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                      SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C. 20549
 
                               ----------------
 
                                   FORM 10-K
 
             ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
                        SECURITIES EXCHANGE ACT OF 1934
 
                  FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
                          COMMISSION FILE NO. 0-26646
 
                             GENERAL SCANNING INC.
            (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
 
            MASSACHUSETTS                              04-2445884
   (STATE OR OTHER JURISDICTION OF                  (I.R.S. EMPLOYER
   INCORPORATION OR ORGANIZATION)                  IDENTIFICATION NO.)
 
 
  500 ARSENAL STREET, WATERTOWN, MA                       02172
   (ADDRESS OF PRINCIPAL EXECUTIVE                     (ZIP CODE)
              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 $117,520,993 based on the last reported sale
price of the Common Stock on the Nasdaq National Market on February 25, 1997.
The number of shares outstanding of the registrant's class of Common Stock as
of February 25, 1997 was 11,900,860 shares.
 
                               ----------------
 
                     DOCUMENTS INCORPORATED BY REFERENCE:
 
  Portions of the Registrant's Proxy Statement for the Annual Meeting of
Stockholders to be held April 17, 1997 are incorporated by reference in Part
III of the Report. Other documents incorporated by reference are listed in the
Exhibit Index.
 
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<PAGE>
 
                             GENERAL SCANNING INC.
 
                         1996 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.........................................      3
          Customers.....................................................      7
          Sales, Marketing and Customer Support.........................      7
          Research and Development......................................      8
          Manufacturing.................................................      9
          Working Capital Requirements..................................     10
          Backlog.......................................................     10
          Competition...................................................     10
          Patents and Intellectual Property.............................     11
          Employees.....................................................     11
 Item 2   Properties....................................................     12
 Item 3   Legal Proceedings.............................................     13
 Item 4   Submission of Matters to a Vote of Security Holders...........     14
          Executive Officers............................................     14
 PART II
 Item 5   Market for Registrant's Common Stock and Related Stockholder
          Matters.......................................................     16
 Item 6   Selected Financial Data.......................................     17
 Item 7   Management's Discussion and Analysis of Financial Condition
          and Results of Operations.....................................     18
 Item 8   Financial Statements and Supplementary Data...................    F-1
 Item 9   Changes In and Disagreements With Accountants on Accounting
          and Financial Disclosure......................................   F-20
 PART III
 Item 10  Directors and Executive Officers of the Registrant............   F-20
 Item 11  Executive Compensation........................................   F-20
 Item 12  Security Ownership of Certain Beneficial Owners and
          Management....................................................   F-20
 Item 13  Certain Relationships and Related Transactions................   F-20
 PART IV
 Item 14  Exhibits, Financial Statement Schedules and Reports on Form 8-
          K.............................................................   F-21
</TABLE>
<PAGE>
 
                                    PART I
 
ITEM 1. BUSINESS
 
OVERVIEW
 
  General Scanning Inc. ("General Scanning" or the "Company") was incorporated
in Massachusetts on July 8, 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 to other manufacturers
of laser systems. In 1996, over 84% of the Company's revenues were derived
from the sale of laser systems and components. General Scanning markets and
sells its products worldwide. In 1996, 59% of its sales were in the United
States, 25% in Asia and 16% in Europe. See Note 12 to Financial Statements for
a more detailed description of the Company's geographic operations.
 
  At the end of August 1996, General Scanning acquired View Engineering, Inc.
("View"), a California corporation, based in Simi Valley, California, through
an exchange of 1.4 million shares of Common Stock of the Company, $.01 par
value ("Common Stock"), in a transaction which was recorded as a pooling of
interests for accounting purposes. Therefore, all historical financial
information has been restated to include the operations of View. View designs,
manufactures and markets vision systems used for measurement and inspection in
electronics and semiconductor manufacturing and for general purpose metrology.
 
  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; DRAM
(dynamic random access memory) processing systems used in the fabrication of
high density computer memory chips; inspection systems for solder paste and
component placement on SMT (surface mount technology) printed circuits;
automatic semiconductor package measurement systems for QFP (quad flat
package), TSOPs (thin small outline package) and BGAs (ball grid arrays);
laser marking systems used for permanent identification of products such as
integrated circuit packages and automotive components; 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 manufacturing of disk drives and other precise tolerance devices;
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 medical imaging. The Company's core technological expertise
which is employed in each of these applications is high speed micropositioning
and precise power control of lasers.
 
  General Scanning also designs and manufactures under ISO 9001 certification
a line of thermal printers for leading medical instrument companies. General
Scanning's printers, based on thermal printing technology, use the Company's
core micropositioning expertise to address customers' needs for high accuracy
recording. General Scanning supplies thermal printers to manufacturers of
medical equipment for critical patient applications such as defibrillators,
patient care monitors, and cardiac pacemaker programmers.
 
  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
types of laser output; 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.
 
                                       1
<PAGE>
 
  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 minimize the risk
inherent in new product development. The Company believes that the diversity
of applications in which its products are used minimizes the risk of
dependence on the economic conditions in any one industrial sector it serves.
 
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,
with the addition of View, 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.
 
    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 expenses. 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 and film imaging. 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
 
                                       2
<PAGE>
 
  support organizations in Japan, Hong Kong, Korea, Taiwan, Germany, England,
  France and Italy in addition to the United States.
 
PRODUCTS AND SERVICES
 
 Laser Systems and Components
 
  Thin Film Resistor Processing Systems--The Company's laser systems are used
in the production of thin film resistive components used in the manufacture of
automotive semiconductor sensor circuits. These precision sensor circuits are
used to measure analog variables (such as acceleration, temperature or
pressure) and convert them into digital electrical signals in a growing range
of applications. For example, semiconductor sensors are used in safety
features in equipment such as airbags, anti-lock brakes, emissions control and
active suspension systems. The Company's M310 laser system adjusts the value
of resistors in a thin film sensor circuit by selective cuts while it is under
test, to achieve a consistent digital electrical output in response to a
reference analog input. In the case of pressure sensors, it may be necessary
to subject the sensor to a calibrating pressure during final manufacturing
steps. This additional function is provided in the Company's M310ST laser
system. The Company's thin film resistor processing systems range in price
from approximately $300,000 to $1,100,000. Representative customers include
Analog Devices, Fuji Electric, Motorola and Nippon Denso.
 
  Thick Film Resistor 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 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 Ericsson,
Kyocera, Matsushita, Samsung and Vishay.
 
  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. The strongest
market segments for SMT measurement products
 
                                       3
<PAGE>
 
have been in the computer, telecommunications and automotive industries.
Customers include IBM, Ford Motor and Motorola.
 
  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--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. The Model
830 inspects individual finished matrix-based devices. All of the systems are
configurable to support a variety of device and feature types. Current prices
for the base systems range from $150,000 to $275,000. Customers include Anam,
ASE (Taiwan), Intel, Micron, Samsung and Texas Instruments.
 
  DRAM Processing Systems--Dynamic random access memory chips ("DRAMs") 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 DRAM is designed with redundant circuitry. Using the
Company's M325 laser system, a semiconductor manufacturer can effectively
disconnect defective or redundant circuits in a DRAM with accurately
positioned and power modulated laser pulses. This improves the yield of usable
DRAMs per treated wafer, effectively lowering the cost per unit produced.
 
  As the memory capacity of DRAMs increases, the feature size and spacing
between the elements of the microcircuits decrease. The computer memory
industry is presently changing from 4 megabit to 16 and 64 megabit DRAMs. The
need for higher density DRAMs in the computer industry is driven both by
memory intensive software and higher speed microprocessors. The Company offers
products which are currently being used for processing DRAMs up to 64
megabits. First-pass manufacturing yields are typically low at the start of
production of a new generation of higher capacity devices. Also, the first-
pass yields have decreased with each successive generation of DRAMs as
geometries shrink and manufacturing becomes more difficult.
 
  DRAMs are currently produced in batches on silicon wafers typically
measuring 6" or 8" in diameter. The industry is currently planning for
production using 12" 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 M325 DRAM processing systems range
in price from approximately $500,000 to $800,000. Representative customers
include Cypress 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 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.
Such systems are gaining acceptance over a broad range of markets, replacing
older technologies such as inkjet, mechanical imprinting and ink stamping.
This change is being driven by the need for permanent marking, for marking
systems which can be interfaced with computers and 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; laser marking does. Also, the laser marking process does not
involve the use of environmentally hazardous solvents.
 
 
                                       4
<PAGE>
 
  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. 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.
 
  Precision Alignment Systems--The Company has developed a laser system which
interfaces with a computer assisted design and manufacturing ("CAD/CAM")
system to assist in the precision alignment of parts during manufacturing
assembly processes. The demand for precision alignment products is growing
with the need for increasingly tight tolerance manufacturing. 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. 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 OLT3050G precision alignment system allows
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
Aerospatiale, Boeing, 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 their associated micro-electronics components.
Current prices range from $55,000 to $150,000. Representative customers
include AMP, Parker Pen, Seagate and St. Jude Medical.
 
  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 ("CT"),
magnetic resonance imaging ("MRI") or nuclear medicine systems. Such images
are usually presented on photographic film for viewing by a radiologist. The
Company's MDL laser imaging systems and its SE154, SAE and LSM 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 these data from the CT, 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. The Company's laser imaging systems and subsystems are sold to
several major producers of CT, MRI and nuclear medicine equipment and film.
The Company also sells a modified version of its SAE 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 (formerly 3M).
 
  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
 
                                       5
<PAGE>
 
applications including materials processing, test and measurement, alignment,
inspection, displays, graphics, vision, rapid prototyping, and medical
applications. 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. As the elements reach peak temperature, they 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. The Company's thermal printers sell in a range from
approximately $200 to $3,000. Representative customers include Datascope,
Medtronic, Physio-Control, Spacelabs Medical and Zoll Medical.
 
                                       6
<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 (chip
                         resistors)
      W670.............. Processing of hybrid thick film electronic circuits
      Model 830......... Lead/bump inspection of electronic components
      Model 880......... In-tray lead/bump inspection of electronic components
      Model 890......... Wafer, die and bump inspection
      Model 8100........ Solder paste measurement, component placement
                         inspection
      M325.............. DRAM and PLD fabrication
      HM1500............ Integrated circuit marking
      HM2000............ Permanent marking of manufactured parts
      TAE............... Production of film images for both medical and
                         graphics applications
      OLT3050G.......... Composite structures fabrication
      Voyager 1000...... Benchtop metrology
      Ultra 8........... Automated, non-contact 3-D measurement
   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
                         Ophthalmalogical and dermatalogical 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
</TABLE>
 
CUSTOMERS
 
  The Company has over 1,000 customers. During 1996, no single customer
accounted for more than 7% of total sales. General Scanning's ten most
significant customers in terms of sales in 1996, listed alphabetically, were:
A.B. Dick, Analog Devices, IBM, Imation (formally 3M), Kanematsu, Maxim,
Mitsubishi, Motorola, Physio-Control and Solectron.
 
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
 
                                       7
<PAGE>
 
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 is not subject to seasonal fluctuations.
 
  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 manufacturing locations in Watertown,
Somerville, Arlington and Bedford, Massachusetts and at View's facilities in
Simi Valley, California and Ann Arbor, Michigan. Additionally, field sales
personnel are located in Atlanta, Chicago, Dallas, Minneapolis and Santa
Clara. 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
recently opened offices in Hong Kong, Korea and Taiwan.
 
  The Company provides customer support in the form of applications
engineering, repair services and spare parts inventory through its offices in
Massachusetts, California, France, Germany, Italy, the United Kingdom, Hong
Kong, Japan, Korea 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 laser interaction with materials.
 
    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.
 
                                       8
<PAGE>
 
  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, 1996, 1995 and 1994, the Company's research
and development expenditures were approximately $18.4 million, $17.1 million
and $13.1 million, respectively. These amounts were approximately 12%, 14% and
13% of sales in the respective periods. As of December 31, 1996, the Company
had 182 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.
 
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 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 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 thermal
printers, 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 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 microprocessor used in the Company's
thermal printers is currently obtained from a single manufacturer, one of the
world's major producers of microprocessors. In the event of a disruption of
this supply, the Company would have to redesign its product to accommodate the
technology of an alternative microprocessor, which the Company believes would
result in an interruption in the manufacture of these products. Development
plans for 1997 include a redesign of these products to accommodate a new, more
readily available microprocessor.
 
  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.
 
                                       9
<PAGE>
 
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 $36 million on December 31,
1996 compared to $42 million on December 31, 1995.
 
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 and 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 several other manufacturers which compete with the Company's laser
marking equipment. 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 the existence 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, which compete for
certain segments of the markets served by the Company's products.
 
  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 component. Increased competitive pressure could
 
                                      10
<PAGE>
 
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, 1996, the Company had 779 full-time employees worldwide,
including 315 in manufacturing, 207 in marketing, sales and field service, 182
in research and development, and 75 in general administration. In addition,
the Company had 39 temporary contract employees engaged principally in new
product development and manufacturing operations. The Company believes that
the use of temporary contract employees allows the Company to respond more
rapidly to fluctuations in manufacturing and product demand and enables the
Company to better control the labor component of its manufacturing costs. 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.
 
                                      11
<PAGE>
 
ITEM 2. PROPERTIES
 
  The Company's headquarters is located in Watertown, Massachusetts, which is
a suburb of Boston. Additionally, the Company leases manufacturing facilities
in Somerville, Arlington and Bedford, Massachusetts, all near Boston. The
Company owns one and leases a second facility in Simi Valley, California, as
well as leases one research facility in Ann Arbor, Michigan.
 
  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,         84,000     owned
                         engineering, offices; corporate
                         headquarters
Somerville, MA, USA..... Marketing, sales, manufacturing,         47,000    leased(1)
                         engineering, offices
Arlington, MA, USA...... Marketing, sales, manufacturing,         30,000    leased(1)
                         engineering, offices
Bedford, MA, USA........ Marketing, sales, manufacturing,         50,000    leased(2)
                         engineering, offices
Simi Valley, CA, USA.... Marketing, sales, manufacturing,         41,000     owned
                         engineering
Simi Valley, CA, USA.... Manufacturing                            21,000    leased(3)
Ann Arbor, MI, USA...... Marketing, sales, engineering, offices   13,000    leased(4)
</TABLE>
--------
(1) Lease expires in 1997.
(2) Lease expires in 2003, with a 3-year renewal option.
(3) Lease expires in 1998, with two 3-year renewal options.
(4) Lease expires in 2001, with two 3-year renewal options.
 
  Additional marketing and sales offices are located in Japan, Germany,
France, Italy, United Kingdom, Hong Kong, Korea, Taiwan and other locations in
the United States. These additional marketing and sales offices are in leased
facilities occupying approximately 20,000 square feet in the aggregate.
 
  The Company has leases on two Massachusetts facilities expiring at the end
of 1997 and is in the process of determining whether to renew or to relocate.
 
  The Company believes that its existing manufacturing facilities will be
adequate to meet its requirements for the foreseeable future and that suitable
additional or substitute space will be available as needed.
 
                                      12
<PAGE>
 
ITEM 3. LEGAL PROCEEDINGS
 
  View Engineering v. Robotic Vision Systems, Inc. USDC Case No. 95-1882. On
or about March 24, 1995, View filed a complaint against Robotic Vision
Systems, Inc. ("RVSI") seeking declaratory relief that (i) U.S. Patent No.
4,328,147 held by RVSI was invalid and (ii) View had not infringed this
patent. RVSI counterclaimed against View for alleged trade libel and patent
infringement seeking a declaration that RVSI's patent was valid and that View
had infringed upon one or more claims of the patent, an order that all
infringing goods be delivered to RVSI for destruction, and compensatory and
punitive damages. On April 15, 1996, View filed a motion for summary judgment
on the grounds that RVSI had not established infringement or trade libel. In
conjunction with this motion, View also brought a Rule 11 motion for
sanctions. On June 27, 1996 the court granted View a summary judgment and
granted in part, its motion for Rule 11 sanctions. The summary judgment and
the Rule 11 sanctions have been appealed. A hearing on this appeal has not yet
been held.
 
  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.
View has obtained a summary judgment on the first of RVSI's claims, and RVSI
has dismissed the other claims. RVSI has appealed the summary judgment with
regard to its first claim. A hearing on this appeal was held on January 9,
1997.
 
  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 and seeking
damages allegedly caused by View's infringement. View filed an answer and
counterclaim on April 22, 1996. Discovery is proceeding.
 
  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. The Company filed
an answer on September 9, 1996. Discovery is proceeding.
 
  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 attorney's
fees, costs and disbursements. The Company has filed an answer and
counterclaim to this complaint. No discovery has commenced in this action.
 
  The Company believes that RVSI's and Electro Scientific's claims in each of
the above actions are without merit and that the Company and View will prevail
in the litigation. However, if RVSI or Electro Scientific prevails on one or
more of its claims, there could be a material adverse effect on the Company's
business, 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.
 
                                      13
<PAGE>
 
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, 1996.
 
                              EXECUTIVE OFFICERS
 
  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>
Jean I. Montagu.........  63 Chairman of the Board and Director
Pierre J. Brosens,        63 Vice Chairman, Clerk, Treasurer and Director
 Sc.D...................
Charles D. Winston......  55 President, Chief Executive Officer and Director
Victor H. Woolley.......  54 Vice President Finance and Chief Financial Officer
Gregory S. Baletsa......  43 Vice President and General Manager of the Recorder
                             Products Division
Michael R. Kampfe.......  47 Vice President and General Manager of the Optical
                             Scanning Products Division
Victor Sabella..........  52 Vice President and General Manager of the
                             Industrial Laser Products Division
Thomas R. Swain.........  51 Vice President and General Manager of the View
                             Engineering Division
Joseph A. Verderber.....  58 Vice President and General Manager of the Laser
                             Systems Division
</TABLE>
 
  Jean I. Montagu, a co-founder of the Company, presently serves as Chairman
of the Board of Directors and as a Director of the Company. Mr. Montagu served
as President of the Company from 1968 until 1984. Mr. Montagu received a B.S.
and an M.S. in Mechanical Engineering from the Massachusetts Institute of
Technology ("MIT").
 
  Pierre Brosens, Sc.D., a co-founder of the Company, presently serves as Vice
Chairman of the Board of Directors. Since the Company's inception, Dr. Brosens
has served as Clerk, as Treasurer, and as a Director of the Company. Dr.
Brosens received B.S., M.S. and Sc.D. degrees from MIT. Dr. Brosens also
currently acts as a Director of Cambridge Acoustical Associates, Inc., a
privately held company.
 
  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 industry, 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.
 
                                      14
<PAGE>
 
  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. Mr. Sabella is a Director of
Technical Communications Corporation.
 
  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 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
                                                 --------------- ---------------
                                                  HIGH     LOW    HIGH     LOW
                                                 ------- ------- ------- -------
   <S>                                           <C>     <C>     <C>     <C>
   First Quarter................................                 $15 3/4 $ 8 7/8
   Second Quarter...............................                 $25 1/4 $12 3/4
   Third Quarter................................ $13 3/4 $11 1/4 $18 1/4 $ 9 1/2
   Fourth Quarter............................... $   13  $    8  $13 3/8 $ 8 1/2
</TABLE>
 
HOLDERS
 
  On February 25, 1997, the Company had approximately 311 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 2,000.
 
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,
                            --------------------------------------------------
                              1996       1995       1994      1993      1992
                            ---------  ---------  --------  --------  --------
                                (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                         <C>        <C>        <C>       <C>       <C>
INCOME STATEMENT DATA:
Net sales:
  Laser systems and
   components.............  $ 131,867  $ 103,405  $ 77,488  $ 62,994  $ 58,665
  Thermal printers........     24,666     22,915    20,624    18,821    20,155
                            ---------  ---------  --------  --------  --------
    Total sales...........    156,533    126,320    98,112    81,815    78,820
                            ---------  ---------  --------  --------  --------
Gross profit:
  Laser systems and
   components.............     60,829     47,861    37,760    29,785    25,010
  Thermal printers........     10,851     10,061     8,533     7,614     8,097
                            ---------  ---------  --------  --------  --------
    Total gross profit....     71,680     57,922    46,293    37,399    33,107
                            ---------  ---------  --------  --------  --------
Operating expenses:
  Research and product
   development............     18,400     17,106    13,090    11,208    11,637
  Selling, general and
   administrative.........     39,475     33,091    27,326    21,689    19,961
                            ---------  ---------  --------  --------  --------
    Total operating
     expenses.............     57,875     50,197    40,416    32,897    31,598
                            ---------  ---------  --------  --------  --------
Income from operations....     13,805      7,725     5,877     4,502     1,509
Merger (expenses).........     (1,950)       --        --        --        --
Interest income (expense),
 net......................        272       (682)     (847)     (896)   (1,106)
Foreign exchange
 transaction gains
 (losses).................       (159)       331       636       (24)      336
                            ---------  ---------  --------  --------  --------
Income before income
 taxes....................     11,968      7,374     5,666     3,582       739
Income taxes..............      5,367      2,803     1,868     1,291       235
                            ---------  ---------  --------  --------  --------
Net income................  $   6,601  $   4,571  $  3,798  $  2,291  $    504
                            =========  =========  ========  ========  ========
Net income per common and
 common equivalent share
 outstanding..............  $    0.53  $    0.44  $   0.42  $   0.26  $   0.06
                            =========  =========  ========  ========  ========
Weighted average common
 and common equivalent
 shares outstanding.......     12,476     10,357     9,099     8,863     8,909
                            =========  =========  ========  ========  ========
<CAPTION>
                                             DECEMBER 31,
                            --------------------------------------------------
                              1996       1995       1994      1993      1992
                            ---------  ---------  --------  --------  --------
<S>                         <C>        <C>        <C>       <C>       <C>
BALANCE SHEET DATA:
Working capital...........  $  57,680  $  52,396  $ 20,275  $ 19,725  $ 16,326
Total assets..............     95,573     89,708    49,859    47,732    44,149
Long-term obligations.....      3,442      3,102     2,961     6,980     8,216
Stockholders' equity......     68,289     59,754    27,111    23,216    20,737
</TABLE>
 
  In 1996 the Company acquired View Engineering, Inc. (View) 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 has been accounted for
as a pooling of interests for accounting purposes and, accordingly, the
financial statements have been retroactively restated to include the accounts
of View for all periods presented.
 
                                      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 1996, 1995 and 1994, approximately 84%, 82% and 79%,
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 1996 and in 1995 grew
approximately 28% and 33%, respectively, over sales for this segment in the
comparable prior periods. Thermal printers sales in 1996 and in 1995 increased
approximately 8% and 11%, respectively, over the comparable prior periods.
 
  In August 1996, the Company acquired View Engineering, Inc. ("View") 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 have been retroactively restated to 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. This segment of the Company's business
has not experienced significant cyclicality in the past.
 
  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 yen
and Deutsche mark as compared to the U.S. dollar, can impact the Company's
sales and expenses, which are reported in U.S. dollars. The Company estimates
that the $30.2 million increase in sales in 1996 over 1995 would have been
approximately 10% higher were it not for a stronger U.S. dollar in 1996 as
compared to 1995. Conversely, the $28.2 million increase in sales in 1995 over
1994 would have been approximately 13% lower were it not for a weaker U.S.
dollar in 1995 as compared to 1994.
 
  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.
 
                                      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 statement of
operations:
 
<TABLE>
<CAPTION>
                                                         YEAR ENDED DECEMBER
                                                         ----------------------
                                                          1996    1995    1994
                                                         ------  ------  ------
<S>                                                      <C>     <C>     <C>
Net sales:
  Laser systems and components..........................   84.2%   81.9%   79.0%
  Thermal printers......................................   15.8    18.1    21.0
                                                         ------  ------  ------
    Total sales.........................................  100.0   100.0   100.0
                                                         ------  ------  ------
Cost of sales:
  Laser systems and components..........................   53.9    53.7    51.3
  Thermal printers......................................   56.0    56.1    58.6
                                                         ------  ------  ------
    Total cost of sales.................................   54.2    54.2    52.8
                                                         ------  ------  ------
Gross profit:
  Laser systems and components..........................   46.1    46.3    48.7
  Thermal printers......................................   44.0    43.9    41.4
                                                         ------  ------  ------
    Total gross profit..................................   45.8    45.8    47.2
                                                         ------  ------  ------
Operating expenses:
  Research and product development......................   11.8    13.5    13.3
  Selling, general and administrative...................   25.2    26.2    27.9
                                                         ------  ------  ------
    Total operating expenses............................   37.0    39.7    41.2
                                                         ------  ------  ------
Income from operations..................................    8.8     6.1     6.0
Merger (expenses).......................................   (1.2)    --      --
Interest income (expense), net..........................    0.1    (0.5)   (0.8)
Foreign exchange transaction gains (losses).............   (0.1)    0.2     0.6
                                                         ------  ------  ------
Income before income taxes..............................    7.6     5.8     5.8
Income taxes............................................    3.4     2.2     1.9
                                                         ------  ------  ------
Net income..............................................    4.2%    3.6%    3.9%
                                                         ======  ======  ======
</TABLE>
 
RESULTS OF OPERATIONS
 
  Sales. Total sales increased to $156.5 million in 1996 from $126.3 million
in 1995 and $98.1 million in 1994. Sales of laser systems and components
increased due to increased unit volumes of end-user systems and OEM laser
systems for film imaging. The increase primarily reflects growth in demand for
the Company's products used in the semiconductor production, electronics
manufacturing, and materials processing industries. The increases in the sales
of thermal printers in both 1995 and 1994 were due, in part, to increased unit
volume to satisfy the requirements of a current customer's introduction of new
products. International sales, as a percentage of total sales, decreased to
41% in 1996 from 47% in 1995 as compared with 38% in 1994.
 
  Gross Profit. Total gross profit was $71.7 million, or 45.8% of sales, in
1996, $57.9 million, or 45.8%, in 1995, and $46.3 million, or 47.2%, in 1994.
Gross profit as a percentage of sales remained unchanged from 1995 to 1996.
Laser systems and components gross profit as a percentage of sales was 46.1%,
46.3% and 48.7% for the years 1996, 1995 and 1994, respectively. Thermal
printers gross profit as a percentage of sales was 44.0% in 1996, 43.9% in
1995 and 41.4% in 1994.
 
  Research and Product Development. Research and product development expenses
increased 8% to $18.4 million in 1996 from $17.1 million in 1995 and $13.1
million in 1994. This increase in research and product development expenses
was primarily due to the addition of personnel to support the development of
new laser systems and components. Research and product development expenses as
a percentage of sales have ranged
 
                                      19
<PAGE>
 
between approximately 12% to 13% over the past three years. Because 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 $39.5 million in 1996, $33.1 million in 1995 and $27.3 million
in 1994. This increase in selling, general and administrative expenses was
primarily due to the addition of sales and marketing personnel and related
costs incurred in supporting increased sales. In 1996, selling, general and
administrative expenses decreased as a percentage of sales due to such
expenses growing more slowly than revenues.
 
  Interest. Net interest income was $271 thousand in 1996 compared to net
expense of $682 thousand in 1995 and $847 thousand in 1994. These changes
primarily reflect interest earned on cash raised in the Company's initial
public offering in September 1995.
 
  Foreign Exchange. Foreign exchange transactions resulted in a loss of $159
thousand in 1996 compared to gains of $331 thousand in 1995 and $636 thousand
in 1994. The loss in 1996 was due primarily to weakening of the yen and
deutsche mark at a time when the Company's net receivables denominated in
these currencies were not fully hedged.
 
  Income Tax. The effective income tax rate was 45% in 1996, 38% in 1995 and
33% in 1994. The high 1996 rate was the result of (i) a portion of merger
expenses not being tax deductible and (ii) 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, where tax rates are generally higher than
in the United States. In 1994, the income taxes in the Company's foreign
subsidiaries in Japan and Germany were reduced by net operating loss
carryforwards. 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 after tax was $6.6 million in 1996, $4.6 million in
1995 and $3.8 million in 1994. The increase in net income in 1996, despite an
increase in the effective tax rate, was primarily due to increased sales and a
leveraging over 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 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 introduction
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; and timing of shipments. 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 is not subject to seasonal fluctuations.
 
LIQUIDITY AND CAPITAL RESOURCES
 
  Cash and cash equivalents totaled $17.7 million on December 31, 1996
compared to $25.7 million on December 31, 1995. During 1996, $1.7 million was
used in operating activities and $6.9 million was used in capital additions.
 
  Historically, cash requirements have been satisfied by cash flows from
operating activities, supplemented by bank loans. 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.
 
                                      20
<PAGE>
 
  A net $1.7 million was used in operating activities during 1996. Net income
of $6.6 million, supplemented by non-cash charges for depreciation, deferred
compensation and deferred income taxes totaling approximately $2.9 million
were offset by increases in current assets, principally accounts receivable
and inventory, of $10.6 million to support expanded business activity and a
reduction in payables of about $600 thousand.
 
  Capital expenditures were $6.9 million for 1996. 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 50,000 square feet
of additional manufacturing, research and office space during the first half
of 1996.
 
  The Company's bank credit agreement provides for a maximum $10 million
revolving credit facility and $4 million in international credit lines. At
December 31, 1996, $3.0 million was outstanding under this agreement.
Borrowings under the $10 million revolving credit facility bear interest at
the London InterBank Offered Rate (LIBOR) plus one and one-half percent or
prime, determined at time of borrowing. Borrowings under the international
credit lines up to a maximum of $4 million accrue interest at a negotiated
rate approximating the country prime rate. The agreement requires compliance
with certain financial ratios.
 
  In 1996, the Company acquired View for 1,437,060 shares of Common Stock in a
transaction which was accounted for as a pooling of interests.
 
  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, 1996,
 1995 and 1994........................................................... F-3
Consolidated Balance Sheets as of December 31, 1996 and 1995............. F-4
Consolidated Statements of Stockholders' Equity for the years ended
 December 31, 1996, 1995 and 1994........................................ F-5
Consolidated Statements of Cash Flows for the years ended December 31,
 1996, 1995 and 1994..................................................... F-6
Notes to Consolidated Financial Statements............................... F-7
Supplementary Financial Information (Quarterly Financial Information for
 1996 and 1995, unaudited)............................................... F-19
</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, 1996 and 1995 and the related consolidated statements of income,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1996. 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, 1996 and 1995 and the results of their
operations and their cash flows for each of the three years in the period
ended December 31, 1996 in conformity with generally accepted accounting
principles.
 
Arthur Andersen LLP
 
Boston, Massachusetts
February 3, 1997
 
                                      F-2
<PAGE>
 
                             GENERAL SCANNING INC.
 
                       CONSOLIDATED STATEMENTS OF INCOME
 
<TABLE>
<CAPTION>
                                              YEAR ENDED DECEMBER 31,
                                         -------------------------------------
                                            1996         1995         1994
                                         -----------  -----------  -----------
                                         (IN THOUSANDS, EXCEPT SHARE DATA)
<S>                                      <C>          <C>          <C>
Net sales:
  Laser systems and components..........    $131,867     $103,405     $77,488
  Thermal printers......................      24,666       22,915      20,624
                                         -----------  -----------  ----------
    Total sales.........................     156,533      126,320      98,112
                                         -----------  -----------  ----------
Cost of sales:
  Laser systems and components..........      71,038       55,544      39,728
  Thermal printers......................      13,815       12,854      12,091
                                         -----------  -----------  ----------
    Total cost of sales.................      84,853       68,398      51,819
                                         -----------  -----------  ----------
Gross profit:
  Laser systems and components..........      60,829       47,861      37,760
  Thermal printers......................      10,851       10,061       8,533
                                         -----------  -----------  ----------
    Total gross profit..................      71,680       57,922      46,293
                                         -----------  -----------  ----------
Operating expenses:
  Research and product development......      18,400       17,106      13,090
  Selling, general and administrative...      39,475       33,091      27,326
                                         -----------  -----------  ----------
    Total operating expenses............      57,875       50,197      40,416
                                         -----------  -----------  ----------
Income from operations..................      13,805        7,725       5,877
Merger (expenses).......................      (1,950)         --          --
Interest income (expense), net..........         272         (682)       (847)
Foreign exchange transaction gains
 (losses)...............................        (159)         331         636
                                         -----------  -----------  ----------
Income before income taxes..............      11,968        7,374       5,666
Income taxes............................       5,367        2,803       1,868
                                         -----------  -----------  ----------
Net income..............................     $ 6,601      $ 4,571     $ 3,798
                                         ===========  ===========  ==========
Net income per common and common
 equivalent share outstanding...........     $  0.53      $  0.44      $ 0.42
                                         ===========  ===========  ==========
Weighted average common and common
 equivalent shares outstanding..........  12,476,237   10,357,287   9,099,474
                                         ===========  ===========  ==========
</TABLE>
 
                            See accompanying notes.
 
                                      F-3
<PAGE>
 
                             GENERAL SCANNING INC.
 
                          CONSOLIDATED BALANCE SHEETS
 
<TABLE>
<CAPTION>
                                                          AS OF DECEMBER 31,
                                                          --------------------
                                                            1996       1995
                                                          ---------  ---------
                                                            (IN THOUSANDS,
                                                          EXCEPT SHARE DATA)
<S>                                                       <C>        <C>
ASSETS
Current assets:
  Cash and cash equivalents.............................. $  17,655  $  25,695
  Accounts receivable, less allowance of $867 in 1996 and
   $792 in 1995..........................................    32,213     23,552
  Inventories............................................    26,051     25,087
  Deferred income taxes..................................     4,022      3,376
  Other current assets...................................     1,581      1,538
                                                          ---------  ---------
    Total current assets.................................    81,522     79,248
                                                          ---------  ---------
Property, plant and equipment, net.......................    12,922      9,191
Other assets.............................................       428        484
Intangible assets, net of amortization of $1,753 in 1996
 and $1,669 in 1995......................................       701        785
                                                          ---------  ---------
                                                          $  95,573  $  89,708
                                                          =========  =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Notes payable to banks and current portion of long-term
   debt.................................................. $   3,030  $   4,475
  Other notes payable....................................       --         700
  Accounts payable.......................................     7,025      8,084
  Accrued expenses.......................................    13,787     13,593
                                                          ---------  ---------
    Total current liabilities............................    23,842     26,852
                                                          ---------  ---------
Long-term debt due after one year........................     1,549      1,556
Deferred compensation....................................     1,893      1,546
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 12,245,655 in 1996 and 11,967,845 in
   1995..................................................       122        119
  Additional paid-in capital.............................    43,657     41,587
  Retained earnings......................................    25,685     19,084
  Cumulative translation adjustment......................      (587)      (448)
  Treasury stock, at cost; 365,995 shares in 1996 and
   1995..................................................      (588)      (588)
                                                          ---------  ---------
  Total stockholders' equity.............................    68,289     59,754
                                                          ---------  ---------
                                                          $  95,573  $  89,708
                                                          =========  =========
</TABLE>
 
                            See accompanying notes.
 
                                      F-4
<PAGE>
 
                             GENERAL SCANNING INC.
 
                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
 
<TABLE>
<CAPTION>
                          COMMON STOCK                                  TREASURY STOCK
                          ------------                                  ----------------
                                 $.01  ADDITIONAL           CUMULATIVE
                                  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,
 1993, as previously
 reported...............   7,671 $ 77   $ 1,888   $12,486      $(147)      (328) $  (482)
Adjustments for View
 Engineering, Inc.
 pooling of interests...   1,437   14    11,151    (1,771)       --         --       --
                          ------ ----   -------   -------      -----     ------  -------
Balance, December 31,
 1993, as restated......   9,108   91    13,039    10,715       (147)      (328)    (482)
Net income..............     --   --        --      3,798        --         --       --
Stock option and warrant
 exercises, including
 tax effects............     120    1       247       --         --         --       --
Purchase of treasury
 stock..................     --   --        --        --         --         (38)    (106)
Cumulative translation
 adjustment.............     --   --        --        --         (45)       --       --
                          ------ ----   -------   -------      -----     ------  -------
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)
                          ====== ====   =======   =======      =====     ======  =======
</TABLE>
 
 
                            See accompanying notes.
 
                                      F-5
<PAGE>
 
                             GENERAL SCANNING INC.
 
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
 
<TABLE>
<CAPTION>
                                                    YEAR ENDED DECEMBER 31,
                                                   ---------------------------
                                                     1996      1995     1994
                                                   --------  --------  -------
                                                        (IN THOUSANDS)
<S>                                                <C>       <C>       <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.......................................  $  6,601  $  4,571  $ 3,798
Adjustments to reconcile net income to net cash
 provided by (used in) operating activities--
  Depreciation and amortization..................     3,180     1,984    2,410
  Deferred compensation..........................       347       319       93
  Deferred income taxes..........................      (646)     (460)    (489)
Changes in current assets and liabilities--
  Accounts receivable............................    (9,444)   (4,194)  (1,722)
  Inventories....................................    (1,119)   (9,104)  (1,263)
  Other current assets...........................         2    (1,111)     196
  Accounts payable and accrued expenses..........      (592)    4,520    4,132
                                                   --------  --------  -------
Net cash provided by (used in) operating
 activities......................................    (1,671)   (3,475)   7,155
                                                   --------  --------  -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant, and equipment,
 net.............................................    (6,902)   (2,596)  (1,765)
Decrease (increase) in other assets..............        15       (67)     117
                                                   --------  --------  -------
Net cash (used in) investing activities..........    (6,887)   (2,663)  (1,648)
                                                   --------  --------  -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds (payments) on notes payable to banks
 and others......................................    (1,934)    2,464   (2,233)
Net proceeds (payments) on long-term debt........        (7)     (178)  (4,112)
Net proceeds from issuance of common stock.......       --     27,740      --
Stock option and warrant exercises, net of tax
 effects.........................................     2,073       588      248
Purchase of treasury stock.......................       --        --      (106)
                                                   --------  --------  -------
Net cash provided by (used in) financing
 activities......................................       132    30,614   (6,203)
                                                   --------  --------  -------
Effect of exchange rate changes on cash and cash
 equivalents.....................................       386      (143)    (480)
                                                   --------  --------  -------
Increase (decrease) in cash and cash
 equivalents.....................................    (8,040)   24,333   (1,176)
Cash and cash equivalents, beginning of period...    25,695     1,362    2,538
                                                   --------  --------  -------
Cash and cash equivalents, end of period.........  $ 17,655  $ 25,695  $ 1,362
                                                   ========  ========  =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for--
  Interest.......................................  $    862  $  1,064  $   908
                                                   ========  ========  =======
  Income taxes...................................  $  4,834  $  2,540  $ 1,973
                                                   ========  ========  =======
</TABLE>
 
                            See accompanying notes.
 
                                      F-6
<PAGE>
 
                             GENERAL SCANNING INC.
 
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                               DECEMBER 31, 1996
 
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 variety of industrial applications that require high-speed
micropositioning and precise power control of lasers. The thermal printer
segment provides a line of thermal printers, primarily 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.
 
  In August 1996, the Company acquired View Engineering, Inc. (View), a
California company, 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>
                                                          YEAR ENDED DEC. 31,
                                                          ---------------------
                                                             1995       1994
                                                          ----------  ---------
                                                             (IN THOUSANDS)
      <S>                                                 <C>         <C>
      Sales:
        General Scanning Inc. ........................... $  101,819  $  76,214
        View Engineering, Inc. ..........................     24,501     21,898
                                                          ----------  ---------
          As restated.................................... $  126,320  $  98,112
                                                          ==========  =========
      Net income:
        General Scanning Inc. ........................... $    6,009  $   3,694
        View Engineering, Inc. ..........................     (1,438)       104
                                                          ----------  ---------
          As restated.................................... $    4,571  $   3,798
                                                          ==========  =========
      Net income per share:
        General Scanning Inc. ........................... $     0.67  $    0.48
        View Engineering, Inc. ..........................      (0.23)     (0.06)
                                                          ----------  ---------
          As restated.................................... $     0.44  $    0.42
                                                          ==========  =========
</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
 
                                      F-7
<PAGE>
 
                             GENERAL SCANNING INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
                               DECEMBER 31, 1996
 
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; and
timing of shipments.
 
  The microprocessor used in the Company's thermal printers is currently
obtained from a single manufacturer, one of the world's major producers of
microprocessors. In the event of a disruption of this supply, the Company
would have to redesign its product to accommodate the technology of an
alternative microprocessor, which the Company believes would result in an
interruption in the manufacture of these products.
 
 Fiscal year
 
  The Company's fiscal year ends on December 31. For interim reporting
purposes, the Company closes its books on the Saturday closest to each
quarter-end. Each of the quarters in the years 1996, 1995 and 1994 included 13
weeks.
 
 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.
 
 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>
                                                               DEC. 31, DEC. 31,
                                                                 1996     1995
                                                               -------- --------
                                                                (IN THOUSANDS)
      <S>                                                      <C>      <C>
      Purchased parts......................................... $12,572  $11,163
      Work-in-process.........................................   5,341    6,648
      Finished goods..........................................   8,138    7,276
                                                               -------  -------
        Total inventory....................................... $26,051  $25,087
                                                               =======  =======
</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.
 
                                      F-8
<PAGE>
 
                             GENERAL SCANNING INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
                               DECEMBER 31, 1996
 
 
 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, 1996, the Company had such contracts to exchange
foreign currencies (yen and Deutsche marks) for U.S. dollars totaling
$3,000,000 maturing through April 1997.
 
  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, 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.
 
 Net income per share of common stock
 
  Net income per common and common equivalent share is computed using the
weighted number of common shares and dilutive common equivalent shares
outstanding during each period. Dilutive common equivalent shares, consisting
of outstanding stock options and warrants, are determined using the treasury
stock method. Fully diluted net income per common and common equivalent share
has not been presented as it is not materially different from primary net
income per common and common equivalent share or is antidilutive.
 
 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. 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 charged to expense as incurred.
 
 Interest
 
  Interest income in 1996 is net of $845,000 of interest expense, and interest
expense in 1995 is net of $373,000 of interest income.
 
 Income tax
 
  The Company does not provide United States federal income taxes on
undistributed earnings of consolidated foreign subsidiaries as such earnings
are deemed to be permanently reinvested in non-U.S. operations.
 
                                      F-9
<PAGE>
 
                             GENERAL SCANNING INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
                               DECEMBER 31, 1996
 
 
 Impairment of long-lived assets
 
  The Company periodically assesses the realizability of its long-lived assets
in accordance with Statement of Financial Accounting Standards 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
 
  In connection with the acquisition of the minority interest in Teradyne
Laser Systems, Inc. in 1991, the Company allocated the excess purchase price
over the fair market value of the assets acquired to intangible assets. These
intangible assets, which include noncompete agreements, patents and goodwill,
are being amortized over their estimated useful lives of from 3 to 15 years.
Amortization expense was $84,000 in 1996 and 1995 and $366,000 in 1994.
 
3. PROPERTY, PLANT AND EQUIPMENT
 
  Property, plant and equipment consists of the following:
 
<TABLE>
<CAPTION>
                                                             DEC. 31,  DEC. 31,
                                                               1996      1995
                                                             --------  --------
                                                              (IN THOUSANDS)
      <S>                                                    <C>       <C>
      Cost:
      Land, buildings and improvements...................... $ 10,936  $ 10,283
      Machinery and equipment...............................   26,271    22,655
                                                             --------  --------
        Total cost..........................................   37,207    32,938
      Accumulated depreciation..............................  (24,285)  (23,747)
                                                             --------  --------
        Net property, plant and equipment................... $ 12,922  $  9,191
                                                             ========  ========
</TABLE>
 
4. ACCRUED EXPENSES
 
  Accrued expenses consists of the following:
 
<TABLE>
<CAPTION>
                                                               DEC. 31, DEC. 31,
                                                                 1996     1995
                                                               -------- --------
                                                                (IN THOUSANDS)
      <S>                                                      <C>      <C>
      Accrued compensation and benefits....................... $ 6,701  $ 6,255
      Income taxes............................................   3,893    3,499
      Other...................................................   3,193    3,839
                                                               -------  -------
        Total accrued expenses................................ $13,787  $13,593
                                                               =======  =======
</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>
                                                               DEC. 31, DEC. 31,
                                                                 1996     1995
                                                               -------- --------
                                                                (IN THOUSANDS)
      <S>                                                      <C>      <C>
      Revolving credit agreements.............................     --    $4,460
      Lines of credit.........................................   3,013      --
      Current portion of long-term debt.......................      17       15
                                                                ------   ------
        Total.................................................  $3,030   $4,475
                                                                ======   ======
</TABLE>
 
 
                                     F-10
<PAGE>
 
                             GENERAL SCANNING INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
                               DECEMBER 31, 1996
 
  The currently effective revolving credit agreement, which expires on
December 31, 1998, provides for borrowings up to $10,000,000. Borrowings bear
interest at the London InterBank Offered Rate (LIBOR) plus one and one-half
percent or prime, determined at the time of borrowing. 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.
 
  Bank lines of credit are provided to the Company's foreign operations with a
maximum availability of $4,000,000. Such debt outstanding at December 31, 1996
was denominated in yen with an interest rate of 1.9%.
 
 Other notes payable
 
  Other notes payable of $700,000 at December 31, 1995 were issued by View
Engineering, Inc. during 1995 with detachable warrants. The notes earned
interest at 10% per annum. All exercisable warrants were converted into common
shares of View Engineering, Inc. prior to or coincident with the merger of
View Engineering, Inc. with General Scanning Inc. The notes have been repaid
and no warrants remain outstanding.
 
 Long-term debt
 
  Long-term debt consists of a mortgage payable at 10.4% 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 $17,000.
 
 Fair value of financial instruments
 
  Statement of Financial Accounting Standards 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 approximated 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.
 
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
 
                                     F-11
<PAGE>
 
                             GENERAL SCANNING INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
                               DECEMBER 31, 1996
 
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.
 
 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 450,546 were
available for future grant at December 31, 1996. 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 555,860 shares of common stock were outstanding under this Plan at
December 31, 1996.
 
  During 1995, the Financial Accounting Standards Board issued SFAS 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.
 
  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 FASB Statement No. 123, the Company's net income and earnings per share
would have been reduced to the pro forma amounts below. Because the Statement
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>
                                         1996   1995
                                        ------ ------
   <S>                      <C>         <C>    <C>
   Net income (thousands):  As reported $6,601 $4,571
                            Pro forma   $6,354 $4,483
   Earnings per share:      As reported $ 0.53 $ 0.44
                            Pro forma   $ 0.51 $ 0.43
</TABLE>
 
                                     F-12
<PAGE>
 
                             GENERAL SCANNING INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
                               DECEMBER 31, 1996
 
 
  Stock option activity for the years ended December 31, 1994, 1995 and 1996
is presented below. The weighted average fair value of options granted in 1996
is $4.47.
 
<TABLE>
<CAPTION>
                                                                       WTD. AVG.
                                                             OPTIONS   EX. PRICE
                                                            ---------  ---------
   <S>                                                      <C>        <C>
   Outstanding at December 31, 1993........................ 1,149,060    $2.33
   Granted.................................................   127,640     2.85
   Exercised...............................................  (119,355)    2.28
   Canceled................................................   (36,685)    2.62
                                                            ---------    -----
   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
                                                            =========    =====
   Exercisable at December 31, 1996........................   768,059    $3.08
                                                            =========    =====
</TABLE>
 
  Additional information regarding the options outstanding at December 31,
1996 follows:
 
<TABLE>
<CAPTION>
      RANGE OF       NO. OF    WTD. AVG.      WTD. AVG.        NO.       WTD. AVG.
   EXERCISE PRICES   OPTIONS EXERCISE PRICE REMAINING LIFE EXERCISABLE EXERCISE PRICE
   ---------------   ------- -------------- -------------- ----------- --------------
   <S>               <C>     <C>            <C>            <C>         <C>
   $1.75-
    $2.36            581,660     $ 2.28       3.3 years      551,760       $ 2.28
   $2.50-
    $12.09           302,754     $ 4.62       7.0 years      187,549       $ 3.63
   $15.00-
    $15.00           143,750     $15.00       9.7 years       28,750       $15.00
</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 used for the 1995 and 1996 grants: risk-free interest rate of
6.3%, expected dividend yield of zero, expected lives of 4 years upon vesting
and expected volatility of approximately 50%.
 
 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. No such warrants were granted,
exercised or canceled in 1994 or 1995. In 1996, 65,000 of such warrants were
exercised at prices ranging from $1.75 to $2.50 per share, and at December 31,
1996, 55,000 of such warrants, all of which are exercisable, remain
outstanding at exercise prices ranging from $1.75 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 all of
such warrants are exercisable at December 31, 1996.
 
                                     F-13
<PAGE>
 
                             GENERAL SCANNING INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
                               DECEMBER 31, 1996
 
 
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 and $307,000 in 1994.
 
 Defined contribution plans
 
  The Company has employee savings defined contribution plans 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 respective plans. Company matching contributions to the plans
were $1,080,000, $488,000 and $363,000 for the years ended December 31, 1996,
1995 and 1994, 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 DEC. 31,
                                                           ---------------------
                                                            1996    1995   1994
                                                           ------- ------ ------
                                                              (IN THOUSANDS)
      <S>                                                  <C>     <C>    <C>
      United States....................................... $10,348 $5,245 $3,221
      Foreign.............................................   1,620  2,129  2,445
                                                           ------- ------ ------
        Total............................................. $11,968 $7,374 $5,666
                                                           ======= ====== ======
</TABLE>
 
  The provision for income taxes for the years ended December 31 consists of
the following:
 
<TABLE>
<CAPTION>
                                                         YEAR ENDED DEC. 31,
                                                         ----------------------
                                                          1996    1995    1994
                                                         ------  ------  ------
                                                            (IN THOUSANDS)
      <S>                                                <C>     <C>     <C>
      Current:
      Federal and State................................. $5,209  $2,200  $  933
      Foreign...........................................    804   1,292     938
                                                         ------  ------  ------
        Total current...................................  6,013   3,492   1,871
      Deferred..........................................   (646)   (689)     (3)
                                                         ------  ------  ------
        Total........................................... $5,367  $2,803  $1,868
                                                         ======  ======  ======
</TABLE>
 
                                     F-14
<PAGE>
 
                             GENERAL SCANNING INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
                               DECEMBER 31, 1996
 
 
  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 DEC. 31,
                                                     ------------------------
                                                      1996     1995     1994
                                                     ------   ------   ------
                                                        (IN THOUSANDS)
      <S>                                            <C>      <C>      <C>
      U.S. federal statutory tax rate..............    34.0%    34.0%    34.0%
      State income taxes, net......................     3.9%     3.9%     2.5%
      Foreign sales corporation....................    (3.0)%   (4.1)%   (3.0)%
      Other taxes provided.........................     2.0%     6.2%     4.2%
      Research and development credits.............    (3.3)%   (6.6)%   (6.3)%
      Effect of foreign losses utilized or not ben-
       efited and of foreign tax rate differen-
       tial........................................     2.1%     1.0%     2.0%
      View Engineering merger expenses not deduct-
       ible for tax purposes.......................     4.0%     --       --
      Valuation allowance for View Engineering pre-
       acquisition losses..........................     6.8%     --       --
      Other, net...................................    (1.7)%    3.6%    (0.4)%
                                                     ------   ------   ------
        Effective tax rate.........................    44.8%    38.0%    33.0%
                                                     ======   ======   ======
</TABLE>
 
  Significant components of deferred income tax assets as of December 31 are
as follows:
 
<TABLE>
<CAPTION>
                                                             DEC. 31,  DEC. 31,
                                                               1996      1995
                                                             --------  --------
                                                              (IN THOUSANDS)
      <S>                                                    <C>       <C>
      Deferred compensation................................. $   700   $   556
      Vacation and sick pay benefit.........................     496       497
      Inventory valuation...................................   2,020     1,879
      Warranty costs........................................     299       269
      Depreciation..........................................    (298)     (289)
      Operating loss and tax credit carryforwards...........   2,673     2,213
      Accounts receivable valuation.........................     210       181
      Other.................................................     595       283
                                                             -------   -------
      Total deferred income tax assets......................   6,695     5,589
      Less valuation allowance..............................  (2,673)   (2,213)
                                                             -------   -------
        Net deferred income tax assets...................... $ 4,022   $ 3,376
                                                             =======   =======
</TABLE>
 
  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 2003. The facility leases require the Company
to pay real estate taxes and other operating costs. For the years
 
                                     F-15
<PAGE>
 
                             GENERAL SCANNING INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
                               DECEMBER 31, 1996
 
ended December 31, 1996, 1995 and 1994, lease expense was approximately
$1,787,000, $1,500,000 and $1,362,000, respectively.
 
  Minimum lease payments under operating leases expiring subsequent to
December 31, 1996 are:
 
<TABLE>
<CAPTION>
                                                                  (IN THOUSANDS)
   <S>                                                            <C>
   1997..........................................................     $1,712
   1998..........................................................        871
   1999..........................................................        628
   2000..........................................................        703
   2001..........................................................        655
   Thereafter....................................................        758
                                                                      ------
     Total minimum lease payments................................     $5,327
                                                                      ======
</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
$602,000 at December 31, 1996. The fair value of the recourse receivables was
not determinable. The Company received cash proceeds relating to the
discounted receivables of $4,144,000, $7,188,000 and $4,671,000 during the
years ended December 31, 1996, 1995 and 1994, 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 claims 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 is seeking compensatory and punitive damages in an
unspecified amount. General Scanning believes the claims are without merit and
is defending this action vigorously.
 
  Voxel, a 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 agreement
between Voxel and GSI, the matter will be subject to binding arbitration in
the event that negotiations do not resolve the issue. At December 31, 1996,
accounts receivable included a total of approximately $931,000 of billed and
unbilled amounts due from Voxel. Management believes the amounts due are
recoverable from Voxel.
 
  The Company has certain other contingent liabilities resulting from
litigation and claims incidental to its business, including two 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, 80% of the loan is being forgiven over a period of four
years, provided that the officer remains an employee of the Company. This loan
is secured by deferred compensation due to this officer. If the officer should
terminate employment, the remaining balance is due upon termination. In each
of 1996, 1995 and 1994, $32,000 of the loan was forgiven and charged as
compensation expense.
 
                                     F-16
<PAGE>
 
                             GENERAL SCANNING INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
                               DECEMBER 31, 1996
 
 
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 DEC. 31,
                                                    ---------------------------
                                                      1996      1995     1994
                                                    --------  --------  -------
                                                         (IN THOUSANDS)
   <S>                                              <C>       <C>       <C>
   Sales to unaffiliated customers:
     Laser systems and components.................. $131,867  $103,564  $77,951
     Thermal printers..............................   24,666    22,915   20,624
     Intersegment elimination......................        0      (159)    (463)
                                                    --------  --------  -------
       Total....................................... $156,533  $126,320  $98,112
                                                    ========  ========  =======
   Income from operations:
     Laser systems and components.................. $ 11,967  $  6,330  $ 4,449
     Thermal printers..............................    4,321     3,845    3,327
     Corporate expenses............................   (2,483)   (2,450)  (1,899)
                                                    --------  --------  -------
       Total....................................... $ 13,805  $  7,725  $ 5,877
                                                    ========  ========  =======
   Identifiable assets:
     Laser systems and components.................. $ 64,836  $ 55,556  $41,269
     Thermal printers..............................    8,150     5,081    4,624
     Corporate assets..............................   22,587    29,071    3,966
                                                    --------  --------  -------
       Total....................................... $ 95,573  $ 89,708  $49,859
                                                    ========  ========  =======
   Capital expenditures:
     Laser systems and components.................. $  5,704  $  2,155  $ 1,565
     Thermal printers..............................    1,198       441      200
                                                    --------  --------  -------
       Total....................................... $  6,902  $  2,596  $ 1,765
                                                    ========  ========  =======
   Depreciation and amortization:
     Laser systems and components.................. $  2,773  $  1,699  $ 1,919
     Thermal printers..............................      407       285      491
                                                    --------  --------  -------
       Total....................................... $  3,180  $  1,984  $ 2,410
                                                    ========  ========  =======
</TABLE>
 
                                      F-17
<PAGE>
 
                             GENERAL SCANNING INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
                               DECEMBER 31, 1996
 
 
 Geographic segment information
 
  Information with respect to the Company's geographic operations is set forth
in the table below.
 
<TABLE>
<CAPTION>
                                                       YEAR ENDED DEC. 31,
                                                    ---------------------------
                                                      1996      1995     1994
                                                    --------  --------  -------
                                                         (IN THOUSANDS)
<S>                                                 <C>       <C>       <C>
Sales to unaffiliated customers:
  North America, including export.................. $107,033  $ 84,621  $69,623
  Europe...........................................   21,300    12,461    9,408
  Asia.............................................   28,200    29,238   19,081
                                                    --------  --------  -------
    Total.......................................... $156,533  $126,320  $98,112
                                                    ========  ========  =======
  Transfers to affiliates.......................... $ 31,800  $ 25,188  $14,216
                                                    ========  ========  =======
  Export sales:
    From North America............................. $ 15,200  $ 17,245  $ 9,273
                                                    ========  ========  =======
Income from operations:
  North America, including export.................. $ 13,623  $  7,884  $ 5,594
  Europe...........................................      898       456      487
  Asia.............................................    1,767     1,835    1,695
  Corporate........................................   (2,483)   (2,450)  (1,899)
                                                    --------  --------  -------
    Total.......................................... $ 13,805  $  7,725  $ 5,877
                                                    ========  ========  =======
Identifiable assets:
  North America, including export.................. $ 57,803  $ 48,935  $37,361
  Europe...........................................    5,925     4,845    3,051
  Asia.............................................   10,588     5,952    5,481
  Corporate........................................   21,257    29,976    3,966
                                                    --------  --------  -------
    Total.......................................... $ 95,573  $ 89,708  $49,859
                                                    ========  ========  =======
</TABLE>
 
                                      F-18
<PAGE>
 
                             GENERAL SCANNING INC.
 
                SUPPLEMENTARY FINANCIAL INFORMATION (UNAUDITED)
 
<TABLE>
<CAPTION>
                           96Q4     96Q3     96Q2     96Q1     95Q4    95Q3     95Q2     95Q1
                          -------  -------  -------  -------  ------- -------  -------  -------
                                       (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                       <C>      <C>      <C>      <C>      <C>     <C>      <C>      <C>
Net sales:
  Laser systems and com-
   ponents..............  $33,251  $32,744  $34,522  $31,350  $29,702 $27,935  $24,792  $20,976
  Thermal printers......    6,765    5,419    6,148    6,334    5,801   5,746    5,741    5,627
                          -------  -------  -------  -------  ------- -------  -------  -------
    Total sales.........   40,016   38,163   40,670   37,684   35,503  33,681   30,533   26,603
                          -------  -------  -------  -------  ------- -------  -------  -------
Gross profit:
  Laser systems and com-
   ponents..............   14,743   15,569   15,845   14,672   13,791  12,851   11,083   10,136
  Thermal printers......    3,152    2,336    2,657    2,706    2,515   2,445    2,642    2,459
                          -------  -------  -------  -------  ------- -------  -------  -------
    Total gross profit..   17,895   17,905   18,502   17,378   16,306  15,296   13,725   12,595
                          -------  -------  -------  -------  ------- -------  -------  -------
Operating expenses:
  Research and product
   development..........    4,410    4,853    4,534    4,603    4,225   4,318    4,393    4,170
  Selling, general and
   administrative.......    9,883    9,313   10,376    9,903    9,525   8,714    7,721    7,131
                          -------  -------  -------  -------  ------- -------  -------  -------
    Total operating ex-
     penses.............   14,293   14,166   14,910   14,506   13,750  13,032   12,114   11,301
                          -------  -------  -------  -------  ------- -------  -------  -------
Income from operations..    3,602    3,739    3,592    2,872    2,556   2,264    1,611    1,294
Merger (expenses).......      --    (1,950)     --       --       --      --       --         -
Interest income (ex-
 pense), net............       81       34       32      125      141    (273)    (318)    (232)
Foreign exchange
 transaction gains
 (losses)...............      (28)     (70)     (42)     (19)      13     188       93       37
                          -------  -------  -------  -------  ------- -------  -------  -------
Income before income
 taxes..................    3,655    1,753    3,582    2,978    2,710   2,179    1,386    1,099
Income taxes............    1,460      824    1,683    1,400    1,030     828      527      418
                          -------  -------  -------  -------  ------- -------  -------  -------
Net income..............  $ 2,195  $   929  $ 1,899  $ 1,578  $ 1,680 $ 1,351  $   859  $   681
                          =======  =======  =======  =======  ======= =======  =======  =======
Net income per common
 and common equivalent
 share outstanding......  $  0.18  $  0.07  $  0.15  $  0.13  $  0.14 $  0.13  $  0.09  $  0.07
                          =======  =======  =======  =======  ======= =======  =======  =======
Weighted average common
 and common equivalent
 shares outstanding.....   12,456   12,514   12,513   12,422   12,331  10,128    9,549    9,421
                          =======  =======  =======  =======  ======= =======  =======  =======
</TABLE>
 
                                      F-19
<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 17, 1997
(the "1997 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 1997 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 1997 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 1997 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 1997 Proxy Statement
under the caption "Certain Transactions" and is incorporated herein by
reference.
 
                                     F-20
<PAGE>
 
                                    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.
 
LIST OF EXHIBITS (numbered in accordance with Item 601 of Regulations 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.
  *3.1 Restated Articles of Organization of the Registrant, as amended
  *3.2 By-Laws of the Registrant, as amended
  *4.1 Specimen Certificate of Common Stock
 *10.1 1981 Stock Option Plan of the Registrant
 *10.2 1992 Stock Option Plan of the Registrant
 *10.3 1995 Directors' Warrant Plan
 *10.4 Lease dated August 10, 1989, as amended to date, between the Registrant
        and Arlington Center Garage and Service Corp.
 *10.5 Lease dated February 24, 1989, as amended to date, between Ames Realty
        Trust Associates and Teradyne Laser Systems Inc. and General Scanning
        Inc.
  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.
  10.7 Lease dated March 24, 1995, as amended to date, between View
        Engineering, Inc. and Marjorie Lynn Landon.
  21.1 Subsidiaries of the Registrant
  23.1 Consent of Arthur Andersen LLP, independent public accountants
  27.1 Financial Data Schedule
</TABLE>
--------
*  Incorporated by reference to the Company's registration statement on Form
   S-1, filed August 11, 1995 (33-95718).
** Incorporated by reference to the Company's Current Report on Form 8-K,
   filed September 6, 1996 (Accession Number 0000927016-96-001043)
 
REPORTS ON FORM 8-K
 
  On September 6, 1996 the Company filed a current report on Form 8-K relating
to its acquisition of View.
 
                                     F-21
<PAGE>
 
                                   SIGNATURES
 
  PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) THE SECURITIES 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)
 
                                                  /s/ Charles D. Winston
                                          By: _________________________________
                                             CHARLES D. WINSTON PRESIDENT AND
                                            CHIEF EXECUTIVE OFFICER (PRINCIPAL
                                                    EXECUTIVE OFFICER)
 
Date: March 7, 1997
 
  PURSUANT TO THE REQUIREMENTS OF THE SECURITIES 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:
 
             SIGNATURE                          TITLE                DATE
 
                                        Chairman of the         March 7, 1997
     /s/ Jean I. Montagu                 Board
-------------------------------------
            JEAN I. MONTAGU
 
 
     /s/ Pierre J. Brosens              Vice Chairman of the    March 7, 1997
-------------------------------------    Board
            PIERRE J. BROSENS
 
     /s/ Charles D. Winston             President, Chief        March 7, 1997
-------------------------------------    Executive Officer
            CHARLES D. WINSTON           and Director
                                         (Principal
                                         Executive Officer)
 
     /s/ Victor H. Woolley              Vice President-         March 7, 1997
-------------------------------------    Finance and Chief
            VICTOR H. WOOLLEY            Financial Officer
                                         (Principal
                                         Financial and
                                         Accounting Officer)
 
     /s/ Richard B. Black               Director                March 7, 1997
-------------------------------------
            RICHARD B. BLACK
 
     /s/ Paul F. Ferrari                Director                March 7, 1997
-------------------------------------
            PAUL F. FERRARI
 
     /s/ Woodie C. Flowers              Director                March 7, 1997
-------------------------------------
            WOODIE C. FLOWERS
 
     /s/ James R. Turner                Director                March 7, 1997
-------------------------------------
            JAMES R. TURNER
 
 
                                      F-22
<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 3, 1997. 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 3, 1997
 
                                     F-23
<PAGE>
 
                             GENERAL SCANNING INC.
 
                 SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
 
<TABLE>
<CAPTION>
                                          ADDITIONS
                                    ---------------------
                         BALANCE AT CHARGED TO CHARGED TO            BALANCE AT
                         BEGINNING  COSTS AND    OTHER                 END OF
      DESCRIPTION        OF PERIOD   EXPENSES   ACCOUNTS  DEDUCTIONS   PERIOD
      -----------        ---------- ---------- ---------- ---------- ----------
                                             (IN THOUSANDS)
<S>                      <C>        <C>        <C>        <C>        <C>
Year ended December 31,
 1994:
Allowance for doubtful
 accounts...............    $338       $185       --         $12        $511
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
</TABLE>
 
                                      F-24
<PAGE>
 
                             GENERAL SCANNING INC.
 
                               INDEX OF EXHIBITS
 
<TABLE>
<CAPTION>
 EXHIBIT
   NO.                              DESCRIPTION                             PAGE
 -------                            -----------                             ----
 <C>     <S>                                                                <C>
  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................................
  10.7   Lease dated March 24, 1995, as amended to date, between View
          Engineering, Inc. and Marjorie Lynn Landon......................
  21.1   Subsidiaries of the Registrant...................................
  23.1   Consent of Arthur Andersen LLP, independent public accountants...
  27.1   Financial Data Schedule..........................................
</TABLE>