<PAGE>
 
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
 
                      SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C. 20549
 
                               ----------------
 
                                   FORM 10-K
 
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
   ACT OF 1934
 
  FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
 
                          COMMISSION FILE NO. 0-26646
 
                               ----------------
 
                             GENERAL SCANNING INC.
            (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
 
<TABLE>
<S>                                            <C>
                MASSACHUSETTS                                    04-2445884
       (STATE OR OTHER JURISDICTION OF                        (I.R.S. EMPLOYER
       INCORPORATION OR ORGANIZATION)                       IDENTIFICATION NO.)
</TABLE>
 
                    500 ARSENAL STREET, WATERTOWN, MA 02172
                   (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
 
                                (617) 924-1010
             (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
 
                               ----------------
 
          SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
 
                                     NONE
 
          SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
 
                         COMMON STOCK, $.01 PAR VALUE
                              TITLE OF EACH 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 such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [_]
 
  Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
 
  The aggregate market value of the voting stock held by non-affiliates of the
registrant was approximately $266,500,999 based on the last reported sale
price of the Common Stock on the Nasdaq National Market on February 10, 1998.
The number of shares outstanding of the registrant's Common Stock as of
February 10, 1998 was 12,467,883 shares.
 
                               ----------------
 
                     DOCUMENTS INCORPORATED BY REFERENCE:
 
  Portions of the Registrant's Proxy Statement for the Annual Meeting of
Stockholders to be held April 16, 1998 are incorporated by reference in Part
III of the Report. Other documents incorporated by reference are listed in the
Exhibit Index.
 
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
<PAGE>
 
                             GENERAL SCANNING INC.
 
                         1997 ANNUAL REPORT--FORM 10-K
 
                               TABLE OF CONTENTS
 
<TABLE>
<CAPTION>
                                                                           PAGE
                                                                           ----
 
                                     PART I
 
 <C>     <S>                                                               <C>
 Item 1  Business.......................................................      1
         Overview.......................................................      1
         Business Strategy..............................................      2
         Products and Services..........................................      2
         Customers......................................................      9
         Sales, Marketing and Customer Support..........................      9
         Research and Development.......................................      9
         Manufacturing..................................................     10
         Working Capital Requirements...................................     11
         Backlog........................................................     11
         Competition....................................................     11
         Patents and Intellectual Property..............................     12
         Employees......................................................     12
 Item 2  Properties.....................................................     13
 Item 3  Legal Proceedings..............................................     13
 Item 4  Submission of Matters to a Vote of Security Holders............     14
         Executive Officers.............................................     15
 
                                    PART II
 
            Market for Registrant's Common Stock and Related Stockholder
 Item 5  Matters........................................................     16
 Item 6  Selected Financial Data........................................     17
         Management's Discussion and Analysis of Financial Condition and
 Item 7  Results of Operations..........................................     18
 Item 8  Financial Statements and Supplementary Data....................    F-1
         Changes in and Disagreements With Accountants on Accounting and
 Item 9  Financial Disclosure...........................................   F-21
 
                                    PART III
 
 Item 10 Directors and Executive Officers of the Registrant.............   F-21
 Item 11 Executive Compensation.........................................   F-21
 Item 12 Security Ownership of Certain Beneficial Owners and Management.   F-21
 Item 13 Certain Relationships and Related Transactions.................   F-21
 
                                    PART IV
 
          Exhibits, Financial Statement Schedules and Reports on Form 8-
 Item 14 K..............................................................   F-21
</TABLE>
<PAGE>
 
                                    PART I
 
ITEM 1. BUSINESS
 
OVERVIEW
 
  General Scanning Inc. ("General Scanning" or the "Company") was incorporated
in Massachusetts in 1968. The Company develops and manufactures a broad line
of laser systems for a wide range of applications in the automotive,
electronics, semiconductor, medical and aircraft industries. In addition, the
Company produces a line of laser subsystems and components, which are used in
the Company's own systems as well as sold in the merchant market. The Company
also designs and manufactures a line of thermal printers for medical
instrument companies, and recently introduced a new foil imprinting technology
for use in photo labs and retail photo finishing outlets. In 1997, over 85% of
the Company's revenues were derived from the sale of laser systems and
components. General Scanning sells and supports its products worldwide. In
1997, 56% of its sales were in the United States, 27% in Asia and 17% in
Europe. See Note 12 to Financial Statements for a more detailed description of
the Company's geographic operations.
 
  General Scanning manufactures laser systems for a variety of industrial
applications including: thin film resistor processing systems used in the
production of automotive sensors for airbags, anti-lock brakes, emissions
control and airflow measurement; thick film resistor processing systems used
in the manufacture of surface mount ("SMT") electronic components;
semiconductor package measurement systems for QFP (quad flat package), TSOPs
(thin small outline package) and BGAs (ball grid arrays); memory repair
processing systems used in the fabrication of high density computer memory
chips; inspection systems for solder paste and component placement on SMT
printed circuits; laser marking systems used for permanent identification of
products such as integrated circuit packages and automotive components;
component handling and sorting systems used in the integration of one or more
laser process or inspection systems; precision alignment systems used
primarily in the fabrication of aircraft composite structures; inspection and
metrology systems employing non-contact 3-D image processing used in the
manufacture of disk drives and other precise tolerance devices; micro-array
scanners for biological analysis; and laser systems and subsystems used in
film imaging. In addition, General Scanning manufactures laser subsystems and
components used by the Company and its customers in many applications
including materials processing, test and measurement, alignment, inspection,
graphics, vision systems, rapid prototyping and certain medical procedures
including dermatology and ophthalmology.
 
  The Company's core technological expertise which is employed in each of
these applications is high speed micropositioning and precise power control of
lasers, as well as 2D and 3D image processing. Designing and manufacturing the
Company's products requires specialized skills in: electronics that can
operate reliably and accurately under a wide range of environmental
conditions; electromechanical devices that can sustain high torsional
acceleration; optics and lenses that operate with a variety of laser power and
wavelength; closed-loop electronic servo systems that precisely and quickly
measure and control relative positions of mechanical components; and software
that controls laser systems and interfaces with adjunct equipment. In
addition, General Scanning maintains control of the critical production
processes which the Company believes allows it to control costs, realize
higher quality production and bring new products to market more quickly. Two
of the Company's core development and manufacturing sites, located in
Wilmington, MA and Bedford, MA, are ISO 9001 certified operations.
 
  General Scanning expands the scope and use of its core products by working
closely with leading customers to identify both value-added functionality and
new applications. The Company designs and manufactures systems and components
with the aim of providing its customers with low overall cost of ownership.
General Scanning's close relationship with its customers enables it to expand
the number of applications for its core technology and reduce the risk
inherent in new product development. The Company believes that the diversity
of applications for its products reduces the risk of dependence on the
economic conditions in any one industrial sector it serves.
<PAGE>
 
BUSINESS STRATEGY
 
  The Company's strategy is to continue to apply its expertise in rapid and
high accuracy micropositioning and precise power control of laser beams and 2-
D and 3-D image processing to the development and manufacture of end-user and
OEM systems, subsystems and components for a broad range of market
applications. This strategy builds upon the Company's strengths in technology,
manufacturing and distribution.
 
  The key elements of the Company's business strategy are as follows:
 
  Leverage Core Technology. The Company is committed to developing new
products and enhancing existing products to address new applications and
evolving manufacturing requirements primarily by leveraging the Company's core
technologies for high accuracy micropositioning and precise power control of
lasers and in image processing.
 
  Customer Driven Product Development. The Company seeks to partner and work
closely with leading manufacturing companies in selected but diverse areas.
This approach allows the Company to incorporate customer feedback during the
design process, which expedites product development, thereby saving
development time and expense. The Company believes that developing a product
to meet a need identified by a market leader and potential customer decreases
the risk typically associated with new product introductions.
 
  Broad Applications in Diverse Markets. The Company currently offers products
serving broad applications in diverse markets, including laser systems for
semiconductor manufacturing, production of automotive sensors, manufacturing
of electronic components and circuits, precision alignment of manufactured
parts, permanent product marking, film imaging and biological analysis. The
Company makes subsystems and components for OEM manufacturers of equipment for
detection of in-process defects and contamination, performance of medical
diagnostic and corrective procedures, confocal microscopy, film imaging, rapid
prototyping, and medical patient vital sign recording. By addressing diverse
markets, the Company seeks to increase its product sales and reduce its
reliance on any single industry or customer. In addition, the Company's
marketing strategy is to continue to develop products based on its core
technical and manufacturing competencies for markets in which it believes it
can attain a leading position in market share.
 
  Maintain Control of Critical Production Processes. The Company's
manufacturing strategy is to identify and perform internally those
manufacturing functions which enable the Company to maintain control over
critical portions of the production process and which add value to its
products. The Company believes it achieves a number of competitive advantages
from such integration, including the ability to achieve lower cost and higher
quality, to bring new products and product enhancements quickly and reliably
to market, and to produce sophisticated component parts not readily available
from other sources.
 
  Focus on Customers' Overall Cost of Ownership. The Company designs and
manufactures systems, subsystems and components aimed at providing its
customers with low overall cost of ownership relative to competing solutions.
The Company's laser systems are intended to assist customers in achieving
higher yields, greater productivity, more efficient use of operator time and
more economical use of manufacturing space.
 
  Address Worldwide Markets. The Company markets, sells and supports its
products worldwide. The Company believes the strength of its international
sales and customer support organization is important to its continued success.
To facilitate its worldwide marketing strategy, the Company has dedicated
sales and support organizations in Japan, Hong Kong, Korea, Taiwan, Singapore,
Malaysia, Germany, England, France and Italy, in addition to eight major
locations in the United States.
 
PRODUCTS AND SERVICES
 
 Laser Systems and Components
 
  Thin Film Laser Processing Systems--The Company's laser systems are used in
the production of thin film circuits to precisely tune the performance of
linear and mixed signal devices used in a variety of applications
 
                                       2
<PAGE>
 
including automotive electronics, consumer products, personal computers,
communications products, appliances, and medical instruments. Tuning is
accomplished by adjusting various component parameters with selective laser
cuts, while the circuit is under test, thereby achieving the desired
electrical performance. For example, in automotive applications, these
precision sensor circuits are used to measure analog variables such as
acceleration, voltage, temperature and pressure, and convert them into
electronic signals suitable for computer processing and subsequent control of
vehicle performance and safety. Automotive applications include engine
control, airbag deployment, anti-lock brake control and active suspension
systems. The M310 laser system subjects the sensor to a calibrating pressure
and then the laser adjusts the sensor parameters to exacting specifications.
The Company's M310 systems combine material handling, test stimulus,
temperature control and laser trim subsystems into a single turnkey package
for tuning linear and mixed signal devices.
 
  More recently, such linear mixed signal circuits are being adopted for smart
appliances (such as camcorders and mobile GPS devices), extended life
batteries, video games, medical instruments and HVAC systems. Such mixed
signal devices were one of the fastest growing segments in the electronic
components industry during 1997. The Company's thin film resistor processing
systems range in price from approximately $300,000 to $1,000,000.
Representative customers include Analog Devices, Robert Bosch, Denso, Fuji
Denki, Burr Brown, Maxim, Motorola and Texas Instruments.
 
  Thick Film Laser Processing Systems--The Company's laser systems are used in
the production of thick film resistive components (known as chip resistors)
for surface mount ("SMT") electronic circuits. Chip resistors are
microelectronic components that replace larger axial lead resistors formerly
used in electronic circuits. Chip resistors are used in most consumer and
industrial electronic products including CD players, VCRs, TVs, camcorders and
cellular telephones. A camcorder, for example, may contain over five hundred
chip resistors. The increasing use of these devices is being driven by the
demand for enhanced functionality, reduced size, and lower cost of consumer
electronics. SMT components meet these needs by providing reduced package size
and production set-up time, and improved reliability and delivery times. The
Company's W724C laser system is an integral part of the process for
manufacturing chip resistors. By means of selected cuts, laser systems are
used to change the effective length and cross section of the electrical
conductor of each resistor element. The resistance is monitored, and the laser
action continues until the precise resistance value is obtained. The Company
believes that the size of resistors will continue to shrink and, as a result,
manufacturers will require more precise laser systems.
 
  The Company's W670 laser systems are used for processing more general
purpose hybrid thick film electronic circuits. These circuits are designed to
withstand harsh environmental uses, such as automotive ignition controls, fuel
sensors and high voltage regulation.
 
  The Company's thick film resistor processing systems range in price from
approximately $200,000 to $350,000. Representative customers include Kyocera,
Matsushita, Philips, Samsung and Vishay.
 
  Semiconductor Measurement Systems--Semiconductor measurement products are
used by customers who manufacture electronic chips and chip packages. These
customers require fully automated, high throughput systems to inspect
electronics packages. Due to the semiconductor industry's drive toward
miniaturization, components and finished packages are becoming smaller and
more fragile. A single damaged lead, bent by a few thousandths of an inch, can
cause manufacturing defects and product failures. Accordingly, semiconductor
chip manufacturers are effectively required to inspect 100% of their chip
packages.
 
  The Company's products perform inspection during fabrication of the chip (in
the "front end" of the manufacturing process) and perform inspection of final
assembled components (in the "back end"). The systems incorporate the
Company's patented three-dimensional scanning laser data acquisition
technology to provide fast, accurate measurement. The Model 890, released in
early 1997, performs front-end wafer, die and package substrate measurement
for the newly emerging high-density, matrix-based package interconnect market.
The Model 880, first introduced in 1995, performs measurement of finished
package leads or bumps without removal of the devices from their carrier
trays. All of the systems are configurable to support a variety of device and
 
                                       3
<PAGE>
 
feature types. Current prices for the base systems range from $150,000 to
$275,000. Customers include Anam/Amkor, Intel, Micron, Samsung and Texas
Instruments.
 
  Surface Mount Measurement Systems--The Company's surface mount measurement
products address another sector of the electronics industry, the manufacture
of printed circuit board assemblies. Customers for SMT measurement products
require systems which can be used for prototyping, near-process monitoring and
in-line process control. These systems can be installed near or in the circuit
board assembly line to address these needs. In the manufacture of surface-
mount electronics, solder, in paste form, is stenciled onto the circuit board
with a screen printer, and then components are placed in their respective
positions on the board by automated equipment. Critical variables in the
manufacturing process, which the Company's systems address, include the amount
of solder deposited on the board and the accurate placement of the electronic
components.
 
  The Model 8100 system was introduced in 1995 and represents the third
generation of equipment design. The Model 8100 uses the Company's patented
three-dimensional scanning laser data acquisition technology, and can inspect
either solder paste depositions or component placement accuracy. The current
base price for the Model 8100 system is approximately $200,000 to $250,000.
The strongest market segments for SMT measurement products have been in the
computer, telecommunications and automotive industries as well as in contract
manufacturers which serve those and other industries. Customers include
Celestica, Chrysler, Hewlett-Packard, Intel, Marconi and Motorola.
 
  Memory Repair Systems--Dynamic random access memory chips are critical
components in the active memory portion of computers and a broad range of
other digital electronic products. To obtain efficient yields in the
production process, each memory component is designed with redundant
circuitry. Using the Company's M325 laser system, a semiconductor manufacturer
can effectively disconnect defective or redundant circuits in a memory chip
with accurately positioned and power modulated laser pulses. This improves the
yield of usable components per treated wafer, effectively lowering the cost
per unit produced.
 
  The demand for memory, measured in megabits, has in recent years been
growing at greater than 50% per year. Approximately half to three quarters of
memory components produced are used in personal computers, with additional
demand coming from networked systems (file servers), flat panel displays,
multimedia systems and consumer electronics. Memory demand by the computer
industry is driven by both memory intensive software (Windows 95(R), graphics,
etc.) and higher speed microprocessors. As the memory capacity increases, the
feature size and spacing between the elements of the microcircuits decrease.
The industry is presently changing from 16 megabit to 64 megabit memory in
response to the demand for additional memory, space limitations to accommodate
it and manufacturing economics. The Company offers products which are
currently being used for processing memory up to and including 64 megabits.
First-pass manufacturing yields are typically low at the start of production
of a new generation of higher capacity devices. First-pass yields have
decreased to, now, less than 20% with each successive generation of memory
chips as geometries shrink and manufacturing becomes more difficult. Laser
processing is used to raise production yields to acceptable economic levels,
frequently to greater than 95%.
 
  Memory components are currently produced in batches on silicon wafers
typically measuring 6" or 8" in diameter. The industry is currently planning
for production using 12" (300 millimeter) diameter wafers. The Company
believes that its technology and systems architecture will allow it to develop
and introduce products to process the new 12" wafers. The Company's newly
introduced M325 memory processing systems range in price from approximately
$500,000 to $900,000. Representative customers include Cypress Semiconductor,
Dominion Semiconductor, IBM, Mitsubishi and Toshiba.
 
  Permanent Marking Systems--The Company's moving spot laser marking systems
are used to apply permanent alphanumeric, graphic and bar-code identification
directly onto electronic components, industrial products and packaging
materials. Laser marking systems remove precise amounts of material from, or
modify the surface of, an object being marked by exact control of the laser
beam as it moves along a prescribed path.
 
                                       4
<PAGE>
 
Such systems are gaining acceptance over a broad range of markets, replacing
older technologies such as inkjet, mechanical imprinting, chemical etching and
ink stamping. This change is being driven by the need for permanent marking
and for marking systems which can be interfaced with computers, and by
environmental acceptance. Industry has recently begun to require product
traceability for years after the date of manufacture. At present, inkjet and
ink stamping do not provide this permanence, while laser marking does. Also,
the laser marking process does not involve the use of environmentally
hazardous solvents.
 
  As an example of this application, the Company's HM1500 laser system is used
to mark integrated circuit ("IC") packages. The plastic or ceramic package
surrounding an IC must be marked without penetration of its thin wall in order
to avoid damaging the expensive circuits it protects. This process requires a
high degree of precision. Laser marking for this application is gaining
widespread usage. The Company's laser systems are also used in other
applications including the marking of automotive parts, electrical components,
tools, medical implants, as well as in the decorative marking of consumer
items. During 1996, the Company replaced its current product offerings with
the 1000 Series products which offered significant advantages in terms of
higher power, larger marking fields, faster marking speeds and higher
precision. In 1997, the Company introduced a diode-pumped laser marker, with a
full 8,760 hour warranty on the laser, which requires no external cooling or
three-phase power. The FM3500-4 laser marking system, also introduced in mid
year, multiplexes a high power laser beam into four completely independent
marking heads that can be remotely located up to 100 feet away from the laser
by fiber optic cable. The Company's laser marking systems range in price from
approximately $50,000 to $225,000. Representative customers include Harris,
Hewlett-Packard, Motorola, SGS Thompson, Texas Instruments and Toshiba.
 
  Components Handling Systems--The Company designs, manufactures and, then,
integrates electronic components handling systems for laser marking, lead
inspection, parts sorting and parts packaging. This capability was added in
late 1997 through the acquisition of Reel-Tech, Inc. Products include in-tray
laser marking, tube-to-tube laser marking, tape and reel systems, media
transfer systems and integrated multi-process systems. These systems can
handle a wide variety of component package configurations. This capability
enables General Scanning to more effectively serve its customers by meeting
the emerging trend to more closely integrate multiple processes and,
therefore, increase manufacturing productivity. The Company's component
handler systems sell in the price range of approximately $125,000 to $400,000.
Representative customers include Micron, Motorola and Samsung.
 
  Precision Alignment Systems--The Company's precision alignment systems
interface with computer assisted design and manufacturing ("CAD/CAM") software
to assist in the precision alignment of parts during manufacturing assembly
processes. The principal use to date has been in the precision alignment of
composite materials for the aircraft industry. Composite materials are
important elements in the fabrication of critical structures for aircraft,
such as jet engine cowlings, cargo and nose wheel doors, and control surfaces
of the wings and vertical stabilizer, as well as for major components in jet
engines, helicopters, communication satellites and rockets. The Company's
systems project a precise image generated from existing CAD/CAM data to guide
the assembly operations personnel in the proper placement and order of layers
of composite materials. The Company's OLT4000 precision alignment systems
allow aircraft manufacturers to eliminate mechanical alignment templates,
minimize costs from engineering changes, and reduce operator learning time and
assembly labor requirements. The Company is exploring the applications of
these systems in other markets. The Company's precision alignment systems sell
in the range from approximately $50,000 to $250,000. Representative customers
include Bell Helicopter, Boeing, CFAN, Daimler-Benz Aerospace, Hughes Aircraft
and Northrop Grumman.
 
  Metrology Systems--The Company's metrology products are automated, non-
contact dimensional coordinate measurement systems which provide major
electronics, telecommunications, and computer manufacturers with the ability
to perform micron accurate measurements of component parts and assemblies
produced throughout their manufacturing processes. These systems utilize
combinations of CCD video camera, image processing, and various laser sensor
technologies to acquire part measurement data. The metrology products are
primarily sold to manufacturers of disk drives, semiconductor packages,
printed circuit boards, and
 
                                       5
<PAGE>
 
their associated micro-electronic components. During 1997, the Company
replaced one of its core product offerings with a new Voyager platform
featuring advances in illumination and autofocus technology, complemented by
easy-to-use graphical user interface to facilitate measurement and
programming. Current prices range from $55,000 to $150,000. Representative
customers include Applied Magnetics, Cummins Engine, IBM, Intel, K. R.
Precision and Seagate Technology.
 
  Film Imaging Systems--The application of lasers for imaging directly onto
film has progressed steadily over the past decade to the point where it has
become the technology of choice in two major markets: medical diagnostics and
graphics. Both applications demand precise micropositioning for pixel
placement and adjustable contrast range. Medical diagnostics often involve
images of the human anatomy derived from computer assisted tomography ("CAT"),
magnetic resonance imaging ("MRI") or nuclear medicine systems. Such images
are usually presented on photographic film for viewing by a radiologist. The
Company's laser imaging subsystems are used to produce images of adjustable
gray-level contrast and high resolution for enhanced medical diagnostic
purposes. The Company's laser imaging equipment, using data sets from CAT, MRI
or nuclear medicine equipment, creates a film image by moving a laser beam
across the width of the film, and modulating it to produce the correct gray
scale level for each picture element, or pixel. When the width of the film has
been scanned, the next line is scanned in sequence. The process is continued
until the entire image is exposed.
 
  In late 1997, General Scanning introduced a film duplicating system which
duplicates 8 x 10 and 14 x 17 films from existing X-ray, CAT and MRI
electronic films. Initially, the system will directly interface with wet and
dry laser imaging systems including Imation's DryView 8700 Laser Imaging
System. The Company intends to expand this digitizing equipment with future
applications in teleradiology and PACS (picture archiving and communication
systems).
 
  The Company also sells a modified version of its film imaging subsystem to
write directly onto a film plate for graphic printing.
 
  The Company's laser imaging systems and subsystems sell in the range from
approximately $1,500 to $20,000. Representative customers include A.B. Dick,
Agfa and Imation.
 
  Large format systems--In 1997, the Company commenced development of an
innovative laser patterning system for use in the manufacture of flat panel
displays ("FPD"). The development, alpha and beta phases of this project are
funded by two multinational companies with an interest in the FPD industry.
FPDs are compact, lightweight, low power alternatives to the traditional
picture tube used in televisions and computer monitors. A typical FPD is
composed of a thin layer of liquid crystal sandwiched between two sheets of
glass, with a variety of layers of material patterned onto the glass surfaces.
The rapidly growing FPD market has been driven by the growth in "laptop"
portable computers and is projected to grow from $10.8 billion in 1995 to
$23.7 billion in 2002 (Stanford Resources). To reduce manufacturing costs per
FPD, the industry is moving to large (up to 800mm x 800mm) glass substrates,
capable of simultaneously fabricating six to nine FPDs per substrate, and to
new techniques for one or more of the manufacturing steps. The product under
development will exploit General Scanning's expertise in the precision
pointing, shaping and control of laser beams to precision patterns, this time
over a large field of view when compared to the Company's current
applications.
 
  Biological scanners--The Company recently introduced a laser-based
fluorescence imaging system for use in the measurement of gene expression.
Identification and quantification of the expression level of different genes
under varying conditions provide researchers with a rough functional analysis
of genomic sequence information, which could lead to potential drug targets.
Similarly, gene expression analysis can be used for diagnostic purposes. Some
scientists believe that pharmacogenomics (the discipline of identifying genes
responsible for different reactions to drugs) could be the quickest route to
improving the therapeutic specificity of drugs. Several biotechnology
companies are active in the development of molecular array technology and
fluorescently labeled ligands. The ScanArray(TM) 3000 Biochip Analysis System
measures the fluorescent intensity at each DNA grid spot facilitating, at high
speed, the analysis of the expression level of a particular gene. The system
is offered for
 
                                       6
<PAGE>
 
sale to end users in research and, on an OEM basis, for resale by those
companies active in biochemistry and microchip technology.
 
  Components--The Company develops, produces and sells optical scanners and
scanner subsystems which include optics, software and control systems. These
are used by the Company and its customers in a variety of applications
including materials processing, test and measurement, alignment, inspection,
displays, graphics, vision, rapid prototyping, and medical applications
including dermatology and ophthalmology. The Company intends to continue to
work with its customers to develop new components and subsystems based upon
its optical scanning technology. The Company sells its scanners in a range
from approximately $100 to $4,000 and its subsystems in a range from
approximately $2,000 to $30,000. Representative customers include Eastman
Kodak, Lumonics, Nikon, Perceptron and Texas Instruments.
 
 Thermal Printing Products
 
  The Company develops, produces and sells a variety of thermal printers which
are designed for use with defibrillators, patient care monitors, cardiac
pacemaker programmers, and other medical applications. Thermal printers are
used to provide a permanent record of a patient's condition during critical
medical care.
 
  The Company's thermal printers generate signal traces, grids and real time
annotation on heat sensitive paper. Paper widths ranging from 48 to 216
millimeters are moved at speeds that can be remotely selected in the range
from 1 millimeter per hour to 125 millimeters per second, and have a
resolution of 8 x 32 dots per millimeter. The text and graphics are generated
by selectively and instantaneously modulating the temperature of small
(approximately 0.105 x 0.175 millimeters) elements of a print head across the
width of the chart. The heated elements create dots on thermal sensitive
paper. By repeated action under the control of an on-board microprocessor, the
desired graphic output can be produced.
 
  The Company works closely with its OEM customers to develop and produce
thermal printers which are incorporated into its customers' products. Typical
customized features of thermal printers offered by the Company include:
package and size dimensions dictated by the customer's end products; speed and
accuracy of chart transport; print resolution; number of fonts; and number of
data channels. Medical uses for the Company's thermal printers require high
reliability, since they are often used in emergency medical equipment which
must be rugged and lightweight. The Company believes that its ability to work
rapidly and efficiently with its customers provides an important benefit to
such customers. Approximately, 66,000 thermal printers were shipped during
1997. The Company's thermal printers sell in a range from approximately $200
to $3,000. Representative customers include Datascope, Marquette, Medtronic,
Physio-Control, Solectron, Spacelabs Medical and Zoll Medical.
 
  In 1997, the Company introduced a new foil imprinting technology, initially
for use in photo labs and in retail photo finishing locations for
personalization of greeting cards. The new process can replace time-consuming
litho techniques, as well as film, metal dies, type and plates typically
required by current foil stamping processes. Qualex, Inc., a subsidiary of
Eastman Kodak, is the Company's initial customer for this new application.
This technology may be applied to other materials in graphics art.
 
                                       7
<PAGE>
 
PRODUCT LIST
 
  The following is an abbreviated list of General Scanning's products and their
typical market applications:
 
<TABLE>
<CAPTION>
 PRODUCTS                 MARKET APPLICATIONS
 --------                 -------------------
 <C>                      <S>
 Laser Systems
    M310ST............... Automotive sensor production
    M310/W678............ Processing of thin film electronic circuits
    W724C................ Manufacture of thick film resistive components
    W670................. Processing of hybrid thick film electronic circuits
                          Lead/bump inspection of individual electronic
    Model 830............ components
    Model 880............ In-tray lead/bump inspection of electronic components
    Model 890............ Wafer, die and bump inspection
                          Solder paste measurement, component placement
    Model 8100........... inspection
    M325................. Memory and PLD fabrication
    HM1000 Series........ Integrated circuit marking
    DM1100............... Permanent marking of manufactured parts
    FM3500-4............. Marking across multiple production lines
                          Material handling and marking of large industrial
    VersaStation......... parts
    LM-4000.............. Integrated tube-to-tube marking
    LM-6000.............. Integrated in-tray marking
    LM-3000MT............ Dual probe tape and reel for fine pitch SMDs
    OLT4000.............. Assembly of composite structures
    Voyager 1000......... Benchtop metrology
    Ultra 8.............. Automated, non-contact 3-D measurement
                          Production of film images for both medical and
    TAE.................. graphics applications
    LD2000 .............. Digitizer for film duplication, teleradiology, PACs
    ScanArray ........... Fluorescent imaging for DNA analysis
 Components
    HPM/SPM/HPLK......... Laser processing of materials, including permanent
                           marking, cutting, drilling and rapid prototyping
    VSH.................. Semiconductor inspection
                          Performance of medical procedures in ophthalmology
                          and dermatology Performance of biomedical measurement
                          and analysis
    Optical Scanners..... Processing of materials
                          Test, measurement and alignment
                          Ophthalmology and dermatology applications
                          Confocal microscopes
                          Projection of images on film
                          Inspection
 Thermal Printers
    AR42................. Defibrillator vital sign recording
    OMNI-100............. Patient critical care monitoring
    OMNI-200............. Cardiac pacemaker programming
    AR200FB.............. Stress testing; electroencephalograph
    Slimline............. Foil imprinting at point-of-sale
    Decorator 2000....... Foil imprinting at central labs
</TABLE>
 
                                       8
<PAGE>
 
CUSTOMERS
 
  The Company has over 1,000 customers. During 1997, no single customer
accounted for more than 5% of total sales. General Scanning's ten most
significant customers in terms of sales in 1997, listed alphabetically, were:
Analog Devices, Boeing, Denso, IBM, Imation, Intel, Maxim, Micron, Physio-
Control and Texas Instruments.
 
SALES, MARKETING AND CUSTOMER SUPPORT
 
  The Company believes that its marketing, sales and customer support
organizations are important to its long-term growth and give the Company the
ability to respond rapidly to the needs of its customers. The Company has
marketing managers for each major product line who have worldwide
responsibility for determining product strategy based on knowledge of the
industry, customer requirements and product performance. These marketing
managers have direct contact with customers and support the field sales and
service personnel. The Company believes that its business may be subject to
seasonal fluctuations due to capital expenditure approval cycles of its
customers.
 
  The Company sells and supports its products worldwide through its own direct
sales and customer service organization. This domestic and international sales
network is augmented by selected independent sales representatives for end-
user laser systems, due to the geographical dispersion of customers for such
products. Field offices have been located in close proximity to key customers
to help achieve short response time. In the United States, the Company
provides marketing support at its locations in Watertown, Wilmington,
Arlington and Bedford, Massachusetts, Indianapolis, Indiana, Simi Valley and
Santa Clara, California and in Ann Arbor, Michigan. In Europe, the Company
distributes its products through its direct sales offices located in Germany,
the United Kingdom, Italy and France. The Company distributes its products in
Japan through its offices in Tokyo and Osaka. Throughout the remainder of
Asia, the Company distributes through its offices in Hong Kong, Korea,
Singapore, Malaysia and Taiwan.
 
  The Company provides customer support in the form of applications
engineering, repair services and spare parts inventory through its offices in
Massachusetts, Michigan, Indiana, California, France, Germany, Italy, the
United Kingdom, Hong Kong, Japan, Korea, Singapore, Malaysia and Taiwan.
Engineering and field support personnel provide telephone support or are
dispatched to customer locations. Additionally, the Company's offices
generally have certain models of the Company's laser systems which are used
for demonstration purposes and for applications engineering. From time to
time, at the request of a customer, the Company will install a laser system at
the customer's manufacturing site to establish manufacturing process and
demonstrate product performance as part of the selling process prior to
receipt of an order. The typical purchase of a laser system includes
installation, on-site customer support and applications engineering.
 
RESEARCH AND DEVELOPMENT
 
  The Company devotes significant resources to development programs directed
at creating new products and product enhancements, as well as developing new
applications for existing products. All of the markets served by the Company
are characterized by rapid technological change and product innovation. The
Company believes that continued timely development of new products and product
enhancements to serve both existing and new markets is necessary to remain
competitive.
 
  The Company maintains significant expertise in the following core
technologies:
 
  Mechanics: design of mechanisms with high rigidity and low moving mass; use
of materials at high stress levels; techniques for precise assembly and
vibration isolation of bearings, lasers and lenses.
 
  Optics: design of laser quality lenses with variable depth of field or large
numerical aperture; design of mirrors of high dynamic rigidity; selection of
wavelength-specific mirror and lens coatings; specification and adjustment of
lasers; and interaction of lasers with materials.
 
 
                                       9
<PAGE>
 
  Magnetics: design and use of rare-earth magnets; heat treatment of specialty
magnetic alloys; design and heat dissipation of compact electrical drive
coils.
 
  Electronics: design of wide bandwidth power amplifiers and high signal-to-
noise ratio and low thermal drift signal detection circuits; design and
manufacture of analog servo controllers with low electromagnetic interference
(EMI) circuitry.
 
  Software: development of high-speed computing algorithms for real-time
control of servo mechanisms; handling of data transmitted according to
customer-specific protocols; design of operator-friendly computer/systems
interfaces.
 
  Systems Design: integration of mechanisms, optics, lasers, laser electro-
optics, power supplies, electronics, communications interfaces and software.
 
  The Company's personnel work closely with customers, frequently at the
customers' facilities, to develop complete process solutions that often
involve new or extended application of the Company's existing products. This
close cooperation leads to new products being developed for a ready customer.
 
  For the years ended December 31, 1997, 1996 and 1995, the Company's research
and development expenditures were approximately $22.3 million (excluding a
one-time expense relating to acquired in-process research and development
associated with the acquisition of Reel-Tech), $18.4 million and $17.1
million, respectively. These amounts were approximately 12%, 12% and 14% of
sales in the respective periods. As of December 31, 1997, the Company had 206
people engaged in research and product development activities. Because the
Company believes that the development of new products is vital to its
continued success, the Company expects significant expenditures to continue on
research and development activities.
 
  Approximately one-half of sales during 1997 were from products introduced
during the current and previous two years.
 
MANUFACTURING
 
  The Company's manufacturing strategy is to identify and perform internally
those manufacturing functions which enable the Company to maintain control
over critical portions of the production process and which add value to its
products. The Company believes it achieves a number of competitive advantages
from such integration, including the ability to achieve lower costs and higher
quality, the ability to bring new products and product enhancements quickly
and reliably to market, and the ability to produce sophisticated component
parts not available from other sources.
 
  The Company's manufacturing is conducted at four facilities located near
Boston, Massachusetts and in Indianapolis, Indiana and Simi Valley,
California. Each of the Company's manufacturing facilities has co-located
manufacturing, manufacturing engineering, marketing and product design
personnel. The Company believes, based on its experience, that this
organizational proximity greatly accelerates development and entry into
production of new products and aids economical manufacturing. The Company's
thermal printers and many of its laser systems are manufactured under ISO 9001
certification.
 
  The Company has fully integrated manufacturing operations in key strategic
elements, such as state-of-the-art metals and plastics fabrication, surface
mount (SMT) printed circuit board fabrication and testing, and extensive in-
process and final product testing capabilities. The Company believes it gains
competitive advantages in its capability to produce high quality, short-run
parts and assemblies in a just-in-time environment which reduces delivery
times to customers.
 
  Certain of the components and materials included in the Company's laser
systems and optical products are currently obtained from single source
suppliers. The Company currently obtains a component for one of its laser
systems products from a single source. The Company currently maintains a six
month inventory of this component and plans to increase this over the next
year. The Company has explored the possibility of producing
 
                                      10
<PAGE>
 
this component internally, and in the event of a disruption in the outside
supply of this component, the Company believes that it could commence
production internally within twelve months.
 
  The Company is subject to a variety of governmental regulations related to
the discharge or disposal of toxic, volatile, or otherwise hazardous chemicals
used on the Company's premises. The Company believes that it is in material
compliance with these regulations and that it has obtained all necessary
environmental permits to conduct its business. Nevertheless, current or future
regulations could require the Company to purchase expensive equipment or to
incur other substantial expenses to comply with environmental regulations. Any
failure by the Company to control the use of, or adequately restrict the
discharge or disposal of, hazardous substances could subject the Company to
future liabilities, result in fines being imposed on the Company, or result in
the suspension of production or cessation of the Company's manufacturing
operations in one or more locations.
 
WORKING CAPITAL REQUIREMENTS
 
  The Company manufactures and sells a variety of laser systems, subsystems
and components, as well as a line of thermal printers. The Company maintains
levels of inventory at various states of assembly in order to be responsive to
customers' requirements.
 
BACKLOG
 
  The Company defines backlog as written purchase orders or other contractual
agreements for products for which the customer has requested delivery within
the next twelve months. Backlog was approximately $44 million on December 31,
1997 compared to $36 million on December 31, 1996.
 
COMPETITION
 
  The markets for the Company's products are highly competitive. The Company
is subject to substantial competition from both established competitors and
potential new market entrants. Significant competitive factors include:
product functionality, performance, size, flexibility, cost, market presence,
customer satisfaction, customer support capabilities and breadth of product
line. The Company believes that it competes favorably on the basis of each of
these factors.
 
  Competition in the development, manufacture and sale of laser systems is
concentrated in certain segments and fragmented in others. To the Company's
knowledge, the automotive sensor manufacturing market in which the Company's
thin film processing systems are used has no other competitors. The markets
for the thick film hybrid circuit processing systems in which the Company
competes have several other manufacturers. The Company is aware of three
competitors in vision systems for solder paste and component placement
inspection. In systems for electronic component lead inspection, the Company
competes primarily with Robotic Vision Systems. The Company competes primarily
with Electro Scientific Industries, which has the major market share, in laser
systems for memory fabrication. The Company is aware of laser marking systems
produced by many other manufacturers which compete with the Company's laser
marking equipment. There are several competitors in the field of component
handling systems. To the Company's knowledge, in the precision alignment
market for the aircraft industry, the Company has one competitor. There are
several competitors in the field of general purpose, non-contact metrology in
which the Company competes.
 
  The Company knows of at least five other manufacturers of subsystems for the
film imaging systems and subsystems market.
 
  In the optical scanner subsystem and components markets, the Company knows
of two other manufacturers. Additionally, there exist two alternate
technologies, rotating polygons and XY-moving tables, to the galvonometric
scanning technology used by the Company, which compete for certain segments of
the markets served by the Company's products.
 
                                      11
<PAGE>
 
  Thermal printing for the medical equipment market has fragmented
competition, mostly from vertically integrated equipment manufacturers.
 
  The Company expects its competitors to continue to improve the design and
performance of their products. There can be no assurance that the Company's
competitors will not develop enhancements to, or future generations of,
competitive products that will offer superior price or performance features,
or that new processes or technologies will not emerge that render the
Company's products less competitive or obsolete. As a result of the
substantial investment required by a customer to integrate capital equipment
into a production line, or to integrate components and subsystems into a
product design, the Company believes that once a customer has selected certain
capital equipment, or certain components or subsystems from a particular
vendor, the customer generally relies upon that vendor to provide equipment
for the specific production line or product application and may seek to rely
upon that vendor to meet other capital equipment, or component or subsystem
requirements. Accordingly, the Company may be at a competitive disadvantage
with respect to a particular customer if that customer utilizes a competitor's
manufacturing equipment or components. Increased competitive pressure could
lead to lower prices for the Company's products, thereby adversely affecting
the Company's business and results of operations. There can be no assurance
that the Company will be able to compete successfully in the future.
 
PATENTS AND INTELLECTUAL PROPERTY
 
  The Company believes that the success of its business depends more on the
technical competence and creativity of its employees than on patents,
trademarks and copyrights. Nevertheless, the Company has a policy of seeking
patents, when appropriate, on inventions concerning new products and
improvements as part of its ongoing research, development and manufacturing
activities.
 
  Although the Company has been granted, has filed applications for and has
been licensed under a number of patents in the United States and foreign
countries, there can be no assurance as to the degree of protection offered by
these patents or as to the likelihood that patents will be issued for pending
applications.
 
  Competitors in the United States and foreign countries, many of which have
substantially greater resources and have made substantial investments in
competing technologies, may have applied for or obtained, or may in the future
apply for and obtain, patents that will prevent, limit or interfere with the
Company's ability to make and sell some of its products. Although the Company
believes that its products do not infringe the patents or other proprietary
rights of third parties, there can be no assurance that other third parties
will not assert infringement claims against the Company or that such claims
will not be successful. (See Item 3, Legal Proceedings.)
 
  The Company also relies upon trade secret protection for its confidential
and proprietary information. The Company routinely enters into confidentiality
agreements with its employees and consultants. There can be no assurance,
however, that these agreements will provide meaningful protection of the
Company's trade secrets, know-how or other proprietary information in the
event of any unauthorized use, misappropriation or disclosure of such trade
secrets, know-how or other proprietary information.
 
EMPLOYEES
 
  As of December 31, 1997, the Company had 915 full-time employees worldwide,
including 396 in manufacturing, 226 in marketing, sales and field service, 206
in research and development, and 87 in general administration. Approximately
108 employees, mostly foreign nationals, reside and work outside of the
United States, primarily in marketing, sales and support. In addition, the
Company periodically engages contract employees principally in new product
development and manufacturing operations. None of the Company's employees is
represented by a labor union, and the Company has never experienced a work
stoppage or strike. The Company considers its employee relations to be good.
 
 
                                      12
<PAGE>
 
ITEM 2. PROPERTIES
 
  The Company's headquarters is located in Watertown, Massachusetts, which is
a suburb of Boston. The principal owned and leased properties of the Company
and its subsidiaries are listed in the table below.
 
<TABLE>
<CAPTION>
                                                                                APPROXIMATE OWNED/
LOCATION                                        PURPOSE                         SQUARE FEET LEASED
--------                                        -------                         ----------- ------
<S>                      <C>                                                    <C>         <C>
Watertown, MA, USA...... Marketing, sales, manufacturing, engineering, offices;   84,000     owned
                          corporate headquarters
Wilmington, MA, USA..... Marketing, sales, manufacturing, engineering, offices    78,000    leased(1)
Arlington, MA, USA...... Marketing, sales, manufacturing, engineering, offices    32,000    leased(2)
Bedford, MA, USA........ Marketing, sales, manufacturing, engineering, offices    50,000    leased(3)
Simi Valley, CA, USA.... Marketing, sales, manufacturing, engineering, offices    41,000     owned
Simi Valley, CA, USA.... Manufacturing                                            21,000    leased(4)
Ann Arbor, MI, USA...... Marketing, sales, engineering, offices                   15,000    leased(5)
Indianapolis, IN, USA... Marketing, sales, manufacturing, engineering, offices    12,000    leased(6)
</TABLE>
--------
(1) Lease expires in 2007, with two 5-year renewal options.
 
(2) Lease expires in 2000, with one 2-year renewal option.
 
(3) Lease expires in 2003, with one 3-year renewal option.
 
(4) Lease expires in 1998, with one 3-year renewal option.
 
(5) Lease expires in 2001, with two 3-year renewal options.
 
(6) Lease expires in 2001, with one 5-year renewal option.
 
  Additional sales and service offices are located in Japan, Germany, France,
Italy, the United Kingdom, Hong Kong, Korea, Taiwan, Singapore, Malaysia and
other locations in the United States. These additional marketing and sales
offices are in leased facilities occupying approximately 25,000 square feet in
the aggregate.
 
  The Company believes that additional manufacturing facilities will be
required within the next two years and that suitable additional or substitute
space will be available as needed.
 
ITEM 3. LEGAL PROCEEDINGS
 
  View Engineering v. Robotic Vision Systems, Inc. USDC Case No. 95-1882. On
or about March 24, 1995, View Engineering, Inc. ("View") filed a complaint
against Robotic Vision Systems, Inc. ("RVSI") seeking declaratory relief that
(i) U.S. Patent No. 4,328,147 (" '147") held by RVSI was invalid and (ii) View
had not infringed this patent. RVSI counterclaimed against View for alleged
trade libel and patent infringement on the "147 patent and on seven additional
patents, seeking a judgment that View had infringed upon one or more claims of
each of the eight patents. After View challenged the merits of RVSI's case,
RVSI dropped its infringement claims involving five of the eight patents and
did not pursue the claim of trade libel. In June, 1996, the Federal District
Court granted View a summary judgment on non-infringement with respect to the
three remaining patents and granted, in part, its motion for reimbursement of
attorneys' fees under Rule 11. The summary judgment and the Rule 11 sanctions
were appealed by RVSI. In July 1997, the summary judgment in favor of View was
upheld and affirmed by the United States Court of Appeals for the Federal
Circuit. The Rule 11 sanctions were remanded back to the District Court to
determine the amount of fees due to View.
 
  Robotic Vision Systems, Inc. v. View Engineering, Inc. USDC Case No. 95-
7441. On or about October 31, 1995, RVSI filed a complaint for patent
infringement against View alleging infringement of U.S. Patent No. 5,463,227
and seeking damages allegedly caused by View's infringement. RVSI's requests
for a temporary restraining order and a preliminary injunction were denied. In
March 1996, View obtained a summary judgment
 
                                      13
<PAGE>
 
on the first of RVSI's claims; and RVSI has dismissed the other claims. RVSI
appealed the summary judgment. In April 1997, the United States Court of
Appeals for the Federal Circuit returned the issue to the District Court for
further discovery. A trial date has been set for August 3, 1998.
 
  Robotic Vision Systems, Inc. v. View Engineering Inc. USDC Case No. 96-
2288. On or about April 1, 1996, RVSI filed a complaint for patent
infringement against View alleging infringement of U.S. Patent No. 5,465,152.
During 1997, View was denied its motion for summary judgment for
noninfringement and for invalidity. A trial commenced in December 1997 and
concluded in January 1998. A briefing schedule has been set, and final
arguments are scheduled for March 30, 1998.
 
  Robotic Vision Systems, Inc. v. General Scanning Inc. USDC Case No. 96-
3884. On or about August 5, 1996, RVSI filed an action claiming that the
Company improperly obtained proprietary information from RVSI for the purpose
of acquiring View and thwarting RVSI's attempts to acquire View. RVSI is
seeking compensatory and punitive damages in an unspecified amount. In
September 1997, the United States District Court for the Eastern District of
New York, pursuant to a motion for summary judgment filed by General Scanning,
dismissed four of RVSI's six claims. In January 1998, the District Court,
responding to a motion by RVSI, readmitted one of the claims originally
dismissed in the summary judgment. A trial is scheduled for May 4, 1998.
 
  Electro Scientific Industries, Inc. v. General Scanning Inc. USDC Case No.
C-96-04628. On or about December 26, 1996, Electro Scientific Industries, Inc.
("Electro Scientific") filed a complaint for patent infringement against the
Company alleging infringement of U.S. Patent Nos. 5,265,114 and 5,473,624.
Electro Scientific is seeking temporary and permanent restraining orders,
compensatory and punitive damages in an unspecified amount, and attorneys'
fees, costs and disbursements. The Company has filed an answer and
counterclaim to this complaint. In November 1997, the Company filed a motion
for summary judgment on the grounds that the patents are invalid. A hearing is
scheduled for February 24, 1998.
 
  General Scanning Inc. v. Voxel Pursuant to the dispute resolution provision
of a development agreement between Voxel and the Company, General Scanning is
seeking through binding arbitration recovery of monies for work performed as
well as lost profits on future production. Voxel counterclaimed seeking
recovery of lost profits. The arbitration hearing was concluded in January
1998. Following post trial submissions, a decision is expected in the spring
of 1998.
 
  The Company believes that RVSI's, Electro Scientific's and Voxel's claims in
each of the above actions are without merit and the Company is vigorously
defending these precedings. However, if RVSI, Electro Scientific or Voxel
prevails on one or more of its claims, there could be a material adverse
effect on the Company's business, financial condition or operating results.
 
  The Company is routinely involved in litigation incidental to its business,
although the Company is not aware of any other pending litigation which, if
adversely determined, could materially and adversely affect its business.
 
  ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
  No matters were submitted to a vote of the Company's security holders during
the last quarter of the year ended December 31, 1997.
 
                                      14
<PAGE>
 
                     EXECUTIVE OFFICERS OF THE REGISTRANT
 
  The following table sets forth the names, ages and positions of the current
executive officers of the Company and the principal occupations held by each
person named for at least the past five years.
 
<TABLE>
<CAPTION>
   NAME                     AGE                  POSITION WITH THE COMPANY
   ----                     ---                  -------------------------
   <S>                      <C> <C>
   Charles D. Winston......  56 President, Chief Executive Officer and Director
   Victor H. Woolley.......  55 Vice President, Chief Financial Officer, Treasurer and Clerk
   Gregory S. Baletsa......  44 Vice President and General Manager of the
                                 Recorder Products Division
   Michael R. Kampfe.......  48 Vice President and General Manager of the
                                 Optical Scanning Products Division
   Victor Sabella..........  53 Vice President and General Manager of the
                                 Industrial Laser Products Division
   Thomas R. Swain.........  52 Vice President and General Manager of the
                                 View Engineering Division
   Joseph A. Verderber.....  59 Vice President and General Manager of the
                                 Laser Systems Division
</TABLE>
 
  Charles D. Winston has served as President and Chief Executive Officer of
the Company since September 1988. He has served as a Director of the Company
since 1989. Prior to joining the Company, from 1986 to 1988, Mr. Winston
served as a management consultant. In 1986, Mr. Winston was an officer of
Savin Corporation. From 1981 to 1985, he served as a Senior Vice President of
Federal Express Corporation.
 
  Victor H. Woolley has been Vice President and Chief Financial Officer of the
Company since August 1995. From 1986 to 1995, Mr. Woolley was Vice President
and Chief Financial Officer of Sepracor Inc., a public company involved in the
manufacture of systems, medical devices and consumables for the biotechnology
and pharmaceutical industries, as well as conducting research in drug
development.
 
  Gregory S. Baletsa joined the Company in 1985. Since 1989, he has served as
Vice President and General Manager of the Company's Recorder Products
Division.
 
  Michael R. Kampfe joined the Company in 1984. From 1990 through 1996, he
served as Vice President and General Manager of the Company's Laser Graphics
Division. In late 1996, the Laser Graphics Division was merged into the
Optical Scanning Products Division under Mr. Kampfe.
 
  Victor Sabella served as Vice President and General Manager of the Company's
Optical Scanning Products Division from October 1992 through 1996. In late
1996, Mr. Sabella became General Manager of the newly-formed Industrial Laser
Products Division, a combination of the Laser Systems Division's laser marking
product line and a new initiative for this technology into expanded industrial
applications. Prior to joining the Company, from 1991 to 1992, Mr. Sabella
served as Senior Vice President of Crosscomm Corp., a communication inter-
networking firm. From 1986 to 1991, he served as the General Manager of the
Microelectronics Division at Analog Devices, Inc.
 
  Thomas R. Swain joined the Company in August 1996 with the acquisition of
View. Prior to the acquisition, Mr. Swain was President and Chief Executive
Officer of View. Mr. Swain originally joined View in 1984 as the Vice
President of Finance and Chief Financial Officer and was promoted to President
in 1992.
 
  Joseph A. Verderber has served as Vice President and General Manager of the
Company's Laser Systems Division since May 1991. Before joining the Company,
Mr. Verderber served as President of Barco Graphics, Inc. from 1990 to 1991.
From 1961 to 1990, Mr. Verderber served in a number of executive positions at
AM International, Inc., including Vice President and General Manager,
VariTyper.
 
                                      15
<PAGE>
 
                                    PART II
 
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
 
MARKET INFORMATION
 
  General Scanning's common stock, $0.01 par value ("Common Stock"), has been
traded on the Nasdaq National Market under the symbol GSCN since September 22,
1995. Prior to September 22, 1995 the Company's Common Stock was not publicly
traded.
 
  The following table sets forth, for the periods indicated, the high and low
prices per share of the Common Stock as reported by the Nasdaq National
Market.
 
<TABLE>
<CAPTION>
                                    1995            1996             1997
                               --------------- --------------- -----------------
                                HIGH     LOW    HIGH     LOW     HIGH     LOW
                               ------- ------- ------- ------- -------- --------
   <S>                         <C>     <C>     <C>     <C>     <C>      <C>
   First Quarter..............                 $15 3/4 $ 8 7/8 $13 9/16 $ 8 5/8
   Second Quarter.............                 $25 1/4 $12 3/4 $15 7/8  $ 6 7/8
   Third Quarter.............. $13 3/4 $11 1/4 $18 1/4 $ 9 1/2 $35 3/4  $13 1/2
   Fourth Quarter............. $13     $ 8     $13 3/8 $ 8 1/2 $34 7/8  $16 5/16
</TABLE>
 
HOLDERS
 
  On February 10, 1998, the Company had approximately 260 stockholders of
record. Since many shares of Common Stock are registered in "nominee" or
"street" name, the Company estimates that the total number of beneficial
owners approximates 3,000.
 
DIVIDENDS
 
  The Company has never paid cash dividends on its Common Stock. The Company
currently intends to reinvest its earnings for use in the business and does
not expect to pay cash dividends in the foreseeable future.
 
 
                                      16
<PAGE>
 
ITEM 6. SELECTED FINANCIAL DATA
 
<TABLE>
<CAPTION>
                                      YEAR ENDED DECEMBER 31,
                             ----------------------------------------------
                               1997      1996      1995     1994     1993
                             --------  --------  --------  -------  -------
                               (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                          <C>       <C>       <C>       <C>      <C>      
INCOME STATEMENT DATA:
Net sales:
  Laser systems and
   components..............  $154,536  $131,867  $103,405  $77,488  $62,994
  Thermal printers.........    26,994    24,666    22,915   20,624   18,821
                             --------  --------  --------  -------  -------
    Total sales............   181,530   156,533   126,320   98,112   81,815
                             --------  --------  --------  -------  -------
Gross profit:
  Laser systems and
   components..............    74,686    60,829    47,861   37,760   29,785
  Thermal printers.........    12,039    10,851    10,061    8,533    7,614
                             --------  --------  --------  -------  -------
    Total gross profit.....    86,725    71,680    57,922   46,293   37,399
                             --------  --------  --------  -------  -------
Operating expenses:
  Research and product
   development.............    22,302    18,400    17,106   13,090   11,208
  Selling, general and
   administrative..........    46,169    39,475    33,091   27,326   21,689
  Acquired in-process
   research and
   development.............    10,600       --        --       --       --
                             --------  --------  --------  -------  -------
    Total operating
     expenses..............    79,071    57,875    50,197   40,416   32,897
                             --------  --------  --------  -------  -------
Income from operations.....     7,654    13,805     7,725    5,877    4,502
Merger (expenses)..........       --     (1,950)      --       --       --
Interest income (expense),
 net.......................       464       272      (682)    (847)    (896)
Foreign exchange
 transaction gains
 (losses)..................      (507)     (159)      331      636      (24)
                             --------  --------  --------  -------  -------
Income before income taxes.     7,611    11,968     7,374    5,666    3,582
Income taxes...............     2,502     5,367     2,803    1,868    1,291
                             --------  --------  --------  -------  -------
Net income.................  $  5,109  $  6,601  $  4,571  $ 3,798  $ 2,291
                             ========  ========  ========  =======  =======
Basic income per common
 share.....................  $   0.42  $   0.56  $   0.48  $  0.52  $  0.31
                             ========  ========  ========  =======  =======
Diluted income per common
 share.....................  $   0.40  $   0.53  $   0.44  $  0.42  $  0.26
                             ========  ========  ========  =======  =======
Weighted average common
 shares outstanding and
 dilutive potential common
 shares....................    12,657    12,476    10,357    9,099    8,863
                             ========  ========  ========  =======  =======
<CAPTION>
                                            DECEMBER 31,
                             ----------------------------------------------
                               1997      1996      1995      994     1993
                             --------  --------  --------  -------  -------
<S>                          <C>       <C>       <C>       <C>      <C>      
BALANCE SHEET DATA:
Working capital............  $ 62,663  $ 57,680  $ 52,396  $20,275  $19,725
Total assets...............   115,042    95,573    89,708   49,859   47,732
Long-term obligations......     3,208     3,442     3,102    2,961    6,980
Stockholders' equity.......    78,229    68,289    59,754   27,111   23,216
</TABLE>
 
  In August 1996 the Company acquired View Engineering, Inc. by issuing
1,437,060 shares of General Scanning Inc. common stock in exchange for all of
View's outstanding shares of capital stock, accrued preferred dividends and
the net value of warrants and options. The transaction was accounted for as a
pooling of interests for accounting purposes and, accordingly, the financial
statements for the years 1993, 1994 and 1995 were retroactively restated to
include the accounts of View.
 
  On November 28, 1997 the Company acquired the assets of Reel-Tech, Inc. in a
transaction that was accounted for as a purchase. Accordingly, the operations
of Reel-Tech, Inc. have been included in the consolidated financial statements
from the date of acquisition. The purchase price of $14.4 million includes
$0.7 million of tangible net assets, $10.6 million of acquired in-process
research and development and $3.1 million of goodwill.
 
                                      17
<PAGE>
 
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
        RESULTS OF OPERATIONS
 
OVERVIEW
 
  General Scanning is a leading manufacturer of laser systems and components
and thermal printers. In 1997, 1996 and 1995, approximately 85%, 84%, and 82%,
respectively, of the Company's revenues were derived from sales of laser
systems and components and the balance was derived from sales of thermal
printers. Sales of laser systems and components in 1997 and in 1996 grew
approximately 17% and 28%, respectively, over sales for this segment in the
comparable prior periods. Thermal printers sales in 1997 and 1996 grew
approximately 9% and 8%, respectively, over the comparable prior periods.
 
  In November 1997, the Company acquired Reel-Tech, Inc. ("Reel-Tech"), a
wholly-owned subsidiary of Data I/O Corporation. The transaction was
structured as a purchase of substantially all the assets and the business of
Reel-Tech and its subsidiary in Singapore and is being accounted for as a
purchase. The operations of Reel-Tech have been included in the consolidated
financial statements from the date of acquisition and are not material to
comparative prior periods. The purchase price of $14.4 million includes $0.7
million of tangible net assets, $10.6 million of acquired in-process research
and development which was recorded as a charge to operations on the date of
acquisition and $3.1 million of goodwill. Reel-Tech is an integrator of
electronics components handling systems for marking, inspection, sorting and
packaging.
 
  In August 1996, the Company acquired View Engineering, Inc. by issuing
1,437,060 shares of General Scanning Common Stock. The transaction was
recorded as a pooling of interests for accounting purposes. Accordingly, the
consolidated financial statements include the accounts of View for all periods
presented. View employs laser image processing technology to serve
applications requiring precision inspection, measurement and process control
in several industries.
 
  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 which are used in
the Company's own systems, as well as sold to other manufacturers of laser
systems. The Company's laser systems sales have been, and are expected to
continue to be, dependent upon its customers' capital expenditures which are
in turn affected by 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 its dependency on any one market; but it
may not always be successful in doing so. The Company also sells thermal
printers to manufacturers of medical equipment for patient care monitoring.
 
  Product prices have remained relatively stable during the periods covered by
this discussion, and price fluctuations did not have a material effect on
reported gross profit. A significant portion of sales are 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.
 
  In September 1995, General Scanning raised a net $27.7 million through its
initial public offering of 2,585,000 shares of Common Stock including over-
allotments.
 
  The Company has begun to assess issues relating to changes in software and
hardware that may be required in the year 2000. Based on its review to date,
any costs relating to the year 2000 issue are expected to be immaterial.
 
                                      18
<PAGE>
 
  The following table sets forth, for the periods indicated, the percentage of
net sales represented by each item reflected in the Company's consolidated
statements of income:
 
<TABLE>
<CAPTION>
                                                               YEAR ENDED
                                                              DECEMBER 31,
                                                            -------------------
                                                            1997   1996   1995
                                                            -----  -----  -----
   <S>                                                      <C>    <C>    <C>
   Net sales:
     Laser systems and components..........................  85.1%  84.2%  81.9%
     Thermal printers......................................  14.9   15.8   18.1
                                                            -----  -----  -----
       Total sales......................................... 100.0  100.0  100.0
                                                            -----  -----  -----
   Cost of sales:
     Laser systems and components..........................  51.7   53.9   53.7
     Thermal printers......................................  55.4   56.0   56.1
                                                            -----  -----  -----
       Total cost of sales.................................  52.2   54.2   54.1
                                                            -----  -----  -----
   Gross profit:
     Laser systems and components..........................  48.3   46.1   46.3
     Thermal printers......................................  44.6   44.0   43.9
                                                            -----  -----  -----
       Total gross profit..................................  47.8   45.8   45.9
                                                            -----  -----  -----
   Operating expenses:
     Research and product development......................  12.3   11.8   13.5
     Selling, general and administrative...................  25.5   25.2   26.2
     Acquired in-process research and development..........   5.8    --     --
                                                            -----  -----  -----
       Total operating expenses............................  43.6   37.0   39.7
                                                            -----  -----  -----
   Income from operations..................................   4.2    8.8    6.1
   Merger (expenses).......................................   --    (1.2)   --
   Interest income (expense), net..........................   0.3    0.1   (0.5)
   Foreign exchange transaction gains (losses).............  (0.3)  (0.1)   0.2
                                                            -----  -----  -----
   Income before income taxes..............................   4.2    7.6    5.8
   Income taxes............................................   1.4    3.4    2.2
                                                            -----  -----  -----
   Net income..............................................   2.8%   4.2%   3.6%
                                                            =====  =====  =====
</TABLE>
 
RESULTS OF OPERATIONS
 
  Sales. Total sales increased to $181.5 million in 1997 from $156.5 million
in 1996 and $126.3 million in 1995. Sales of laser systems and components
increased primarily due to increased unit volume of end-user systems,
primarily reflecting growth in demand for the Company's products used in
semiconductor production and electronics manufacturing. Secondarily, sales in
1997 increased due to funding by two multinational companies for development
of a laser patterning system for use in the manufacture of flat panel
displays. The increases in the sales of thermal printers were primarily due to
increased unit volume of thermal printers and to the introduction of a new
product in the fourth quarter of 1997. International sales, as a percentage of
total sales, were 44% in 1997, 41% in 1996 and 47% in 1995.
 
  Gross Profit. Total gross profit was $86.7 million, or 47.8% of sales, in
1997, $71.7 million, or 45.8% of sales, in 1996 and $57.9 million, or 45.9% of
sales, in 1995. Laser systems and components gross profit as a percentage of
sales was 48.3%, 46.1% and 46.3% for the years 1997, 1996 and 1995,
respectively. The improvement in the laser systems and components gross profit
in 1997 was due to 1) improved absorption of labor and manufacturing overhead
over increased production volume, and 2) a reduction in material costs due to
changes in product mix and cost reductions. Thermal printers gross profit as a
percentage of sales was 44.6% in 1997, 44.0% in 1996 and 43.9% in 1995.
 
                                      19
<PAGE>
 
  Research and Product Development. Research and product development expenses
increased 21% to $22.3 million in 1997 (excluding a one-time expense relating
to acquired in-process research and development associated with the
acquisition of Reel-Tech) from $18.4 million in 1996 and $17.1 million in
1995. This increase in research and product development expenses was primarily
due to the addition of personnel and related costs to support the development
of new laser systems and components. Research and product development expenses
as a percentage of sales have ranged between approximately 12% to 13% over the
past three years. Because the Company believe that the development of new
products is vital to its continued success, the Company expects to maintain
similar levels of research and development expenses as a percentage of sales
over the long term.
 
  Selling, General and Administrative. Selling, general and administrative
expenses were $46.2 million in 1997, $39.5 million in 1996 and $33.1 million
in 1995. These increases in selling, general and administrative expenses were
primarily due to the addition of sales and marketing personnel and related
costs and to additional sales commission expense incurred in supporting
increased sales. Additionally, in 1997 legal costs increased as a result of
defending various legal proceedings, as discussed in Item 3. to this Form 10-
K. Selling, general and administrative expenses as a percentage of sales have
ranged between approximately 25% to 26% over the past three years.
 
  Acquired in-process research and development. Acquired in-process research
and development expense in 1997 of $10.6 million results from an independent
appraisal of Reel-Tech's intangible assets acquired.
 
  Interest. Net interest income was $464 thousand in 1997 compared to $272
thousand in 1996 and net expense of $682 thousand in 1995. These changes
primarily reflect interest earned on cash raised in the Company's initial
public offering in September 1995 and the repayment of View's revolving credit
debt subsequent to View's acquisition by the Company in August 1996.
 
  Foreign Exchange. Foreign exchange transactions resulted in a loss of $507
thousand in 1997 and $159 thousand in 1996 as compared to a gain of $331
thousand in 1995. The losses in 1997 and 1996 were due primarily to a
weakening of the Japanese yen and major European currencies compared to the
U.S. dollar at a time when the Company's net receivables denominated in these
currencies were not fully hedged.
 
  Income Tax. The effective income tax rate for the Company was 33% in 1997,
45% in 1996 and 38% in 1995, compared to a United States Federal tax rate of
34%. The Company's effective tax rate for each year was benefited by research
and development credits and by deductions associated with the Company's
foreign sales corporation. The Company's effective rate for each year was
increased by higher tax rates in many of the countries where the Company
operates and by state income taxes. The high 1996 rate was the result of (1) a
portion of merger expenses not being tax deductible and (2) losses incurred at
View prior to the effective date of the merger that could not be used to
offset General Scanning's profit for tax purposes. The 1995 rate reflects
increased profits in the Company's foreign operations. The Company has
provided a valuation allowance against View's net operating loss carryforwards
and tax credits due to the uncertainty of their realizability as a result of
limitations on their utilization in accordance with certain tax laws and
regulations.
 
  Net Income. Net income was $5.1 million in 1997, $6.6 million in 1996 and
$4.6 million in 1995. The decrease in net income in 1997 from 1996 was due to
the $10.6 million acquired in-process research and development expense
associated with the acquisition of Reel-Tech. The increase in net income in
1996 over 1995, despite one-time merger expenses and an increase in the
effective tax rate associated with the acquisition of View, was primarily due
to increased sales and a leveraging of operating expenses which grew at a
lower rate than did the increase in sales.
 
  Summary. The Company has experienced, and may continue to experience,
fluctuations in operating results due to a variety of factors, including: the
rate of growth of the markets for its products; market acceptance of the
Company's products and those of its competitors; development and promotional
expenses relating to the introduction of new products or new versions of
existing products; changes in pricing policies by the Company
 
                                      20
<PAGE>
 
and its competitors; the timing of the receipt of orders from major customers;
the timing of shipments; and economic conditions in markets served by the
Company. The Company's expense levels are based, in part, on its expectations
as to future sales and, as a result, operating results would be
disproportionately affected by a reduction in sales or a failure to meet the
Company's sales expectations. The Company believes that its business may be
subject to seasonal fluctuations due to capital expenditure approval cycles of
its customers.
 
  The Company's worldwide sales expose the Company to risks relating to
economic conditions outside of the United States. The Company believes that
recent and ongoing economic turmoil in certain Asian markets may reduce the
Company's sales, although it is difficult to measure or predict the precise
effect of the Asian situation on the Company's results.
 
LIQUIDITY AND CAPITAL RESOURCES
 
  Cash and cash equivalents totaled $8.4 million on December 31, 1997 compared
to $17.7 million on December 31, 1996. In the Fall of 1995, the Company raised
a net $27.7 million through its initial public offering of 2,585,000 shares of
Common Stock, inclusive of 335,000 shares exercised by the underwriters to
cover over-allotments.
 
  A net $3.2 million was provided by operating activities during 1997. Net
income of $5.1 million was supplemented by non-cash charges totaling $0.5
million for depreciation, amortization and deferred compensation, net of
deferred income taxes and by $10.6 million for acquired in-process research
and development, which is included in cash flows used in investing activities.
In support of expanded business activity, accounts receivable and inventory
increased by $19.9 million offset by an increase in payables and accrued
expenses of $7.0 million.
 
  Cash flows used in investing activities in 1997 include $12.4 million for
the acquisition of Reel-Tech, representing cash expended. An additional $2.0
million of consideration for Reel-Tech was represented by the issuance of
75,118 shares of the Company's Common Stock. Investing activities in 1997 also
includes capital expenditures of $5.3 million. These expenditures were
primarily for the purposes of adding manufacturing capacity, providing
equipment for operating efficiencies within the Company's existing facilities
and the acquisition and initial installation of a new company-wide information
system platform. The Company began to occupy newly leased 78,000 square feet
of additional manufacturing, research and office space in December 1997.
 
  The Company's revolving credit agreement with its lending bank, as amended
in 1997, provides for a maximum $20 million revolving credit facility and $6
million in international credit lines. Borrowings under the $20 million
revolving credit facility bear interest at the London InterBank Offered Rate
(LIBOR) plus one and one-quarter percent or prime, determined at time of
borrowing. Borrowings under the international credit lines, of which $4.2
million was outstanding at December 31, 1997, accrue interest at a negotiated
rate approximating the prime rate in the applicable country. The agreement
requires compliance with certain financial ratios and expires December 31,
1999.
 
  The Company believes that its existing cash, together with cash generated
from future operations and its existing bank line 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 two years. 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.
 
                                      21
<PAGE>
 
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
                             GENERAL SCANNING INC.
 
                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 
<TABLE>
<CAPTION>
                                                                           PAGE
                                                                           ----
<S>                                                                        <C>
Report of Independent Public Accountants..................................  F-2
Consolidated Statements of Income for the years ended December 31, 1997,
 1996 and 1995............................................................  F-3
Consolidated Balance Sheets as of December 31, 1997 and 1996..............  F-4
Consolidated Statements of Stockholders' Equity for the years ended
 December 31, 1997, 1996 and 1995.........................................  F-5
Consolidated Statements of Cash Flows for the years ended December 31,
 1997, 1996 and 1995......................................................  F-6
Notes to Consolidated Financial Statements................................  F-7
Supplementary Financial Information (Quarterly Financial Information for
 1997 and 1996, unaudited)................................................ F-20
</TABLE>
 
                                      F-1
<PAGE>
 
                   REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
 
To the Stockholders of General Scanning Inc.:
 
  We have audited the accompanying consolidated balance sheets of General
Scanning Inc. (a Massachusetts corporation) and subsidiaries as of December
31, 1997 and 1996 and the related consolidated statements of income,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1997. 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 generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
 
  In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of General Scanning Inc. and
subsidiaries as of December 31, 1997 and 1996 and the results of their
operations and their cash flows for each of the three years in the period
ended December 31, 1997, in conformity with generally accepted accounting
principles.
 
                                          Arthur Andersen LLP
 
Boston, Massachusetts
February 2, 1998
 
                                      F-2
<PAGE>
 
                             GENERAL SCANNING INC.
 
                       CONSOLIDATED STATEMENTS OF INCOME
 
<TABLE>
<CAPTION>
                                               YEAR ENDED DECEMBER 31,
                                         -------------------------------------
                                            1997         1996         1995
                                         -----------  -----------  -----------
                                          (IN THOUSANDS, EXCEPT SHARE DATA)
<S>                                      <C>          <C>          <C>
Net sales:
  Laser systems and components.......... $   154,536  $   131,867  $   103,405
  Thermal printers......................      26,994       24,666       22,915
                                         -----------  -----------  -----------
    Total sales.........................     181,530      156,533      126,320
                                         -----------  -----------  -----------
Cost of sales:
  Laser systems and components..........      79,850       71,038       55,544
  Thermal printers......................      14,955       13,815       12,854
                                         -----------  -----------  -----------
    Total cost of sales.................      94,805       84,853       68,398
                                         -----------  -----------  -----------
Gross profit:
  Laser systems and components..........      74,686       60,829       47,861
  Thermal printers......................      12,039       10,851       10,061
                                         -----------  -----------  -----------
    Total gross profit..................      86,725       71,680       57,922
                                         -----------  -----------  -----------
Operating expenses:
  Research and product development......      22,302       18,400       17,106
  Selling, general and administrative...      46,169       39,475       33,091
  Acquired in-process research and
   development..........................      10,600          --           --
                                         -----------  -----------  -----------
    Total operating expenses............      79,071       57,875       50,197
                                         -----------  -----------  -----------
Income from operations..................       7,654       13,805        7,725
Merger (expenses).......................         --        (1,950)         --
Interest income (expense), net..........         464          272         (682)
Foreign exchange transaction gains
 (losses)...............................        (507)        (159)         331
                                         -----------  -----------  -----------
Income before income taxes..............       7,611       11,968        7,374
Income taxes............................       2,502        5,367        2,803
                                         -----------  -----------  -----------
Net income.............................. $     5,109  $     6,601  $     4,571
                                         ===========  ===========  ===========
Basic income per common share........... $      0.42  $      0.56  $      0.48
                                         ===========  ===========  ===========
Diluted income per common share......... $      0.40  $      0.53  $      0.44
                                         ===========  ===========  ===========
Weighted average common shares
 outstanding and dilutive potential
 common shares.......................... 12,656,763   12,476,237   10,357,287
                                         ===========  ===========  ===========
</TABLE>
 
 
                            See accompanying notes.
 
                                      F-3
<PAGE>
 
                             GENERAL SCANNING INC.
 
                          CONSOLIDATED BALANCE SHEETS
 
<TABLE>
<CAPTION>
                                                        AS OF DECEMBER 31,
                                                       --------------------
                                                         1997       1996
                                                       ---------  ---------
                                                          (IN THOUSANDS,
                                                        EXCEPT SHARE DATA)
<S>                                                    <C>        <C>       
                        ASSETS
                        ------
Current assets:
  Cash and cash equivalents........................... $   8,418  $ 17,655
  Accounts receivable, less allowance of $1,203 in
   1997 and $867 in 1996..............................    44,425    32,213
  Inventories.........................................    34,051    26,051
  Deferred income taxes...............................     7,857     4,022
  Other current assets................................     1,517     1,581
                                                       ---------  --------
    Total current assets..............................    96,268    81,522
                                                       ---------  --------
Property, plant and equipment, net....................    14,611    12,922
Other assets..........................................       437       428
Intangible assets, net of amortization of $1,863 in
 1997 and $1,753 in 1996..............................     3,726       701
                                                       ---------  --------  
                                                       $ 115,042  $ 95,573
                                                       =========  ========
         LIABILITIES AND STOCKHOLDERS' EQUITY
         ------------------------------------

Current liabilities:
  Notes payable to banks and current portion of long-
   term debt.......................................... $   4,169  $  3,030
  Current portion of deferred compensation............       582       --
  Accounts payable....................................    12,775     7,025
  Accrued expenses....................................    16,079    13,787
                                                       ---------  --------
    Total current liabilities.........................    33,605    23,842
                                                       ---------  --------
Long-term debt due after one year.....................     1,530     1,549
Deferred compensation, less current portion...........     1,678     1,893
Commitments and contingencies (Note 10)
Stockholders' equity:
  Preferred stock, $.01 par value; authorized
   1,000,000 shares; issued and outstanding--none.....       --        --
  Common stock, $.01 par value; authorized 15,000,000
   shares; issued 12,791,796 in 1997 and 12,245,655 in
   1996...............................................       128       122
  Additional paid-in capital..........................    48,788    43,657
  Retained earnings...................................    30,794    25,685
  Cumulative translation adjustment...................      (892)     (587)
  Treasury stock, at cost; 366,073 shares in 1997 and
   365,995 shares in 1996.............................      (589)     (588)
                                                       ---------  --------
    Total stockholders' equity........................    78,229    68,289
                                                       ---------  --------
                                                       $ 115,042  $ 95,573
                                                       =========  ========
</TABLE>
 
 
                            See accompanying notes.
 
                                      F-4
<PAGE>
 
                             GENERAL SCANNING INC.
 
                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
 
<TABLE>
<CAPTION>
                                                                                          
                           COMMON STOCK                                                   
                          --------------- ADDITIONAL          CUMULATIVE  TREASURY STOCK 
                                 $.01 PAR  PAID-IN   RETAINED TRANSLATION ----------------
                          SHARES  VALUE    CAPITAL   EARNINGS ADJUSTMENT  SHARES    COST
                          ------ -------- ---------- -------- ----------- -------- -------
                                                  (IN THOUSANDS)
<S>                       <C>    <C>      <C>        <C>      <C>         <C>      <C>
Balance, December 31,
 1994...................   9,228   $ 92    $13,286   $14,513     $(192)      (366) $  (588)
Net income..............     --     --         --      4,571       --         --       --
Issuance of common
 stock..................   2,585     26     27,714       --        --         --       --
Stock option and warrant
 exercises, including
 tax effects............     155      1        587       --        --         --       --
Cumulative translation
 adjustment.............     --     --         --        --       (256)       --       --
                          ------   ----    -------   -------     -----     ------  -------
Balance, December 31,
 1995...................  11,968    119     41,587    19,084      (448)      (366)    (588)
Net income..............     --     --         --      6,601       --         --       --
Stock option and warrant
 exercises, including
 tax effects............     278      3      2,070       --        --         --       --
Cumulative translation
 adjustment.............     --     --         --        --       (139)       --       --
                          ------   ----    -------   -------     -----     ------  -------
Balance, December 31,
 1996...................  12,246    122     43,657    25,685      (587)      (366)    (588)
Net income..............     --     --         --      5,109       --         --       --
Stock option and warrant
 exercises, including
 tax effects............     471      5      3,132       --        --         --       --
Fractional shares from
 View Engineering, Inc.
 merger.................     --     --         --        --        --         --        (1)
Shares issued in
 acquiring
 Reel-Tech, Inc.........      75      1      1,999       --        --         --       --
Cumulative translation
 adjustment.............     --     --         --        --       (305)       --       --
                          ------   ----    -------   -------     -----     ------  -------
Balance, December 31,
 1997...................  12,792   $128    $48,788   $30,794     $(892)      (366) $  (589)
                          ======   ====    =======   =======     =====     ======  =======
</TABLE>
 
 
 
                            See accompanying notes.
 
 
                                      F-5
<PAGE>
 
                             GENERAL SCANNING INC.
 
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
 
<TABLE>
<CAPTION>
                                                    YEAR ENDED DECEMBER 31,
                                                    --------------------------
                                                      1997     1996     1995
                                                    --------  -------  -------
                                                         (IN THOUSANDS)
<S>                                                 <C>       <C>      <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income......................................... $  5,109  $ 6,601  $ 4,571
Adjustments to reconcile net income to net cash
 provided by
 (used in) operating activities--
  Acquired in-process research and development.....   10,600      --       --
  Depreciation and amortization....................    3,941    3,180    1,984
  Deferred compensation............................      367      347      319
  Deferred income taxes............................   (3,837)    (646)    (460)
Changes in current assets and liabilities, net of
 effects of
 Reel-Tech, Inc. acquisition--
  Accounts receivable..............................  (13,659)  (9,444)  (4,194)
  Inventories......................................   (6,271)  (1,119)  (9,104)
  Other current assets.............................      (42)       2   (1,111)
  Accounts payable and accrued expenses............    6,977     (592)   4,520
                                                    --------  -------  -------
Net cash provided by (used in) operating
 activities........................................    3,185   (1,671)  (3,475)
                                                    --------  -------  -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of Reel-Tech, Inc.(1).....................  (12,446)     --       --
Additions to property, plant and equipment, net....   (5,335)  (6,902)  (2,596)
Decrease (increase) in other assets................       20       15      (67)
                                                    --------  -------  -------
Net cash (used in) investing activities............  (17,761)  (6,887)  (2,663)
                                                    --------  -------  -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable to banks and others....   16,662   13,633    2,464
(Payments) on notes payable to banks and others....  (15,087) (15,567)     --
Net (payments) on long-term debt...................      (19)      (7)    (178)
Net proceeds from issuance of common stock.........      --       --    27,740
Stock option and warrant exercises, including tax
 effects...........................................    3,136    2,073      588
                                                    --------  -------  -------
Net cash provided by financing activities..........    4,692      132   30,614
                                                    --------  -------  -------
Effect of exchange rate changes on cash and cash
 equivalents.......................................      647      386     (143)
Increase (decrease) in cash and cash equivalents...   (9,237)  (8,040)  24,333
Cash and cash equivalents, beginning of period.....   17,655   25,695    1,362
                                                    --------  -------  -------
Cash and cash equivalents, end of period........... $  8,418  $17,655  $25,695
                                                    ========  =======  =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for--
  Interest......................................... $    478  $   862  $ 1,064
                                                    ========  =======  =======
  Income taxes..................................... $  4,485  $ 4,834  $ 2,540
                                                    ========  =======  =======
(1) Acquisition of Reel-Tech, Inc.:
Net assets and in-process research and development
 acquired.......................................... $(14,446) $   --   $   --
Issuance of common stock...........................    2,000      --       --
                                                    --------  -------  -------
Net cash used to acquire business.................. $(12,446) $   --   $   --
                                                    ========  =======  =======
</TABLE>
 
                            See accompanying notes.
 
                                      F-6
<PAGE>
 
                               GENERAL SCANNING
 
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
                               DECEMBER 31, 1997
 
1. SIGNIFICANT ACCOUNTING POLICIES
 
 Nature of operations
 
  General Scanning Inc. develops, manufactures and sells its products on a
worldwide basis through two industry segments: laser systems and components;
and thermal printers. The laser systems and components segment provides
products for a wide range of applications in the automotive, electronics,
semiconductor, medical and aircraft industries. The Company's core
technological expertise which is employed in each of these applications is
high speed micropositioning and precise power control of lasers, as well as 2D
and 3D image processing. The thermal printer segment provides a line of
thermal printers for the medical industry.
 
 Basis of presentation
 
  The consolidated financial statements include the accounts of General
Scanning Inc. and its wholly-owned subsidiaries (the "Company"). Significant
intercompany accounts and transactions have been eliminated in consolidation.
The Company's 50% joint venture in the United Kingdom, which had been
accounted for by the equity method, was fully acquired on December 31, 1995 in
a purchase transaction. The acquisition was not material to the Company's
operations.
 
  On November 28, 1997, the Company acquired the assets of Reel-Tech, Inc. for
$14.4 million, which consisted of $12.4 million of cash and 75,118 shares of
General Scanning Inc. common stock. Reel-Tech is an integrator of electronics
components handling systems for marking, lead inspection, parts sorting and
parts packaging. The transaction was accounted for as a purchase for
accounting purposes and, accordingly, the operations of Reel-Tech have been
included in the consolidated financial statements from the date of
acquisition. Acquired in-process research and development of $10.6 million
charged against income in 1997 results from an independent appraisal of Reel-
Tech's intangible assets acquired. Goodwill arising from the transaction of
$3.1 million is being amortized on a straight-line basis over a 10 year
period. Results of operations would not have changed materially for 1997 or
1996 if Reel-Tech had been acquired on January 1, 1996.
 
                                      F-7
<PAGE>
 
                             GENERAL SCANNING INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
  In August 1996, the Company acquired View Engineering, Inc. ("View") by
issuing 1,437,060 shares of General Scanning Inc. common stock (after giving
effect to certain adjustments at the closing) in exchange for all of View's
outstanding shares of capital stock, accrued preferred dividends and the net
value of warrants and options. View uses laser image processing technology to
serve applications requiring precision inspection, measurement and process
control. The transaction has been accounted for as a pooling of interests for
accounting purposes and, accordingly, the accompanying consolidated financial
statements have been retroactively restated to include the accounts of View
for all periods presented. Merger expenses include primarily brokers' fees and
legal and accounting costs. The following is a reconciliation of certain
restated amounts with amounts previously reported.
 
<TABLE>
<CAPTION>
                                                                       1995
                                                                  --------------
                                                                  (IN THOUSANDS)
     <S>                                                          <C>
     Sales:
       General Scanning Inc......................................    $101,819
       View Engineering, Inc.....................................      24,501
                                                                     --------
         As restated.............................................    $126,320
                                                                     ========
     Net income:
       General Scanning Inc......................................    $  6,009
       View Engineering, Inc.....................................      (1,438)
                                                                     --------
         As restated.............................................    $  4,571
                                                                     ========
     Diluted income per common share:
       General Scanning Inc......................................    $   0.67
       View Engineering, Inc.....................................       (0.23)
                                                                     --------
         As restated.............................................    $   0.44
                                                                     ========
</TABLE>
 
 Use of estimates
 
  The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
 
 Risks and uncertainties
 
  The Company has experienced, and may continue to experience, fluctuations in
operating results due to a variety of factors, including: the rate of growth
of the markets for laser systems and components and thermal printers; market
acceptance of the Company's products and those of its competitors; development
and promotional expenses relating to the introductions of new products or new
versions of existing products; changes in pricing policies by the Company and
its competitors; the timing of the receipt of orders from major customers; the
timing of shipments and economic conditions in foreign markets.
 
  Certain of the components and materials included in the Company's laser
systems and optical products are currently obtained from single source
suppliers. There can be no assurance that a disruption of this outside supply
would not create substantial manufacturing delays and additional cost to the
Company.
 
 Cash and cash equivalents
 
  Cash and cash equivalents include cash in banks and highly liquid
investments having original maturity dates not exceeding three months. The
investments are stated at cost, which approximates their fair value. The
Company does not believe it is exposed to any significant credit risk on its
cash and cash equivalents.
 
 
                                      F-8
<PAGE>
 
                             GENERAL SCANNING INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
 Inventories
 
  Inventories, which include materials and conversion costs, are stated at the
lower of cost (primarily first-in, first-out) or market. Inventories consist
of the following:
 
<TABLE>
<CAPTION>
                                                                  DECEMBER 31,
                                                                 ---------------
                                                                  1997    1996
                                                                 ------- -------
                                                                  (IN THOUSANDS)
     <S>                                                         <C>     <C>
     Purchased parts............................................ $14,992 $12,572
     Work-in-process............................................   8,127   5,341
     Finished goods.............................................  10,932   8,138
                                                                 ------- -------
     Total inventory............................................ $34,051 $26,051
                                                                 ======= =======
</TABLE>
 
 Depreciation and amortization
 
  Depreciation and amortization are determined by the straight-line and
declining-balance methods over the estimated useful lives of the owned assets.
Estimated useful lives for buildings and improvements range from 5 to 31 years
and for machinery and equipment from 3 to 15 years. Leasehold improvements are
amortized over the lesser of their useful lives or the lease term, including
option periods expected to be utilized.
 
 Foreign currency
 
  Assets and liabilities of foreign operations are translated from foreign
currencies into U.S. dollars at the exchange rates in effect at the period-
end. Revenues and expenses are translated at the average exchange rate in
effect for the period. The resulting translation adjustments are recorded as a
component of stockholders' equity.
 
  Foreign exchange forward contracts and local currency borrowings are used to
reduce the impact of certain foreign currency balance sheet fluctuations.
Gains and losses from the forward contracts that are not hedges of firm
commitments are accrued at each balance sheet date and included in the
Consolidated Statements of Income as foreign exchange transaction gains
(losses). At December 31, 1997, the Company had such contracts to exchange
foreign currencies (yen, French francs and Deutsche marks) for U.S. dollars
totaling $4,200,000 maturing through May 1998.
 
  In certain circumstances, the Company enters into foreign exchange forward
contracts to reduce the impact of foreign currency fluctuations arising from
foreign currency denominated customer sales. Gains and losses on these
contracts are deferred until the contract matures. At December 31, 1997, 1996
and 1995 there were no such contracts.
 
  To the extent the Company utilizes foreign exchange forward contracts, it
purchases them from major financial institutions for terms that have not
exceeded six months.
 
 Income per share of common stock
 
  In 1997, the Company adopted Statement of Financial Accounting Standards
("SFAS") No. 128, Earnings per Share, effective December 15, 1997. Amounts
reported herein for 1996 and 1995 as "Diluted income per common share" are the
same as those reported prior as "Net income per common and common equivalent
share outstanding." Basic income per common share was computed by dividing net
income by the weighted average number of common shares outstanding during the
year. For diluted income per common share, the denominator also includes
dilutive outstanding stock options and warrants determined using the treasury
stock method.
 
                                      F-9
<PAGE>
 
                             GENERAL SCANNING INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
  Common and common share equivalent share disclosures are:
 
<TABLE>
<CAPTION>
                                                            YEAR ENDED DECEMBER
                                                                    31,
                                                            --------------------
                                                             1997   1996   1995
                                                            ------ ------ ------
                                                               (IN THOUSANDS)
     <S>                                                    <C>    <C>    <C>
     Weighted average common shares outstanding...........  12,065 11,774  9,608
     Dilutive potential common shares.....................     592    702    749
                                                            ------ ------ ------
     Diluted common shares................................  12,657 12,476 10,357
                                                            ====== ====== ======
     Options and warrants excluded from diluted income per
      common share as their effect would be antidilutive..     104     76      2
                                                            ====== ====== ======
</TABLE>
 
 Revenue recognition
 
  The Company recognizes product revenues generally at the later of the time
of shipment or when substantially all terms and conditions of the sale have
been met. For certain long-term contracts, revenues and profits are recognized
using the percentage-of-completion method. The Company provides for estimated
warranty costs at the time of revenue recognition.
 
 Research and product development expense
 
  Expenditures for research and development of products and manufacturing
processes are expensed as incurred.
 
 Interest
 
  Interest income in 1997 and 1996 is net of $498,000 and $845,000 of interest
expense, respectively, and interest expense in 1995 is net of $373,000 of
interest income.
 
 Impairment of long-lived assets
 
  The Company periodically assesses the realizability of its long-lived assets
in accordance with SFAS No. 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of. Based on its review, the
Company does not believe that any material impairment of its long-lived assets
has occurred.
 
2. INTANGIBLE ASSETS
 
  Purchase price in excess of the fair market value of assets acquired,
including in-process research and development, is recorded as intangible
assets. Such assets arising from the acquisition of the minority interest in
Teradyne Laser Systems, Inc. in 1991 are being amortized on a straight-line
basis over their estimated useful lives of from 3 to 15 years. Goodwill
arising in connection with the acquisition of the assets of Reel-Tech, Inc. in
1997 is being amortized on a straight-line basis over 10 years. Amortization
expense was $109,000 in 1997 and $84,000 in 1996 and 1995.
 
                                     F-10
<PAGE>
 
                             GENERAL SCANNING INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
3. PROPERTY, PLANT AND EQUIPMENT
 
  Property, plant and equipment consists of the following:
 
<TABLE>
<CAPTION>
                                                                DECEMBER 31,
                                                               ----------------
                                                                1997     1996
                                                               -------  -------
                                                               (IN THOUSANDS)
     <S>                                                       <C>      <C>
     Cost:
     Land, buildings and improvements......................... $13,134  $10,936
     Machinery and equipment..................................  28,955   26,271
                                                               -------  -------
       Total cost.............................................  42,089   37,207
     Accumulated depreciation................................. (27,478) (24,285)
                                                               -------  -------
       Net property, plant and equipment...................... $14,611  $12,922
                                                               =======  =======
</TABLE>
 
4. ACCRUED EXPENSES
 
  Accrued expenses consists of the following:
 
<TABLE>
<CAPTION>
                                                                 DECEMBER 31,
                                                                ---------------
                                                                 1997    1996
                                                                ------- -------
                                                                (IN THOUSANDS)
     <S>                                                        <C>     <C>
     Accrued compensation and benefits......................... $ 8,448 $ 6,701
     Income taxes..............................................   3,404   3,893
     Other.....................................................   4,227   3,193
                                                                ------- -------
       Total accrued expenses.................................. $16,079 $13,787
                                                                ======= =======
</TABLE>
 
5. DEBT
 
 Notes payable to banks and current portion of long-term debt
 
  Notes payable to banks and current portion of long-term debt consists of the
following:
 
<TABLE>
<CAPTION>
                                                                  DECEMBER 31,
                                                                  -------------
                                                                   1997   1996
                                                                  ------ ------
                                                                       (IN
                                                                   THOUSANDS)
     <S>                                                          <C>    <C>
     Lines of credit............................................. $4,150 $3,013
     Current portion of long-term debt...........................     19     17
                                                                  ------ ------
       Total..................................................... $4,169 $3,030
                                                                  ====== ======
</TABLE>
 
  The Company's revolving credit agreement with its lending bank was amended
on November 28, 1997. Under its amended terms, the agreement provides for
borrowings of up to $20,000,000 and will expire on December 31, 1999. Interest
on outstanding borrowings is charged at the London InterBank Offered Rate
(LIBOR) plus 1.25% or prime, determined at the time of borrowing. No such debt
was outstanding at December 31, 1997. A commitment fee of 3/8% per annum is
paid quarterly in arrears on the unused portion. Among other restrictions, the
agreement requires a minimum level of tangible net worth and compliance with
certain financial ratios.
 
  Under the terms of the revolving credit agreement, the Company's foreign
operations may borrow up to a maximum of $6,000,000 under lines of credit.
Such debt outstanding at December 31, 1997 was denominated in yen with a
weighted average interest rate of 1.6%.
 
 
                                     F-11
<PAGE>
 
                             GENERAL SCANNING INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 Long-term debt
 
  Long-term debt consists of a mortgage payable at 10 3/8% interest,
collateralized by certain land and building. Interest and principal are
payable at $14,906 per month until maturity in February 2000, at which time
the remaining principal of $1,507,516 will be payable. The portion of
principal payable within one year, which is included in current liabilities,
is $19,000.
 
 Fair value of financial instruments
 
  SFAS No. 107, Disclosures About Fair Value of Financial Instruments,
requires disclosure of the year-end fair value of significant financial
instruments, including debt. The Company believes, based upon current terms,
that the carrying value of its debt approximates its fair value.
 
6. DEFERRED COMPENSATION
 
  Officers and certain employees may defer payment of their compensation until
termination of employment or later. Interest on the outstanding balance is
credited quarterly at the prime rate. The portion of deferred compensation
estimated to be due within one year is included in current liabilities.
 
7. STOCKHOLDERS' EQUITY
 
 Recapitalization
 
  In August 1995, the Company's stockholders voted to amend its Articles of
Organization to change the par value of the Company's common stock from $1.00
to $.01. Subsequently, the Board of Directors authorized a 5-for-1 stock
split, effected as a dividend, of the Company's common stock. All share and
per share amounts of common stock for all periods presented have been
retroactively adjusted to reflect the change in par value and the stock split.
 
 Preferred stock
 
  In August 1995, the stockholders approved an amendment to the Articles of
Organization which authorizes 1,000,000 shares of preferred stock, $.01 par
value. The preferred stock is divisible and issuable into one or more series.
The rights and preferences of the different series may be established by the
Board of Directors without further action by the stockholders. The Board of
Directors is authorized, with respect to each series, to fix and determine,
among other things, (i) the dividend rate, (ii) the liquidation preference,
(iii) whether such shares will be convertible into, or exchangeable for, any
other securities and (iv) whether such shares will have voting rights and, if
so, the conditions under which such shares will vote as a separate class.
 
 Shareholder rights plan
 
  On April 30, 1997, the Board of Directors adopted a Shareholders Rights Plan
( the "Plan") and declared a dividend distribution, payable on May 1, 1997, of
one preferred share purchase right under the Plan (each a "Right") for each
outstanding share of common stock of the Company. Under the Plan, each Right,
when exercisable, entitles the holder to purchase from the Company one ten-
thousandth of a share of the Company's Series A Junior Participating Preferred
Stock at a price of $70 per one ten-thousandth of a Preferred Share, subject
to adjustment and to certain exceptions. The value of the one ten-thousandth
interest in a share of Preferred Stock purchasable upon exercise of each Right
is intended to approximate the value of one share of common stock.
 
 
                                     F-12
<PAGE>
 
                             GENERAL SCANNING INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
  The rights are not exercisable and cannot be transferred separately from the
common stock until the first to occur of (a) 10 business days after a public
announcement that a person or group of affiliated or associated persons
(excluding certain persons and groups) has acquired beneficial ownership of
20% or more of the outstanding common stock (the date of such an announcement,
a "Shares Acquisition Date"), or (b) 10 business days (subject to extension by
the Board) after the start or announcement of a tender or exchange offer, the
consummation of which would result in beneficial ownership by a person or
group of 20% or more of the outstanding common stock.
 
  Prior to the earlier of (a) the tenth day after the Shares Acquisition Date,
or (b) the expiration of the Rights, the Company may under certain
circumstances redeem the Rights at a price of $0.001 per Right. In certain
cases a Right will entitle the holder to purchase common stock of the Company
or an acquiring company having a value of two times the exercise price of the
Right. Under certain conditions the Company may exchange the Rights for common
stock or preferred stock. The Rights expire on May 1, 2007 unless they are
redeemed by the Company.
 
  So long as the Rights are not transferable separately from the common stock,
the Company will issue one Right with each new share of common stock issued.
The Rights could have certain anti-takeover effects, in that they would cause
substantial dilution to a person or group that attempts to acquire the Company
on terms not approved by the Board of Directors.
 
 Stock options
 
  The 1992 Stock Option Plan, as amended in August 1995, provides for the
issuance of nonqualified and incentive stock options to purchase up to
1,000,000 shares of the Company's common stock, of which 175,611 were
available for future grant at December 31, 1997. Under this plan, options are
granted at the fair value per share as determined by the Board of Directors at
the date of grant. Outstanding options vest over periods of three or four
years beginning on the date of grant and expire ten years from the date of
grant. The Company's 1981 Stock Option Plan has terminated; however, options
to purchase 197,160 shares of common stock were outstanding under the 1981
Plan at December 31, 1997.
 
  During 1995, the Financial Accounting Standards Board issued SFAS No. 123,
which defines a fair value based method of accounting for an employee stock
option or similar equity instrument and encourages all entities to adopt that
method of accounting for all of their employee stock compensation plans.
However, it also allows an entity to continue to measure compensation costs
for those plans using the method of accounting prescribed by APB 25. Entities
electing to remain with the accounting in APB 25 must make pro forma
disclosures of net income and, if presented, earnings per share as if the fair
value based method of accounting defined in the Statement had been applied.
 
                                     F-13
<PAGE>
 
                             GENERAL SCANNING INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
  The Company has elected to account for its stock-based compensation plans
under APB 25, under which immaterial amounts of compensation have been
recognized. Had compensation cost for these plans been determined consistent
with SFAS No. 123, the Company's net income and earnings per share would have
been reduced to the pro forma amounts below. Because SFAS No. 123 method of
accounting has not been applied to options granted prior to January 1, 1995,
the resulting pro forma compensation costs may not be representative of that
to be expected in future years.
 
<TABLE>
<CAPTION>
                                                             1997   1996   1995
                                                            ------ ------ ------
     <S>                                                    <C>    <C>    <C>
     Net income (thousands):
       As reported......................................... $5,109 $6,601 $4,571
       Pro forma........................................... $4,410 $6,354 $4,483
     Diluted income per share:
       As reported......................................... $ 0.40 $ 0.53 $ 0.44
       Pro forma........................................... $ 0.35 $ 0.51 $ 0.43
</TABLE>
 
  The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted-average
assumptions: risk-free interest rate of 5.5% (6.3% in 1996 and 1995), expected
dividend yield of zero, expected lives of 4 years upon vesting and expected
volatility of 50%.
 
  Stock option activity for the years ended December 31, 1995, 1996 and 1997
is presented below. The weighted average fair value of options granted was
$6.74 in 1997 and $4.47 in 1996.
 
<TABLE>
<CAPTION>
                                                                       WTD. AVG.
                                                             OPTIONS   EX. PRICE
                                                            ---------  ---------
     <S>                                                    <C>        <C>
     Outstanding at December 31, 1994...................... 1,120,660   $ 2.38
     Granted...............................................   116,064     6.30
     Exercised.............................................  (155,000)    2.29
     Canceled..............................................      (750)    2.36
                                                            ---------   ------
     Outstanding at December 31, 1995...................... 1,080,974     2.81
     Granted...............................................   166,250    14.33
     Exercised.............................................  (212,810)    2.32
     Canceled..............................................    (6,250)    7.65
                                                            ---------   ------
     Outstanding at December 31, 1996...................... 1,028,164     4.75
     Granted...............................................   287,000    14.78
     Exercised.............................................  (449,523)    2.71
     Canceled..............................................   (11,065)   10.97
                                                            ---------   ------
     Outstanding at December 31, 1997......................   854,576   $ 9.10
                                                            =========   ======
     Exercisable at December 31, 1997......................   462,335   $ 5.87
                                                            =========   ======
</TABLE>
 
  Additional information regarding the options outstanding at December 31,
1997 follows:
 
<TABLE>
<CAPTION>
  RANGE OF               NO. OF    WTD. AVG.      WTD. AVG.      NUMBER      WTD. AVG.
EXERCISE PRICES          OPTIONS EXERCISE PRICE REMAINING LIFE EXERCISABLE EXERCISE PRICE
---------------          ------- -------------- -------------- ----------- --------------
<S>                      <C>     <C>            <C>            <C>         <C>
$ 1.75-$ 2.36........... 241,910     $ 2.29       2.8 years      227,660       $ 2.29
$ 2.50-$12.09........... 212,956     $ 5.70       7.0 years      131,515       $ 4.82
$13.38.................. 222,910     $13.38       9.4 years       41,390       $13.38
$15.00-$32.63........... 176,800     $17.10       9.0 years       61,770       $16.29
</TABLE>
 
                                     F-14
<PAGE>
 
                             GENERAL SCANNING INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
 Warrants
 
  The Company has issued warrants for the purchase of common stock to the
nonemployee members of the Board of Directors. Warrants issued through 1995
vested over periods of three or four years, beginning on the date of grant,
and expire ten years from the date of grant. In 1996, 65,000 of such warrants
were exercised at prices ranging from $1.75 to $2.50 per share and in 1997,
17,500 of such warrants were exercised at $1.75 per share. At December 31,
1997, 37,500 of such warrants, all of which are exercisable, remain
outstanding at exercise prices ranging from $2.36 to $2.50 per share.
 
  During 1995, the stockholders adopted the 1995 Directors' Warrant Plan and
reserved 100,000 shares for future issuance of warrants to nonemployee
Directors under the Plan. The exercise price of such warrants is the fair
market value per share as determined by a committee of the Board of Directors
at the date of grant. The warrants are subject to vesting as determined by
such committee and expire ten years from the date of grant. In 1996, 8,000
such warrants were granted at an exercise price of $20.75 per share and in
1997 8,000 such warrants were granted at an exercise price of $13.00 per
share. In 1997, 4,000 warrants were exercised at prices ranging from $13.00 to
$20.75 per share. At December 31, 1997, 12,000 of such warrants, all of which
are exercisable, remain outstanding at exercise prices ranging from $13.00 to
$20.75 per share.
 
8. BENEFIT PLANS
 
 Employee Stock Ownership Plan
 
  Under the Employee Stock Ownership Plan (ESOP) established in 1989, Company
contributions were in the form of cash or common stock and were allocated to
eligible employees based on their relative compensation. The ESOP was
terminated effective December 31, 1995 and the plan assets have been
distributed to plan participants. Company contributions to the ESOP were
$367,000 in 1995.
 
 Defined contribution plans
 
  The Company has an employee savings defined contribution plan under the
provisions of Section 401(k) of the Internal Revenue Code under which
contributions may be made by its domestic employees. The Company matches the
contributions of participating employees on the basis of the percentages
specified in the plan. Company matching contributions to the plan were
$1,379,000, $1,080,000 and $488,000 for the years ended December 31, 1997,
1996 and 1995, respectively.
 
9. INCOME TAXES
 
  The Company accounts for income taxes using the liability method. Under this
method, deferred tax assets and liabilities are determined based on the
difference between the financial statement and tax bases of assets and
liabilities using the currently enacted tax rates.
 
  The components of income before income taxes for the years ended December 31
are as follows:
 
<TABLE>
<CAPTION>
                                                            YEAR ENDED DECEMBER
                                                                    31,
                                                           ---------------------
                                                            1997   1996    1995
                                                           ------ ------- ------
                                                              (IN THOUSANDS)
     <S>                                                   <C>    <C>     <C>
     United States........................................ $3,860 $10,348 $5,245
     Foreign..............................................  3,751   1,620  2,129
                                                           ------ ------- ------
       Total.............................................. $7,611 $11,968 $7,374
                                                           ====== ======= ======
</TABLE>
 
                                     F-15
<PAGE>
 
                             GENERAL SCANNING INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
  The provision for income taxes for the years ended December 31 consists of
the following:
 
<TABLE>
<CAPTION>
                                                         YEAR ENDED DECEMBER
                                                                 31,
                                                         ----------------------
                                                          1997    1996    1995
                                                         ------  ------  ------
                                                            (IN THOUSANDS)
     <S>                                                 <C>     <C>     <C>
     Current:
     Federal and State.................................. $4,165  $5,209  $2,200
     Foreign............................................  2,174     804   1,292
                                                         ------  ------  ------
       Total current....................................  6,339   6,013   3,492
     Deferred........................................... (3,837)   (646)   (689)
                                                         ------  ------  ------
       Total............................................ $2,502  $5,367  $2,803
                                                         ======  ======  ======
</TABLE>
 
  The income tax provision for the years ended December 31 is different from
that which would be computed by applying the U.S. federal income tax rate to
income before taxes as follows:
 
<TABLE>
<CAPTION>
                                                  YEAR ENDED DECEMBER 31,
                                                  ----------------------------
                                                    1997      1996      1995
                                                  --------   -------   -------
     <S>                                          <C>        <C>       <C>
     U.S. federal statutory tax rate............      34.0 %    34.0 %    34.0 %
     State income taxes, net....................       6.0 %     3.9 %     3.9 %
     Foreign sales corporation..................      (5.0)%    (3.0)%    (4.1)%
     Research and development credits...........     (10.5)%    (3.3)%    (6.6)%
     Foreign tax rate differential..............      12.5 %     2.1 %     1.0 %
     View Engineering merger expenses not
      deductible for tax purposes...............       --        4.0 %     --
     Change in valuation allowance for View pre-
      acquisition losses........................      (6.0)%     6.8 %
     Other, net.................................       1.9 %     0.3 %     9.8 %
                                                  --------   -------   -------
       Effective tax rate.......................      32.9 %    44.8 %    38.0 %
                                                  ========   =======   =======
</TABLE>
 
  Significant components of deferred income tax assets as of December 31 are
as follows:
 
<TABLE>
<CAPTION>
                                                                DECEMBER 31,
                                                               ----------------
                                                                1997     1996
                                                               -------  -------
                                                               (IN THOUSANDS)
     <S>                                                       <C>      <C>
     Deferred compensation.................................... $   814  $   700
     Vacation and sick pay benefit............................     576      496
     Inventory valuation......................................   1,577    2,020
     Warranty costs...........................................     357      299
     Depreciation.............................................    (260)    (298)
     Operating loss and tax credit carryforwards..............   2,248    2,673
     Acquired in-process research and development.............   3,816      --
     Accounts receivable valuation............................     356      210
     Other....................................................     621      595
                                                               -------  -------
       Total deferred income tax assets.......................  10,105    6,695
     Less valuation allowance.................................  (2,248)  (2,673)
                                                               -------  -------
       Net deferred income tax assets......................... $ 7,857  $ 4,022
                                                               =======  =======
</TABLE>
 
                                     F-16
<PAGE>
 
                             GENERAL SCANNING INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
  The Company has provided a valuation allowance on the net operating loss
carryforwards and tax credits related to its wholly-owned subsidiary, View
Engineering, Inc., due to the uncertainty of their realizability as a result
of limitations on their utilization in accordance with certain tax laws and
regulations. The operating loss carryforwards expire from 2005 through 2011
and the tax credits expire in 1999 and 2000. Utilization of the operating loss
carryforwards and tax credits is limited to approximately $1.2 million per
year.
 
10. COMMITMENTS AND CONTINGENCIES
 
 Operating leases
 
  The Company leases certain equipment and facilities under operating lease
agreements that expire through 2007. The facility leases require the Company
to pay real estate taxes and other operating costs. For the years ended
December 31, 1997, 1996 and 1995, lease expense was approximately $1,948,000,
$1,787,000 and $1,500,000, respectively.
 
  Minimum lease payments under operating leases expiring subsequent to
December 31, 1997 are:
 
<TABLE>
<CAPTION>
                                                  (IN THOUSANDS)
       <S>                                        <C>
       1998......................................    $2,219
       1999......................................     1,834
       2000......................................     1,432
       2001......................................     1,020
       2002......................................       847
       Thereafter................................     2,326
                                                     ------
         Total minimum lease payments............    $9,678
                                                     ======
</TABLE>
 
 Recourse receivables
 
  In Japan, where it is customary to do so, the Company discounts certain
notes receivable at a bank with recourse. The Company's maximum exposure was
$1,858,000 at December 31, 1997. The fair value of the recourse receivables
was not determinable. The Company received cash proceeds relating to the
discounted receivables of $5,262,000, $4,144,000 and $7,188,000 during the
years ended December 31, 1997, 1996 and 1995, respectively.
 
 Legal proceedings and disputes
 
  In August 1996, Robotic Vision Systems, Inc. ("RVSI") commenced an action
against General Scanning in the United States District Court for the Eastern
District of New York. RVSI claimed that General Scanning improperly obtained
proprietary information from RVSI for the purpose of obtaining ownership of
View Engineering, Inc. and of thwarting RVSI's attempts to acquire View
Engineering. The plaintiff was seeking compensatory and punitive damages in an
unspecified amount. In September 1997 and January 1998, that same Court issued
a series of decisions on General Scanning's motion for summary judgment.
Claims were dismissed for: (1) breach of contract, (2) breach of the implied
covenant of good faith and fair dealing, and (3) violations under the
Massachusetts Unfair and Deceptive Business Practices Statute. Claims were not
dismissed for: (1) tortious interference with business relations, (2) fraud of
confidential business information, and (3) unfair competition in contravention
of New York common law. The claims not dismissed, which the Company believes
are without merit and is defending vigorously, are expected to result in a
jury trial during 1998.
 
  Voxel, a prior customer of the Company, asserted in December 1996 that the
Company may not have met certain product specifications. The Company believes
its product has met the necessary specifications. Pursuant to the dispute
resolution section in the Development Agreement between Voxel and the Company,
the matter
 
                                     F-17
<PAGE>
 
                             GENERAL SCANNING INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
has been submitted to binding arbitration. Net accounts receivable at December
31, 1997 and 1996 included approximately $1,012,000 and $931,000,
respectively, of billed and unbilled amounts due from Voxel. Management
believes its case is meritorious and that the amounts due from Voxel are
recoverable.
 
  The Company has certain other contingent liabilities resulting from
litigation and claims incidental to its business, including three patent
infringement suits relating to products currently sold or expected to be sold
by the Company. Management believes that the probable resolution of such
contingencies will not have a materially adverse effect on the Company's
results of operations or financial position.
 
11. RELATED PARTY TRANSACTION
 
  In 1992, the Company's Board of Directors authorized a loan to an officer in
the amount of $160,000 as a reimbursement for certain relocation expenses.
Under the agreement, as amended, the loan has been forgiven and charged as
compensation expense on a pro-rata basis over the five years ending December
31, 1997.
 
12. SEGMENT INFORMATION
 
 Industry segment reporting
 
  Information with respect to the Company's industry segments is set forth in
the table below.
 
<TABLE>
<CAPTION>
                                                    YEAR ENDED DECEMBER 31,
                                                   ----------------------------
                                                     1997      1996      1995
                                                   --------  --------  --------
                                                         (IN THOUSANDS)
     <S>                                           <C>       <C>       <C>
     Sales to unaffiliated customers:
       Laser systems and components............... $154,536  $131,867  $103,564
       Thermal printers...........................   26,994    24,666    22,915
       Intersegment elimination...................        0         0      (159)
                                                   --------  --------  --------
         Total.................................... $181,530  $156,533  $126,320
                                                   ========  ========  ========
     Income from operations:
       Laser systems and components(1)............ $  6,075  $ 11,967  $  6,330
       Thermal printers...........................    5,034     4,321     3,845
       Corporate expenses.........................   (3,455)   (2,483)   (2,450)
                                                   --------  --------  --------
         Total.................................... $  7,654  $ 13,805  $  7,725
                                                   ========  ========  ========
     Identifiable assets:
       Laser systems and components............... $ 91,923  $ 64,836  $ 55,556
       Thermal printers...........................    6,844     8,150     5,081
       Corporate assets...........................   16,275    22,587    29,071
                                                   --------  --------  --------
         Total.................................... $115,042  $ 95,573  $ 89,708
                                                   ========  ========  ========
     Capital expenditures:
       Laser systems and components............... $  5,244  $  5,704  $  2,155
       Thermal printers...........................       91     1,198       441
                                                   --------  --------  --------
         Total.................................... $  5,335  $  6,902  $  2,596
                                                   ========  ========  ========
     Depreciation and amortization:
       Laser systems and components............... $  3,459  $  2,773  $  1,699
       Thermal printers...........................      482       407       285
                                                   --------  --------  --------
         Total.................................... $  3,941  $  3,180  $  1,984
                                                   ========  ========  ========
</TABLE>
--------
(1) Includes $10,600 charge for acquired in-process research and development
    in 1997.
 
                                     F-18
<PAGE>
 
                             GENERAL SCANNING INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 Geographic segment information
 
  Information with respect to the Company's geographic operations is set forth
in the table below.
 
<TABLE>
<CAPTION>
                                                    YEAR ENDED DECEMBER 31,
                                                   ----------------------------
                                                     1997      1996      1995
                                                   --------  --------  --------
                                                         (IN THOUSANDS)
     <S>                                           <C>       <C>       <C>
     Sales to unaffiliated customers:
       North America, including export............ $118,985  $107,033  $ 84,621
       Europe.....................................   23,554    21,300    12,461
       Asia.......................................   38,991    28,200    29,238
                                                   --------  --------  --------
         Total.................................... $181,530  $156,533  $126,320
                                                   ========  ========  ========
     Transfers to affiliates...................... $ 47,102  $ 31,800  $ 25,188
                                                   ========  ========  ========
     Export sales:
       From North America......................... $ 17,300  $ 15,200  $ 17,245
                                                   ========  ========  ========
     Income from operations:
       North America, including export(1)......... $  7,299  $ 13,623  $  7,884
       Europe.....................................    2,081       898       456
       Asia.......................................    1,729     1,767     1,835
       Corporate..................................   (3,455)   (2,483)   (2,450)
                                                   --------  --------  --------
         Total.................................... $  7,654  $ 13,805  $  7,725
                                                   ========  ========  ========
     Identifiable assets:
       North America, including export............ $ 75,184  $ 57,803  $ 48,935
       Europe.....................................    9,356     5,925     4,845
       Asia.......................................   16,757    10,588     5,952
       Corporate..................................   13,745    21,257    29,976
                                                   --------  --------  --------
         Total.................................... $115,042  $ 95,573  $ 89,708
                                                   ========  ========  ========
</TABLE>
--------
(1)Includes $10,600 charge for acquired in-process research and development in
1997.
 
                                      F-19
<PAGE>
 
                             GENERAL SCANNING INC.
 
                      SUPPLEMENTARY FINANCIAL INFORMATION
                                  (UNAUDITED)
 
<TABLE>
<CAPTION>
                           97Q4     97Q3     97Q2    97Q1     96Q4     96Q3     96Q2     96Q1
                          -------  -------  ------- -------  -------  -------  -------  -------
                                       (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                       <C>      <C>      <C>     <C>      <C>      <C>      <C>      <C>
Net sales:
  Laser systems and
   components...........  $45,408  $40,515  $37,504 $31,109  $33,251  $32,744  $34,522  $31,350
  Thermal printers......    8,135    7,041    5,210   6,608    6,765    5,419    6,148    6,334
                          -------  -------  ------- -------  -------  -------  -------  -------
   Total sales..........   53,543   47,556   42,714  37,717   40,016   38,163   40,670   37,684
                          =======  =======  ======= =======  =======  =======  =======  =======
Gross profit:
  Laser systems and
   components...........   22,337   19,810   17,527  15,012   14,743   15,569   15,845   14,672
  Thermal printers......    3,656    3,031    2,291   3,061    3,152    2,336    2,657    2,706
                          -------  -------  ------- -------  -------  -------  -------  -------
   Total gross profit...   25,993   22,841   19,818  18,073   17,895   17,905   18,502   17,378
                          -------  -------  ------- -------  -------  -------  -------  -------
Operating expenses:
  Research and product
   development..........    6,246    6,126    4,978   4,952    4,410    4,853    4,534    4,603
  Selling, general and
   administrative.......   13,388   11,357   11,103  10,321    9,883    9,313   10,376    9,903
  Acquired in-process
   research and
   development..........   10,600      --       --      --       --       --       --       --
                          -------  -------  ------- -------  -------  -------  -------  -------
   Total operating
    expenses............   30,234   17,483   16,081  15,273   14,293   14,166   14,910   14,506
                          -------  -------  ------- -------  -------  -------  -------  -------
Income (loss) from
 operations.............   (4,241)   5,358    3,737   2,800    3,602    3,739    3,592    2,872
Merger (expenses).......      --       --       --      --       --    (1,950)     --       --
Interest income
 (expense), net.........       66      135      165      98       81       34       32      125
Foreign exchange
 transaction gains
 (losses)...............     (181)    (227)      11    (110)     (28)     (70)     (42)     (19)
                          -------  -------  ------- -------  -------  -------  -------  -------
Income (loss) before
 income taxes...........   (4,356)   5,266    3,913   2,788    3,655    1,753    3,582    2,978
Income taxes............   (1,528)   1,685    1,367     978    1,460      824    1,683    1,400
                          -------  -------  ------- -------  -------  -------  -------  -------
Net income (loss).......  $(2,828) $ 3,581  $ 2,546 $ 1,810  $ 2,195  $   929  $ 1,899  $ 1,578
                          =======  =======  ======= =======  =======  =======  =======  =======
Basic income (loss) per
 common share...........  $ (0.23) $  0.30  $  0.21 $  0.15  $  0.19  $  0.08  $  0.16     0.14
                          =======  =======  ======= =======  =======  =======  =======  =======
Diluted income (loss)
 per common share.......  $ (0.23) $  0.28  $  0.20 $  0.15  $  0.18  $  0.07  $  0.15  $  0.13
                          =======  =======  ======= =======  =======  =======  =======  =======
Weighted average common
 shares outstanding and
 dilutive potential
 common shares..........   12,310   12,739   12,553  12,465   12,456   12,514   12,513   12,422
                          =======  =======  ======= =======  =======  =======  =======  =======
</TABLE>
 
 
                                      F-20
<PAGE>
 
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
        FINANCIAL DISCLOSURE
 
  Not applicable.
 
                                   PART III
 
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
 
DIRECTORS
 
  The information with respect to directors is contained the Company's Proxy
Statement for the Annual Meeting of Stockholders to be held on April 16, 1998
(the "1998 Proxy Statement") under the caption "Election of Directors" and is
incorporated herein by reference.
 
EXECUTIVE OFFICERS
 
  The information with respect to executive officers is set forth under the
caption "Executive Officers" in Part I of this report.
 
REPORTS OF BENEFICIAL OWNERSHIP
 
  The information required by this item is contained in the 1998 Proxy
Statement under the caption "Stock Ownership of Principal Stockholders and
Management" and is incorporated herein by reference.
 
ITEM 11. EXECUTIVE COMPENSATION
 
  The response to this item is contained in the Company's 1998 Proxy Statement
under the captions "Director Compensation," "Compensation of Executive
Officers" and "Employment Agreements" and is incorporated herein by reference.
 
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
 
  The response to this item is contained in the Company's 1998 Proxy Statement
under the caption "Stock Ownership of Principal Stockholders and Management"
and is incorporated herein by reference.
 
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
 
  The response to this item is contained in the Company's 1998 Proxy Statement
under the caption "Certain Transactions" and is incorporated herein by
reference.
 
                                    PART IV
 
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
 
LIST OF FINANCIAL STATEMENTS
 
  See the index to consolidated financial statements and financial statement
schedules.
 
LIST OF FINANCIAL STATEMENT SCHEDULES
 
  See Schedule II-Valuation and Qualifying Accounts.
 
                                     F-21
<PAGE>
 
LIST OF EXHIBITS (NUMBERED IN ACCORDANCE WITH ITEM 601 OF REGULATION S-K)
 
<TABLE>
   <C>   <S>
    2.1  Agreement and Plan of Merger, dated as of June 7, 1996, among the
          Registrant, GSI Acquisition Sub, Inc. and View Engineering, Inc.(2)
    2.2  Asset Purchase Agreement dated as of November 28, 1997, among the
          Registrant, Reel-Tech, Inc.and Data I/O Corporation(4)
    3.1  Restated Articles of Organization of the Registrant, as amended(1)
    3.2  Certificate of Vote of Directors Establishing a Class of Stock
    3.3  By-Laws of the Registrant, as amended(1)
    4.1  Specimen Certificate of Common Stock(1)
    4.2  Rights Agreement dated May 1, 1997 between the Registrant and American
          Stock Transfer & Trust Company, as Rights Agent(3)
   10.1  1981 Stock Option Plan of the Registrant(1)
   10.2  1992 Stock Option Plan of the Registrant(1)
   10.3  1995 Directors' Warrant Plan(1)
   10.4  Lease dated August 10, 1989, as amended to date, between the
          Registrant and Arlington Center Garage and Service Corp.(1)
   10.5  Lease dated February 24, 1989, as amended to date, between Ames Realty
          Trust Associates and Teradyne Laser Systems Inc. and the
          Registrant(1)
   10.6  Lease dated July 31, 1996, as amended to date, between View
          Engineering, Inc. and Donald J. Devine as Trustee under the Donald J.
          Devine Trust Agreement(5)
   10.7  Lease dated March 24, 1995, as amended to date, between View
          Engineering, Inc. and Marjorie Lynn Landon(5)
   10.8  Amended and Restated Revolving Credit Agreement between the Registrant
          and The First National Bank of Boston dated as of December 28,
          1995(6)
   10.9  Amendment to Amended and Restated Revolving Credit Agreement dated
          July 25, 1997
   10.10 Second Amendment to Amended and Restated Revolving Credit Agreement
          dated November 28, 1997
   10.11 Lease dated July 15, 1997, as amended to date, between the Registrant
          and The Wilmington Realty Trust
   10.12 Split Dollar Compensation Agreement dated September 13, 1997 between
          the Registrant and Charles D. Winston
   21.1  Subsidiaries of the Registrant
   23.1  Consent of Arthur Andersen LLP, independent public accountants
   27.1  Financial Data Schedule
</TABLE>
--------
(1) Incorporated by reference to the Company's registration statement on Form
    S-1, filed August 11, 1995 (33-95718).
(2) Incorporated by reference to the Company's Current Report on Form 8-K,
    filed September 6, 1996 (Accession Number 0000927016-96-001043)
(3) Incorporated by reference to the Company's Current Report on Form 8-K,
    filed May 23, 1997 (Accession Number 0000927016-97-001541)
 
                                     F-22
<PAGE>
 
(4) Incorporated by reference to the Company's Current Report on Form 8-K,
    filed December 8, 1997 (Accession Number 0000927016-97-003306)
(5) Incorporated by reference to the Company's Current Report on Form 10-K,
    filed March 11, 1997 (Accession Number 0000927016-97-000756)
(6) Incorporated by reference to the Company's Current Report on Form 10-Q,
    filed August 9, 1996 (Accession Number 0000927016-96-000759)
 
REPORTS ON FORM 8-K
 
  On December 8, 1997 the Company filed a Current Report on Form 8-K relating
to its acquisition of
Reel-Tech, Inc.
 
                                     F-23
<PAGE>
 
                                  SIGNATURES
 
  Pursuant to the requirements of Section 13 or 15(d) the Securities Exchange
Act of 1934, the Registrant, General Scanning Inc., has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.
 
                                          GENERAL SCANNING INC.
                                                (Registrant)
 
                                                 
                                          By:    /s/ Charles D. Winston
                                              ---------------------------------
                                                     Charles D. Winston
                                               President and Chief Executive
                                                          Officer
                                               (Principal Executive Officer)
 
Date: February 27, 1998
 
  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 in the capacities and on the dates indicated:
 
<TABLE>
<CAPTION>
                NAME                             TITLE                  DATE
                ----                             -----                  ----
<S>                                  <C>                           <C>
     /s/ Pierre J. Brosens           Chairman of the Board          February 27,
------------------------------------                                    1998
         Pierre J. Brosens

     /s/ Charles D. Winston          President, Chief Executive     February 27,
------------------------------------  Officer and Director              1998
         Charles D. Winston           (Principal Executive
                                      Officer)
     /s/ Victor H. Woolley           Vice President-Finance and     February 27,
------------------------------------  Chief Financial Officer           1998
         Victor H. Woolley            (Principal Financial and
                                      Accounting Officer)
      /s/ Richard B. Black           Director                       February 27,
------------------------------------                                    1998
          Richard B. Black

      /s/ Paul F. Ferrari            Director                       February 27,
------------------------------------                                    1998
          Paul F. Ferrari

     /s/ Woodie C. Flowers           Director                       February 27,
------------------------------------                                    1998
         Woodie C. Flowers

      /s/ James R. Turner            Director                       February 27,
------------------------------------                                    1998
          James R. Turner

     /s/ Dorothy S. Zinberg          Director                       February 27,
------------------------------------                                    1998
         Dorothy S. Zinberg
</TABLE>
 
                                     F-24
<PAGE>
 
             REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE
 
  We have audited in accordance with generally accepted auditing standards,
the consolidated financial statements of General Scanning Inc. and
subsidiaries included in this Form 10-K and have issued our report thereon
dated February 2, 1998. Our audit was made for the purpose of forming an
opinion on the basic financial statements taken as a whole. Schedule II 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 financial statements. This schedule has been subjected to the
auditing procedures applied in the audit of the basic financial statements
and, in our opinion, fairly states, in all material respects, the financial
data required to be set forth therein in relation to the basic financial
statements taken as a whole.
 
                                          Arthur Andersen LLP
 
Boston, Massachusetts
February 2, 1998
 
                                     F-25
<PAGE>
 
                             GENERAL SCANNING INC.
 
                 SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
 
<TABLE>
<CAPTION>
                                            ADDITIONS
                                       -------------------
                            BALANCE AT CHARGED TO CHARGED              BALANCE
                            BEGINNING  COSTS AND  TO OTHER             AT END
 DESCRIPTION                OF PERIOD   EXPENSES  ACCOUNTS DEDUCTIONS OF PERIOD
 -----------                ---------- ---------- -------- ---------- ---------
                                               (IN THOUSANDS)
<S>                         <C>        <C>        <C>      <C>        <C>
Year ended December 31,
 1995:
  Allowance for doubtful
   accounts................    $511       $281      --        --       $  792
Year ended December 31,
 1996:
  Allowance for doubtful
   accounts................     792         79      --          4         867
Year ended December 31,
 1997:
  Allowance for doubtful
   accounts................     867        340      --          4       1,203
</TABLE>
 
                                      F-26
<PAGE>
 
                             GENERAL SCANNING INC.
 
                               INDEX OF EXHIBITS
 
<TABLE>
<CAPTION>
 EXHIBIT
 NUMBER                            DESCRIPTION                            PAGE
 -------                           -----------                            ----
 <C>     <S>                                                              <C>
  3.2    Certificate of Vote of Directors Establishing a Class of Stock
  10.9   Amendment to Amended and Restated Revolving Credit Agreement
          dated July 25, 1997
  10.10  Second Amendment to Amended and Restated Revolving Credit
          Agreement dated November 28, 1997
  10.11  Lease dated July 15, 1997, as amended to date, between the
          Registrant and The Wilmington Realty Trust
  10.12  Split Dollar Compensation Agreement dated September 13, 1997
          between the Registrant and Charles D. Winston
  21.1   Subsidiaries of the Registrant
  23.1   Consent of Arthur Andersen LLP, independent public accountants
  27.1   Financial Data Schedule
</TABLE>