move of Reel Tech
operations from Indiana to Massachusetts, and with the restructuring of overseas
operations.

     In the prior quarter, the $6.1 million restructuring, litigation settlement
and other charges included: (i) $3.7 million relating to a litigation settlement
with Robotic Vision Systems, Inc. ("RVSI"); (ii) fully reserving for the
possible uncollectibility of $1.0 million due the Company (and previously
recorded as earned) from Voxel, which after an arbitration panel ruling in favor
of the Company during the prior quarter; filed a voluntary petition under
Chapter 11, which was subsequently converted to a proceeding under Chapter 7 of
the Federal Bankruptcy Code, and (iii) charges of $1.4 million relating to a
reduction in the Company's cost structure, including $1.1 million of leased
facility costs and $0.3 million of
employee 

                                       7
<PAGE>
 
severance costs. Accruals remaining as of October 3, 1998 from prior quarter
restructuring charges are $0.6 million of leased facility costs.

8.  AGREEMENT AND PLAN OF MERGER
    ----------------------------

     On October 27, 1998 the Company and Lumonics Inc. entered into an Agreement
and Plan of Merger (the "Agreement") to combine the companies in a merger of
equals transaction.  Pursuant to the terms of the Agreement, a wholly-owned
subsidiary of Lumonics will be merged with and into the Company and each
outstanding share of the Company will be exchanged for 1.347 shares of Lumonics
stock.  Upon consummation of the transaction, the stockholders of General
Scanning will own approximately 50% of the combined company.  Consummation of
the transaction is subject to the satisfaction of certain conditions to closing,
including regulatory approval and stockholder approval of both companies.  The
merger is expected to close during the first quarter of 1999.

                                       8
<PAGE>
 
                             GENERAL SCANNING INC.
          MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                           AND RESULTS OF OPERATIONS
                                        
OVERVIEW

General Scanning Inc. ("General Scanning" or the "Company") is a leading
manufacturer of laser systems and components, and printers.  In the nine months
ended October 3, 1998 and in the fiscal year 1997, 82% of the Company's revenues
was derived from sales of laser systems and components, and the balance was
derived from sales of printers.  Sales of laser systems and components in the
nine months ended October 3, 1998 grew 6% over sales for this segment in the
comparable period in 1997.  Printer sales in the nine months ended October 3,
1998 grew 35% over sales for the comparable period in 1997.

The Company sells its laser systems primarily to manufacturers of products
containing advanced electronic components and circuitry.  In addition, the
Company produces a line of laser subsystems and components that are used in the
Company's own systems, as well as sold to other manufacturers of laser systems.
The Company's laser system sales have been, and are expected to continue to be,
dependent upon its customers' capital expenditures which are, in turn, affected
by business cycles in the markets served by those customers.  The Company's
strategy is to expand applications for its products into different and varied
markets in order to limit dependency on any one market, but it may not always be
successful in doing so.

The Company also sells printers.  Although these products have historically been
sold primarily to manufacturers of medical equipment for patient care
monitoring, increases in printer sales are due to expanded shipments of the new
photo finishing system which was introduced late last fall.  This segment of the
Company's business has not experienced significant cyclicality in the past,
however, sales of certain printers used in the greeting card industry tend to
increase in the third quarter in anticipation of holiday greeting card sales.

Product prices experienced increased competitive pressure during the quarter,
and pricing actions did have a negative effect on reported gross profit.  A
significant portion of sales is made in foreign currencies.  Fluctuations in
currency exchange rates, particularly in the Japanese yen and European
currencies as compared to the U.S. dollar, can impact the Company's sales and
expenses, which are reported in U.S. dollars.

On October 27, 1998 the Company and Lumonics Inc. entered into an Agreement and
Plan of Merger (the "Agreement") to combine the companies in a merger of equals
transaction.  Pursuant to the terms of the Agreement, a wholly-owned subsidiary
of Lumonics will be merged with and into the Company and each outstanding share
of the Company will be exchanged for 1.347 shares of Lumonics stock.  Upon
consummation of the transaction, the stockholders of General Scanning will own
approximately 50% of combined company.  Consummation of the transaction is
subject to the satisfaction of certain conditions to closing, including
regulatory approval and stockholder approval of both companies.  The merger is
expected to close during the first quarter of 1999.

RESULTS OF OPERATIONS

THREE MONTHS ENDED OCTOBER 3, 1998 AND SEPTEMBER 27, 1997

Sales.   Total sales were $42.0 million for the three months ended October 3,
1998, a decrease of 12% as compared to $47.6 million in total sales in the
three-month period ended September 27, 1997.  Laser systems and component sales
for the three months ended October 3, 1998 decreased 21% to $31.9 million from
$40.5 million in the comparable period of 1997 primarily due to slower activity
in the Company's semiconductor product lines and sales in Asia.  In addition, in
June 1998, pursuant to a litigation settlement, the Company agreed not to
compete in the field of semiconductor interconnection inspection. Sales in this
sector had historically ranged between 5% and 10% of total sales. The Company
does not

                                       9
<PAGE>
 
anticipate marked improvement in its semiconductor product line sales or in the
Asian markets it serves until later next year, at the earliest.

These decreases were partially offset by strengthening sales in medical imaging
and DNA biochip scanning, continued solid performance in trim and test
applications for the automotive and electronics markets, and sales by the Reel-
Tech operation, which was acquired by the Company purchase in November 1997.

Printer sales for the three months ended October 3, 1998 increased 44% to $10.2
million from $7.0 million in the comparable period of 1997 primarily due to
expanded shipments of the new photo finishing system which was introduced in the
fourth quarter of 1997.

Laser systems and components sales, as a percentage of total sales, decreased to
76% in the three months ended October 3, 1998 from 85% of total sales in the
comparable period of 1997.  International sales, many of which are denominated
in foreign currencies, were approximately 40% and 49% of total sales in the
quarters ended October 3, 1998 and September 27, 1997, respectively.  The
reduction in international sales is due to the weakening of the Asian markets.

Gross profit.   Total gross profit was $18.0 million, or 43% of sales, for the
three months ended October 3, 1998, compared to $22.8 million, or 48% of sales,
for the three-month period ended September 27, 1997.  Laser systems and
components gross profit decreased to 43% of sales in the three months ended
October 3, 1998 from 49% of sales for the comparable three-month period of 1997.
The decrease was primarily due to product mix, pricing and lower sales volumes.
Printers gross profit remained at 43% of sales in the three months ended October
3, 1998 from 43% for the comparable three-month period of 1997.

Research and product development.   Research and product development expenses
were $6.1 million, or 15% of total sales, for the three months ended October 3,
1998, compared to $6.1 million, or 13% of total sales, for the three-month
period ended September 27, 1997.

Selling, general and administrative.   Selling, general and administrative
expenses increased to $12.2 million in the three months ended October 3, 1998
from $11.4 million in the comparable period of 1997.  This increase was
primarily due to the addition of sales and marketing support personnel and
related costs incurred in supporting anticipated increased sales.  These
expenses increased to 29% of total sales for the three-month period ended
October 3, 1998 from 24% in the comparable period in 1997.

Restructuring, and other charges.  A charge of $0.7 million was taken during the
three months ended October 3, 1998 to accrue employee severance costs associated
with the move of Reel-Tech operations from Indiana to Massachusetts, and with
the restructuring of overseas operations.

Interest.   Net interest expense was $0.1 million for the three-month period
ended October 3, 1998 compared to net interest income of $0.1 million for the
comparable period of 1997.  A decrease in cash, resulting in less interest
income, and an increase in debt, resulting in more interest expense, were
primarily due to a $12.4 million cash outlay used for the acquisition of the
assets of Reel-Tech, Inc. in November 1997.

Foreign exchange.   Foreign exchange transactions resulted in a gain of $115
thousand in the three months ended October 3, 1998 compared to a loss of $227
thousand in the comparable period of 1997.  Gains and losses are incurred when
the Company's net receivables denominated in certain non-U.S. currencies,
including yen, deutsche marks and other major European currencies, are not fully
hedged.  The Company continues to utilize foreign exchange forward contracts,
primarily to reduce the impact of foreign currency fluctuations arising from
intercompany balances.

Income tax.   The effective income tax rate for the Company was 35% for the
three months ended October 3, 1998 compared to 32% for the three months ended
September 27, 1997.

                                       10
<PAGE>
 
Net income (loss).   Net loss for the three months ended October 3, 1998 was
$0.7 million, or $0.06 per share based upon 12.6 million common shares, compared
to $3.6 million in net income, or $0.28 per diluted share based upon 12.7
million common and dilutive potential common shares in the third quarter of
1997.

Backlog.   Backlog at October 3, 1998 was approximately $35 million compared to
$44 million at December 31, 1997.

NINE MONTHS ENDED OCTOBER 3, 1998 AND SEPTEMBER 27, 1997

Sales.   Total sales were $141.7 million for the nine months ended October 3,
1998, an increase of 11% over $128.0 million in total sales in the nine-month
period ended September 27, 1997.  Laser systems and component sales for the nine
months ended October 3, 1998 increased 6% to $116.1 million from $109.1 million
in the comparable period of 1997 primarily due to strengthening sales in medical
imaging, DNA biochip scanning, continued solid performance in trim and test
applications for the automotive and electronics markets, and sales by the Reel-
Tech operation, which was acquired by the Company in November 1997.   Although
laser systems and component sales increased 6% over the same nine-month period
in the prior year, they fell short of the Company's expectations.  Slower than
expected activity occurred in the Company's semiconductor product lines and in
Asia.  Pursuant to a litigation settlement, the Company has agreed not to
compete in the field of semiconductor interconnection inspection.  Sales in this
sector have historically ranged between 5% and 10% of total sales. The Company
does not anticipate marked improvement in its semiconductor product line sales
or in the Asian markets it serves until later next year, at the earliest.

Printer sales for the nine months ended October 3, 1998 increased 35% to $25.6
million from $18.9 million in the comparable period of 1997 primarily due to
expanded shipments of the new photo finishing system which was introduced late
last fall.

Laser systems and components sales were 82% of total sales in the nine months
ended October 3, 1998 compared to 85% of total sales for the comparable period
of 1997.  International sales, many of which are denominated in foreign
currencies, were approximately 41% and 45% of total sales in the nine months
ended October 3, 1998 and September 27, 1997, respectively.  Sales to Asia have
declined in recent quarters, partially offset by increases in sales to Europe in
the first half of 1998.

Gross profit.   Total gross profit was $65.8 million, or 46% of sales, for the
nine months ended October 3, 1998, compared to $60.7 million, or 47% of sales,
for the nine-month period ended September 27, 1997.  Laser systems and
components gross profit decreased to 47% of sales in the nine months ended
October 3, 1998 from 48% of sales for the comparable nine-month period of 1997.
The decrease was primarily due to product mix, pricing and lower sales volumes.
Printers gross profit remained at 44% of sales in the nine months ended October
3, 1998 from 44% for the comparable nine-month period of 1997.

Research and product development.   Research and product development expenses
increased to $20.9 million, or 15% of total sales, for the nine months ended
October 3, 1998, from $16.1 million, or 13% of total sales, for the nine-month
period ended September 27, 1997.  This increase was primarily due to the
addition of full-time and consulting personnel and related costs to support the
development of new laser systems and components products.

Selling, general and administrative.   Selling, general and administrative
expenses increased to $39.0 million in the nine months ended October 3, 1998
from $32.8 million in the comparable period of 1997.  This increase was
primarily due to the addition of sales and marketing support personnel and
related costs incurred in supporting anticipated increased sales. These expenses
were 28% of total sales for the nine-month period ended October 3, 1998 compared
to 26% of total sales for the comparable period in 1997.

                                       11
<PAGE>
 
Restructuring, litigation settlement and other charges.  A charge of $0.7
million was taken during the three months ended October 3, 1998 to accrue
employee severance costs associated with the move of Reel-Tech operations from
Indiana to Massachusetts, and with the restructuring of overseas operations.

In the prior quarter, the $6.1 million restructuring, litigation settlement and
other charges included: (i) $3.7 million relating to a litigation settlement
with Robotic Vision Systems, Inc. ("RVSI"); (ii) fully reserving for the
possible uncollectibility of $1.0 million due the Company (and previously
recorded as earned) from Voxel, which after an arbitration panel ruling in favor
of the Company during the prior quarter; filed a voluntary petition under
Chapter 11, which was subsequently converted to a proceeding under Chapter 7 of
the Federal Bankruptcy Code, and (iii) charges of $1.4 million relating to a
reduction in the Company's cost structure, including $1.1 million of leased
facility costs and $0.3 million of employee severance costs.  Accruals remaining
as of October 3, 1998 from prior quarter restructuring charges are $0.6 million
of leased facility costs.

Litigation with RVSI, arising from the Company's acquisition of View
Engineering, Inc. ("View") in August 1996, was settled in June 1998. RVSI
claimed that the Company used improperly obtained information in connection with
the acquisition.  The Company denied all such claims.  Under the terms of the
settlement, the Company has agreed not to compete and has granted an exclusive
technology license to RVSI in the field of semiconductor interconnection
inspection.  RVSI agreed not to compete in the field of solder paste inspection.
Costs associated with the settlement were $7.4 million, including unsaleable
inventory of $5.1 million, legal fees of $1.3 million, employee severance of
$0.2 million, leased facility costs of $0.2 million and other related costs of
$0.6 million.  Partially offsetting these costs is $3.75 million consideration
RVSI agreed to pay the Company for the non-competition agreement and technology
license.  The consideration consists of a subordinated note of $2.25 million and
271,493 shares of RVSI common stock valued at $1.5 million at the settlement
date.  The subordinated note bears interest at the prime rate with quarterly
pro-rata principal payments from September 2001 through June 2003. The Company
considers the common stock to be available-for-sale and, accordingly, is
recording changes in its fair market value, net of tax effects, as a component
of stockholders' equity.

Interest.   Net interest expense was $0.4 million for the nine-month period
ended October 3, 1998 compared to net interest income of $0.4 million for the
comparable period of 1997.  A decrease in cash, resulting in less interest
income, and an increase in debt, resulting in more interest expense, were
primarily due to a $12.4 million cash outlay used for the acquisition of the
assets of Reel-Tech, Inc. in November 1997.

Foreign exchange.   Foreign exchange transactions resulted in a gain of $95
thousand in the nine months ended October 3, 1998 compared to a loss of $326
thousand in the comparable period of 1997.  Gains and losses are incurred when
the Company's net receivables denominated in certain non-U.S. currencies,
including yen, deutsche marks and other major European currencies, are not fully
hedged.  The Company continues to utilize foreign exchange forward contracts,
primarily to reduce the impact of foreign currency fluctuations arising from
intercompany balances.

Income tax.   The effective income tax rate for the Company was 35% for the nine
months ended October 3, 1998 compared to 34% for the nine months ended September
27, 1997.

Net income (loss).   Net loss for the nine months ended October 3, 1998 was $0.7
million or $0.06 per share, and net income for the nine months ended September
27, 1997 was $7.9 million or $0.63 per share,  based upon 12.6 million weighted
average common and dilutive potential common shares in each of the 1998 and 1997
periods.

LIQUIDITY AND CAPITAL RESOURCES

Cash and cash equivalents totaled $4.4 million on October 3, 1998 compared to
$8.4 million on December 31, 1997.  Notes payable to banks and the current
portion of long-term debt increased to $7.0 million on 

                                       12
<PAGE>
 
October 3, 1998 from $4.2 million on December 31, 1997. During the first nine
months of 1998, $4.5 million was used in operating activities, $4.2 million was
provided by financing activities and $3.8 million was used in investing
activities.

Net loss of $0.7 million in the first nine months of 1998, supplemented by non-
cash charges for depreciation and amortization and deferred compensation
totaling $3.4 million, offset by $3.8 million non-cash income for the
consideration received from RVSI pursuant to the litigation settlement and by a
net increase in working capital of $3.0 million, resulting in $4.5 million used
in operating activities.

Cash flow from investing activities was primarily due to capital expenditures of
$3.8 million for property, plant and equipment.

The Company's revolving credit agreement with its lending bank provides for a
maximum $20 million revolving credit facility.  The Company also has $6 million
in international credit lines.  Borrowings under the $20 million revolving
credit facility, of which $3.0 million were outstanding at October 3, 1998, bear
interest at the London InterBank Offered Rate (LIBOR) plus one and one-half
percent, or prime, determined at the time of borrowing. The agreement requires
compliance with certain financial ratios and expires December 31, 1999.
Borrowings under the international credit lines, of which $4.0 million
denominated in yen were outstanding at October 3, 1998, accrue interest at a
negotiated interest rate approximating the prime rate in the applicable country.

The Company believes that existing cash, together with cash generated by future
operations and the existing bank lines of credit, will be sufficient to satisfy
anticipated cash needs to fund working capital and investments in manufacturing
facilities and equipment for its existing businesses over the next twelve
months.   The Company may, from time to time, as market and business conditions
warrant, invest in or acquire complementary businesses, products or
technologies.  The Company may require additional equity or debt financings to
fund such activities, which could result in additional dilution to the Company's
shareholders.

YEAR 2000

The use of computer programs written using two digits rather than four to define
the applicable year gives rise to what is commonly referred to as the Year 2000
problem.  The major areas being addressed by the Company in regards to Year 2000
compliance are internal operating systems, the installed base of products at
customer sites and third party compliance issues.

The efficient operation of the Company's business is dependant, in part, on its
computer software and hardware.  These systems are used in several key areas of
the Company's business, including sales, purchasing, engineering, inventory
control, manufacturing, service and financial reporting.  The Company has been
evaluating its systems to identify potential Year 2000 compliance problems.
These actions are necessary to ensure that the programs and systems will
recognize and accurately process the Year 2000 and beyond.  Based on present
information, the Company believes its systems for operations will be Year 2000
compliant by the first quarter of 1999.

The company also continues to assess the impact of the Year 2000 issue on the
operations of its products installed at customers.  The installed base customers
that have older products that are not Year 2000 compliant are being contacted
and offered upgrade options.

Finally, the Company is in the process of assessing its major suppliers'
compliance with Year 2000 issues.  The Company believes that suppliers and
customers present the area of greatest risk to the Company in part because of
the Company's limited ability to influence actions of such third parties, and in
part because of the Company's inability to estimate the level of impact of
noncompliance of third parties throughout the extended supply chain.

                                       13
<PAGE>
 
Because the Company has been upgrading its operations systems applications to be
Year 2000 compliant, it is anticipated that the future costs of the Year 2000
compliance for operations will not materially impact the financial results of
the Company.  However, the effect of third party impact cannot be quantified at
this time because the Company cannot accurately estimate the magnitude,
duration, or ultimate impact of noncompliance by suppliers, customers and other
third parties that have no direct relationship to the Company.  The Company
believes that its competitors face a similar risk.  Going forward the Company
will continue to make every effort to identify and minimize that risk.

To the extent this analysis discusses financial projections, information or
expectations about General Scanning's products or markets, or otherwise makes
statements about the future, such statements are forward looking and are subject
to a number of risks and uncertainties that could cause actual results to differ
materially from the statements made.  These factors include the fact that the
Company's sales have been, and are expected to continue to be, dependent upon
customer capital equipment expenditures which are, in turn, affected by business
cycles in the markets served by those customers.  Other factors include
continued volatility in the semiconductor industry and Asian markets, the risk
of order delays and cancellations, the risk of delays by the Company's OEM
customers in introducing their new products and market acceptance of those
products incorporating subsystems supplied by the Company, similar risks to the
Company in delays in new product introductions and market acceptance of its new
products, and other risks detailed in the Company's Form 10-K that has been
filed in connection with its 1997 fiscal year.

                                       14
<PAGE>
 
                             GENERAL SCANNING INC.
                          PART II. OTHER INFORMATION


Item 1.   Changes in legal proceedings and arbitration
          --------------------------------------------

          Robotic Vision Systems, Inc. v. View Engineering, Inc. USDC Case No.
          95-7441. This case involves a patent infringement complaint by RVSI
          alleging infringement of U.S. Patent No. 5,463,227. A hearing on a
          motion for claim construction is scheduled for January, 1999. A trial
          date was scheduled for October of 1998, but the Court has adjourned
          the trial date indefinitely. For additional information, see the
          Company's Form 10-K for 1997 and Form 10-Q for the quarter ended July
          4, 1998.

          Electro Scientific Industries, Inc. v. General Scanning Inc. USDC Case
          No. C-96-4628. The U.S. District Court for the Northern District of
          California issued a decision on motions for summary judgment in an
          action filed against the Company for alleged patent infringement
          concerning U.S. Patent Nos. 5,265,114 and 5,473,624. The Court granted
          Electro Scientific's motions for summary judgment on infringement and
          on the issue of whether Electro Scientific committed inequitable
          conduct by intentionally failing to cite prior art to the U.S. Patent
          Office in connection with one of its patents. The Court denied the
          Company's motion for summary judgment that the Electro Scientific
          patents are invalid due to prior art. The case is in a phase of
          further discovery and a trial is scheduled for March, 1999. For
          additional information, see the Company's Form 10-K for 1997 and Form
          10-Q for the quarter ended July 4, 1998.

          Electro Scientific Industries, Inc. v. General Scanning Inc. USDC Case
          No. 98-4027. On or about October 20, 1998 Electro Scientific commenced
          an action in the U.S. District Court for the Northern District of
          California alleging infringement of three Electro Scientific patents
          (U.S. Patent Nos. 5,569,398, 5,685,995 and 5,808,272) and seeking an
          injunction, damages and attorneys' fees. Discovery has not yet
          commenced, and a trial date has not been set.

          Lemelson Medical, Education & Research Foundation, Limited Partnership
          v. Intel Corporation, et. al. USDC Case No. 98-1413. On or about July
          31, 1998 the Lemelson Foundation commenced legal proceedings in the
          U.S. District Court for the District of Arizona against a number of
          U.S. semiconductor manufacturing companies, including companies that
          have purchased systems from the Company. The complaint alleges that
          methods used by these manufacturers infringe patents held by the
          Foundation and seeks an injunction against future infringement, treble
          damages, interest, costs and attorneys' fees. While General Scanning
          is not named as a defendant in any of the proceedings, several of the
          Company's customers are involved. A few of these customers have
          notified the Company of the allegations and have asked the Company
          about the actions the Company plans to take in light of patent
          indemnification provisions under which General Scanning equipment was
          purchased for the operations involved in the alleged infringements.

          Resolved legal proceedings and arbitration
          ------------------------------------------

          Robotic Vision Systems Inc. v. View Engineering, Inc. USDC Case No. 
          96-2288 In June 1998, the U.S. District Court for the Central District
          of California found infringement by View on a particular method of
          measuring substrate coplanarity of unpopulated ball grid array
          packages. RVSI had previously dropped all claims for damages; hence,
          no damages were awarded. The Court determined that View had not
          willfully infringed and therefore refused RVSI's claim for attorneys'
          fees. The Court enjoined View from infringing or inducing infringement
          of the patent in question, No. 5,465, 152. The Company, on behalf of
          View, has appealed the injunction. No date has been set for oral
          argument on the appeal. For additional information, see the Company's
          Form 10-K for 1997 and Form 10-Q for the quarter ended July 4, 1998.

                                       15
<PAGE>
 
          Robotic Vision Systems, Inc. v. General Scanning Inc. USDC Case No.
          96-3884 Litigation with RVSI, arising from the Company's acquisition
          of View Engineering, Inc. ("View") in August 1996, was settled in June
          1998. RVSI claimed that the Company used improperly obtained
          information in connection with the acquisition. The Company denied all
          such claims. Under the terms of the settlement, the Company has agreed
          not to compete and has granted an exclusive technology license to RVSI
          in the field of semiconductor interconnection inspection. RVSI agreed
          not to compete in the field of solder paste inspection. See footnote 6
          to the financial statements of the Company included in the Form 10-Q
          for the second quarter ended July 4, 1998 and the Company's 1997 Form
          10-K for additional information.

          General Scanning Inc. v. Voxel In May 1998, a three-member panel of
          the American Arbitration Association decided in favor of the Company
          and awarded the Company $1.9 million plus applicable post-judgement
          interest. The award included $1.0 million that the Company had
          recorded as earned and due from Voxel as of December 31, 1997 for
          engineering services performed and out-of-pocket expenses related to
          the construction of beta units. Following the arbitration decision
          Voxel filed a voluntary petition under Chapter 11, which was
          subsequently converted to a proceeding under Chapter 7 of the Federal
          Bankruptcy Code. Accordingly, in the quarter ended July 4, 1998, the
          Company fully reserved for the possible uncollectibility of the $1.0
          million due to the Company.

          The Company believes that RVSI's and Electro Scientific's claims in
          each of the above actions are without merit; and the Company is
          vigorously defending these proceedings. However, if RVSI or Electro
          Scientific prevails on one or more of its claims, there could be a
          material adverse effect on the Company's business, operating results
          and/or financial condition.

Item 2.   Changes in Securities
          ---------------------

          None

Item 3.   Defaults upon Senior Securities
          -------------------------------

          None

Item 4.   Submission of Matters to a Vote of Security Holders
          ---------------------------------------------------

          None

Item 5.   Other Information
          -----------------

          None

Item 6.   Exhibits and Reports on Form 8-K
          --------------------------------

          a) Exhibits
          -----------

          *2   Agreement and Plan of Merger between Lumonics Inc., and General
               Scanning Inc., dated as of October 27, 1998

               The General Scanning Disclosure Letter and the Lumonics
               Disclosure Letter contain exceptions to representations and
               warranties made in the Agreement and certain other information.
               General Scanning agrees to furnish supplementally a copy of any
               omitted schedule to the Commission upon request.

                                       16
<PAGE>
 
          *4.1  Stock Option Agreement by and among General Scanning Inc. and
                Lumonics Inc., dated October 27, 1998

          *4.2  Stock Option Agreement by and among General Scanning Inc.,
                Lumonics Inc. and Grizzley Acquisition Corp., dated October 27,
                1998

          27    Financial data schedule
 
          _________________________
          *     Incorporated herein by reference to the Company's filing on Form
                8-K (File No. 0-26646), as filed with the Commission on November
                3, 1998.
 
          b) Reports on Form 8-K
          ----------------------

          On November 3, 1998, the Company filed a Current Report on Form 8-K
          relating to its Agreement and Plan of Merger with Lumonics Inc.

                                       17
<PAGE>
 
                             GENERAL SCANNING INC.
                                  SIGNATURES
                                        


Pursuant to the requirements 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.



General Scanning Inc.



/s/ Charles D. Winston             Date: November 12, 1998
----------------------                                    
Charles D. Winston
President and
Chief Executive Officer



/s/ Victor H. Woolley              Date: November 12, 1998
---------------------                                             
Victor H. Woolley
Vice President Finance and
Chief Financial Officer

                                       18