10-K405

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

                                    FORM 10-K

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

For the Fiscal Year Ended September 30, 2000
or

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

Commission File Number: 0-5255


                                 COHERENT, INC.

               DELAWARE                                  94-1622541
    (State or other jurisdiction of                   (I.R.S. Employer
     incorporation or organization)                  Identification No.)

             5100 PATRICK HENRY DRIVE, SANTA CLARA, CALIFORNIA 95054
               (Address of principal executive offices) (Zip Code)

       Registrant's telephone number, including area code: (408) 764-4000

           Securities registered pursuant to Section 12(b) of the Act:

                                                  Name of each exchange
           Title of each class                     on which registered
           -------------------                    ---------------------
                   None                                   None


           Securities registered pursuant to Section 12(g) of the Act:
                          Common Stock, $.01 par value
                          Common Stock Purchase Rights

                                (Title of Class)

         Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/  No / /

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

         As of November 15, 2000, 27,318,382 shares of common stock were
outstanding. The aggregate market value of the voting shares (based on the
closing price reported by the NASDAQ National Market System on November 15,
2000) of Coherent, Inc., held by nonaffiliates was $816,258,153. For purposes of
this disclosure, shares of common stock held by persons who own 5% or more of
the outstanding common stock and shares of common stock held by each officer and
director have been excluded in that such persons may be deemed to be
"affiliates" as that term is defined under the Rules and Regulations of the Act.
This determination of affiliate status is not necessarily conclusive.

DOCUMENTS INCORPORATED BY REFERENCE

         Portions of the definitive proxy statement to be filed prior to
February 23, 2001, pursuant to Regulation 14A of the Securities Exchange Act of
1934 are incorporated by reference into Part III of this Form 10-K.



                                     PART I.

ITEM 1.         BUSINESS

GENERAL

         Coherent, Inc. is one of the world's leading suppliers of
photonics-based solutions in a broad range of commercial, medical and scientific
applications. We design, manufacture and market lasers, laser-based systems,
precision optics and related accessories for a diverse group of customers. Since
inception in 1966, we have grown through a combination of internal expansion and
strategic acquisitions of companies with related technologies and products.
While our products address a broad range of applications, we are increasingly
concentrating our efforts on several rapidly growing segments of the photonics
market: semiconductor and related manufacturing and optical telecommunications
applications.

         In addition, we are also focusing on the development and production of
high power, semiconductor-based lasers for a variety of applications.

         We have three reportable business segments: Electro-Optics, Medical
and Lambda Physik, which work with customers to provide cost-effective
photonics-based solutions. In addition to the semiconductor and related
manufacturing and optical telecommunications markets, the Electro-Optics
segment focuses on markets such as materials processing, scientific research,
printing and reprographics and advanced packaging. Our Medical segment
focuses on the aesthetic, ophthalmic and surgical markets, with an emphasis
in the aesthetic market on hair removal and in the ophthalmic market on the
treatment of retinal diseases, including age-related macular degeneration, or
AMD. Lambda Physik focuses on lithography, with other target markets
including lasers for the production of flat panel displays, ink jet printers,
fiber bragg gratings, refractive surgery, scientific research, materials
processing and micro-machining applications.

         On July 26, 2000, we completed a public offering of 1,500,000 shares of
common stock at an offering price of $65 per share. The net proceeds to us,
after deducting underwriting discounts and offering expenses was approximately
$91,852,000. These net proceeds will be used for acquisitions of or investments
in businesses, technologies and products, continued development of new
technologies and general corporate purposes.

         On September 21, 2000, our Lambda Physik subsidiary issued 3,890,000
shares of its common stock in an initial public offering on Germany's Neuer
Markt. Proceeds from the offering of shares, based on the offering price of
approximately $31 per share, net of offering expenses was approximately
$92,715,000. These net proceeds will be used to finance Lambda's internal and
external growth, including research and development activities aiming at the
development of new laser applications, of extreme UV light sources, and the next
generation of laser solutions and for strategic acquisitions.

STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT

         Some of the statements in this Annual Report on Form 10-K, including
but not limited to the "Risk Factors," "Management's discussion and analysis of
financial condition and results of operations," "Business" and elsewhere in this
document constitute forward-looking statements within the meaning of the Private
Securities Litigation Act of 1995. These statements relate to future events or
our future financial performance and involve known and unknown risks,
uncertainties and other factors that may cause our industry's actual results,
levels of activity, performance or achievements to be materially different from
those expressed or implied by any forward-looking statements. Some of these
factors are listed under "Risk Factors" and elsewhere in this document. In some
cases, you can identify forward-looking statements by terminology such as "may,"
"will," "could," "would," "should," "expect," "plan," "anticipate," "intend,"
"believe," "estimate," "predict," "potential" or "continue" or the negative of
these terms or other comparable terminology. These statements are only
predictions. Actual events or results may differ materially. Moreover, neither
we nor any other person assumes responsibility for the accuracy and completeness
of those statements. We are under no duty to update any of the forward-looking
statements after the date of this document to reflect the occurrence of
unanticipated events.

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RISK FACTORS

RISKS RELATED TO OUR BUSINESS
- -----------------------------

WE MAY EXPERIENCE QUARTERLY AND ANNUAL FLUCTUATIONS IN OUR NET SALES AND
OPERATING RESULTS IN THE FUTURE, WHICH MAY RESULT IN VOLATILITY IN OUR STOCK
PRICE.

         Our net sales and operating results may vary significantly from quarter
to quarter and from year to year in the future. A number of factors, many of
which are outside of our control, may cause these variations, including:

- -        fluctuations in demand for, and sales of, our products or prolonged
         downturns in the industries that we serve;

- -        ability of our suppliers to produce and deliver components and parts,
         including sole or limited source components, in a timely manner, in the
         quantity and quality desired and at the prices we have budgeted;

- -        timing or cancellation of customer orders and shipment scheduling;

- -        fluctuations in our product mix;

- -        foreign currency fluctuations;

- -        introductions of new products and product enhancements by our
         competitors, entry of new competitors into our markets, pricing
         pressures and other competitive factors;

- -        our ability to develop, introduce, manufacture and ship new and
         enhanced  products in a timely manner without defects;

- -        rate of market acceptance of our new products;

- -        delays or reductions in customer purchases of our products in
         anticipation of the introduction of new and enhanced products by us or
         our competitors;

- -        our ability to control expenses;

- -        timing of regulatory approvals and changes in domestic and regulatory
         environments;

- -        level of capital spending of our customers;

- -        economic conditions, especially in the Asia-Pacific market;

- -        potential obsolescence of our inventory; and

- -        costs related to acquisitions of technology or businesses.

         In addition, we often recognize a substantial portion of our sales in
the last month of the quarter. Our expenses for any given quarter are typically
based on expected sales and if sales are below expectations in any given
quarter, the adverse impact of the shortfall on our operating results may be
magnified by our inability to adjust spending quickly to compensate for the
shortfall. We also base our manufacturing on our forecasted product mix for the
quarter. If the actual product mix varies significantly from our forecast, we
may not be able to fill some orders during that quarter, which would result in
delays in the shipment of our products. Accordingly, variations in timing of
sales, particularly for our higher priced, higher margin products, can cause
significant fluctuations in quarterly operating results. As a result of all
these factors, our operating results in one or more future periods may fail to
meet the expectations of market analysts or investors. In that event, the
trading price of our common stock would likely decline.

         For example, in the third quarter of fiscal 1998 we experienced a
problem with our VersaPulse family of products for aesthetic applications
because it did not meet customer expectations. As a result, we saw a significant
increase in returns and allowances and decrease in sales, which caused a

                                       3


substantial decline in our quarterly results. This situation persisted into the
first half of fiscal 1999, by which time we had improved both the reliability
and functionality of these products.

         Due to these and other factors, we believe that quarter-to-quarter and
year-to-year comparisons of our past operating results may not be meaningful.
You should not rely on our results for any quarter or year as an indication of
our future performance. Our operating results in future quarters and years may
be below public market analysts' or investors' expectations, which would likely
cause the price of our common stock to fall.

WE DEPEND ON SOLE SOURCE OR LIMITED SOURCE SUPPLIERS FOR SOME OF THE KEY
COMPONENTS AND MATERIALS, INCLUDING EXOTIC MATERIALS AND CRYSTALS, IN OUR
PRODUCTS, WHICH MAKES US SUSCEPTIBLE TO SUPPLY SHORTAGES OR PRICE FLUCTUATIONS
THAT COULD ADVERSELY AFFECT OUR BUSINESS.

         We currently purchase several key components and materials used in the
manufacture of our products from sole source or limited source suppliers. Some
of these suppliers are relatively small private companies that may discontinue
their operations at any time. We typically purchase our components and materials
through purchase orders and we have no guaranteed supply arrangement with any of
these suppliers. We may fail to obtain these supplies in a timely manner in the
future. We may experience difficulty identifying alternative sources of supply
for certain components used in our products. Once identified, we would
experience further delays from evaluating and testing the products of these
potential alternative suppliers. Furthermore, financial or other difficulties
faced by these suppliers or significant changes in demand for these components
or materials could limit their availability. Any interruption or delay in the
supply of any of these components or materials, or the inability to obtain these
components and materials from alternate sources at acceptable prices and within
a reasonable amount of time, would impair our ability to meet scheduled product
deliveries to our customers and could cause customers to cancel orders.

         We rely exclusively on our own production capability to manufacture
certain strategic components, optics and optical systems, semiconductor lasers,
lasers and laser-based systems. Because we manufacture, package and test these
components, products and systems at our own facilities, and such components,
products and systems are not readily available from other sources, any
interruption in manufacturing would adversely affect our business. In addition,
our failure to achieve adequate manufacturing yields at our manufacturing
facilities may materially and adversely affect our operating results and
financial condition.

OUR FUTURE SUCCESS DEPENDS ON OUR ABILITY TO INCREASE OUR SALES VOLUMES AND
DECREASE OUR COSTS TO OFFSET ANTICIPATED DECLINES IN THE AVERAGE SELLING PRICES
OF OUR PRODUCTS AND, IF WE ARE UNABLE TO REALIZE GREATER SALES VOLUMES AND LOWER
COSTS, OUR OPERATING RESULTS MAY SUFFER.

         Our future success depends on the continued growth of the markets for
lasers, laser systems, precision optics and related accessories, as well as our
ability to identify in advance emerging markets for laser-based systems. We
cannot assure you that we will be able to successfully identify new high-growth
markets in the future. Moreover, we cannot assure you that new markets will
develop for our products or our customers' products, or that our technology or
pricing will enable such markets to develop. Future demand for our products is
uncertain and will depend to a great degree on the continued technological
development and the introduction of new or enhanced products. If this does not
continue, sales of our products may decline and our business will be harmed.

         We have historically been the industry's high quality, high priced
supplier of laser systems. We have in the past experienced decreases in the
average selling prices of some of our products. We anticipate that as competing
products become more widely available, the average selling price of our products
may decrease. If we are unable to offset the anticipated decrease in our average
selling prices by increasing our sales volumes, our net sales will decline. In
addition, to maintain our gross margins, we must continue to reduce the cost of
our products. Further, as average selling prices of our current products
decline, we must develop and introduce new products and product enhancements
with higher margins. If we cannot maintain our gross margins, our operating
results could be seriously harmed, particularly if the average selling prices of
our products decrease significantly.

OUR FUTURE SUCCESS DEPENDS ON OUR ABILITY TO DEVELOP AND SUCCESSFULLY INTRODUCE
NEW AND ENHANCED PRODUCTS THAT MEET THE NEEDS OF OUR CUSTOMERS.

         Our current products address a broad range of commercial, medical
and scientific applications in the photonics markets. We cannot assure you
that the market for these applications will continue to

                                       4


generate significant or consistent demand for our products. Demand for our
products could be significantly diminished by new technologies or products
that replace them or render them obsolete.

         Over the last three fiscal years, our research and development expenses
have been in the range of 10% to 11% of net sales. Our future success depends on
our ability to anticipate our customers' needs and develop products that address
those needs. Introduction of new products and product enhancements will require
that we effectively transfer production processes from research and development
to manufacturing and coordinate our efforts with those of our suppliers to
achieve volume production rapidly. If we fail to effectively transfer production
processes, develop product enhancements or introduce new products in sufficient
quantities to meet the needs of our customers as scheduled, our net sales may be
reduced and our business may be harmed.

WE HAVE VERY LITTLE EXPERIENCE IN PROVIDING OPTICAL COMPONENTS TO THE OPTICAL
TELECOMMUNICATIONS MARKET SEGMENT; WE DO NOT CURRENTLY HAVE THE ABILITY TO
PACKAGE ACTIVE COMPONENTS; AND, EVEN IF SUCCESSFUL IN DEVELOPING THIS PACKAGING,
WE STILL MAY NOT MEET THE STRINGENT TELCORDIA SPECIFICATIONS, ANY OF WHICH COULD
LIMIT OUR ABILITY TO SUCCEED IN THIS MARKET.

         We have only recently begun to develop products for the optical
telecommunications market. Sales to that market accounted for $11.3 million, or
2%, of net sales during fiscal 2000. Our lack of prior experience in this market
could put us at a competitive disadvantage. In addition, we have not yet
developed qualified packaging for our active components. Even as we develop this
packaging, we still may not meet the stringent Telcordia specifications.
Telcordia specifications are worldwide industry telecommunications standards
established by an industry consortium. Most potential telecommunications
customers demand that we meet these specifications. We do not anticipate that we
will have a Telcordia-qualified product before early 2002. Our failure to
develop qualified packaging or to meet the Telcordia specifications would
seriously harm our future sales of our active optical telecommunications
products.

WE FACE RISKS ASSOCIATED WITH OUR INTERNATIONAL SALES THAT COULD HARM OUR
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

         For fiscal years 2000, 1999 and 1998, 58%, 58% and 55%, respectively,
of our net sales were derived from international sales. We anticipate that
international sales will continue to account for a significant portion of our
revenues in the foreseeable future. A portion of our international sales occurs
through our international sales subsidiaries and the remainder of our
international sales result from exports to foreign distributors and resellers.
Our international operations and sales are subject to a number of risks,
including:

- -        longer accounts receivable collection periods;

- -        the impact of recessions in economies outside the United States;

- -        unexpected changes in regulatory requirements;

- -        certification requirements;

- -        reduced protection for intellectual property rights in some countries;

- -        potentially adverse tax consequences;

- -        political and economic instability; and

- -        preference for locally produced products.

         We are also subject to the risks of fluctuating foreign exchange rates,
which could materially adversely affect the sales price of our products in
foreign markets as well as the costs and expenses of our international sales
subsidiaries. While we use forward exchange contracts, currency swap contracts,
currency options and other risk management techniques to hedge our foreign
currency exposure, we remain exposed to the economic risks of foreign currency
fluctuations. For additional discussion about our foreign currency risks, see
"Item 7A--Quantitative and Qualitative Disclosures About Market Risk."

                                       5


WE MAY NOT BE ABLE TO PROTECT OUR PROPRIETARY TECHNOLOGY, WHICH COULD ADVERSELY
AFFECT OUR COMPETITIVE ADVANTAGE.

         We rely on a combination of patent, copyright, trademark and trade
secret laws and restrictions on disclosure to protect our intellectual property
rights. We cannot assure you that our patent applications will be approved, that
any patents that may be issued will protect our intellectual property or that
any issued patents will not be challenged by third parties. Other parties may
independently develop similar or competing technology or design around any
patents that may be issued to us. We cannot be certain that the steps we have
taken will prevent the misappropriation of our intellectual property,
particularly in foreign countries where the laws may not protect our proprietary
rights as fully as in the United States. See "Business--Intellectual Property."

WE COULD BECOME SUBJECT TO LITIGATION REGARDING INTELLECTUAL PROPERTY RIGHTS,
WHICH COULD SERIOUSLY HARM OUR BUSINESS.

         The laser industry is characterized by a very large number of patents,
many of which are of questionable validity and some of which appear to overlap
with other issued patents. As a result, there is a significant amount of
uncertainty in the industry regarding patent protection and infringement. In
recent years, there has been significant litigation in the United States
involving patents and other intellectual property rights. In the future, we may
be a party to litigation to protect our intellectual property or as a result of
an alleged infringement of others' intellectual property. These claims and any
resulting lawsuit, if successful, could subject us to significant liability for
damages or invalidation of our proprietary rights. These lawsuits, regardless of
their success, would likely be time-consuming and expensive to resolve and would
divert management time and attention. Any potential intellectual property
litigation also could force us to do one or more of the following:

- -        stop manufacturing, selling or using our products that use the
         infringed intellectual property;

- -        obtain from the owner of the infringed intellectual property right a
         license to sell or use the relevant technology, although such license
         may not be available on reasonable terms, or at all; or

- -        redesign the products that use the technology.

         If we are forced to take any of these actions, our business may be
seriously harmed. We do not have insurance to cover potential claims of this
type.

         We may in the future initiate claims or litigation against third
parties for infringement of our proprietary rights to protect these rights or to
determine the scope and validity of our proprietary rights or the proprietary
rights of competitors. These claims could result in costly litigation and the
diversion of our technical and management personnel.

WE DEPEND ON SKILLED PERSONNEL TO OPERATE OUR BUSINESS EFFECTIVELY IN A RAPIDLY
CHANGING MARKET, AND IF WE ARE UNABLE TO RETAIN EXISTING OR HIRE ADDITIONAL
PERSONNEL, OUR ABILITY TO DEVELOP AND SELL OUR PRODUCTS COULD BE HARMED.

         Our future success depends upon the continued services of our executive
officers and other key engineering, sales, marketing, manufacturing and support
personnel. None of our officers or key employees in the United States is bound
by an employment agreement for any specific term and these personnel may
terminate their employment at any time. In addition, we do not have "key person"
life insurance policies covering any of our employees.

         We intend to hire a significant number of additional employees during
the next 12 months. Our ability to continue to attract and retain highly skilled
personnel will be a critical factor in determining whether we will be successful
in the future. Competition for highly skilled personnel is intense, especially
in the Silicon Valley, where two of our major operating facilities are located.
We may not be successful in attracting, assimilating or retaining qualified
personnel to fulfill our current or future needs. This is particularly
challenging for a mature public company such as Coherent, as many employees are
seeking jobs with pre-public and newly public companies. Our failure to attract
additional employees and retain our existing employees could adversely affect
our growth and our business.

                                       6


THE LONG SALES CYCLES FOR OUR PRODUCTS MAY CAUSE US TO INCUR SIGNIFICANT
EXPENSES WITHOUT OFFSETTING REVENUES.

         Customers often view the purchase of our products as a significant and
strategic decision. As a result, customers typically expend significant effort
in evaluating, testing and qualifying our products before making a decision to
purchase them, resulting in a lengthy initial sales cycle. While our customers
are evaluating our products and before they place an order with us, we may incur
substantial sales and marketing and research and development expenses to
customize our products to the customer's needs. We may also expend significant
management efforts, increase manufacturing capacity and order long-lead-time
components or materials prior to receiving an order. Even after this evaluation
process, a potential customer may not purchase our products. As a result, these
long sales cycles may cause us to incur significant expenses without ever
receiving revenue to offset those expenses.

THE MARKETS IN WHICH WE SELL OUR PRODUCTS ARE INTENSELY COMPETITIVE AND
INCREASED COMPETITION COULD CAUSE REDUCED SALES LEVELS, REDUCED GROSS MARGINS OR
THE LOSS OF MARKET SHARE.

         Competition in the various photonics markets in which we provide
products is very intense. In the semiconductor and related manufacturing,
materials processing, scientific research and printing markets, we compete
against a number of companies, including SDL, Inc., Spectra-Physics Lasers,
Inc., Cymer, Inc. and Gigaphoton. In the optical telecommunications market, we
compete, or expect to compete, against SDL, Inc., JDS Uniphase Corporation, GSI
Lumonics, Inc. and Spectra-Physics Lasers, Inc., among others. Our medical
products compete against products offered by ESC Medical Systems Ltd., Candela
Corporation, Iridex Corporation and The Carl Zeiss Group, among others. Some of
our competitors are large companies that have significant financial, technical,
marketing and other resources. These competitors may be able to devote greater
resources than we can to the development, promotion, sale and support of their
products. Several of our competitors that have large market capitalizations or
strong cash reserves are much better positioned than we are to acquire other
companies in order to gain new technologies or products that may displace our
product lines. Any of these acquisitions could give our competitors a strategic
advantage. Any business combinations or mergers among our competitors, forming
larger competitors with greater resources, could result in increased
competition, price reductions, reduced margins or loss of market share, any of
which could materially and adversely affect our business, results of operations
and financial condition.

         Additional competitors may enter the market and we are likely to
compete with new companies in the future. We expect to encounter potential
customers that, due to existing relationships with our competitors, are
committed to the products offered by these competitors. As a result of the
foregoing factors, we expect that competitive pressures may result in price
reductions, reduced margins and loss of market share. For a more detailed
discussion of our competition, see "Business--Competition."

OUR MEDICAL PRODUCTS ARE SUBJECT TO US AND INTERNATIONAL MEDICAL REGULATIONS AND
CONTROLS, WHICH IMPOSE SUBSTANTIAL FINANCIAL COSTS ON US AND WHICH CAN PREVENT
OR DELAY THE INTRODUCTION OF NEW PRODUCTS.

         Our ability to sell our medical products is subject to various federal,
state and international rules and regulations governing the medical products
industry. In the United States, we are subject to inspection and market
surveillance by the Food and Drug Administration, or FDA, to determine
compliance with regulatory requirements. The FDA regulates the clinical testing,
manufacturing, labeling, sale, distribution and promotion of medical devices.
The regulatory process is costly, lengthy and uncertain. Unless an exemption
applies, each medical device that we wish to market in the United States must
receive either 510(k) clearance or pre-marketing approval in advance from the
FDA. The FDA's 510(k) clearance process usually takes from four to 12 months,
but it can take longer. For products subject to pre-market approval, the
regulatory process generally takes from one to three years or more and involves
substantially greater risks and commitment of resources than the 510(k)
clearance process. We may not be able to obtain necessary regulatory approvals
or clearances on a timely basis, if at all, for any of our products under
development and delays in receipt of or failure to receive such approvals or
clearances could have an adverse effect on our business.

         Following clearance or approval, marketed products are subject to
continuing regulation. We are required to adhere to the FDA's Quality System
Regulation, or QSR, and similar regulations in other countries, which include
design, testing, quality control and documentation requirements. Ongoing
compliance with QSR, labeling and other applicable regulatory requirements is
monitored through periodic inspections and market surveillance by the FDA and by
comparable agencies in other countries.

                                       7


         Our failure to comply with applicable requirements could lead to an
enforcement action, which could have an adverse effect on our financial
condition and results of operations. The FDA can institute a wide variety of
enforcement actions, ranging from a public warning letter to more severe
sanctions such as:

- -        fines, injunctions and civil penalties;

- -        recall or seizure of our products;

- -        the issuance of public notices or warnings;

- -        operating restrictions, partial suspension or total shutdown of
         production;

- -        refusal of our request for 510(k) clearance pre-market approval of new
         products;

- -        withdrawal of 510(k) clearance or pre-market approvals already granted;
         and

- -        criminal prosecution.

         The FDA also has the authority to require repair, replacement or refund
of the cost of any medical device manufactured or distributed by us.

         Our medical products are subject to additional similar regulations in
most of the international markets in which we sell our products. Changes to
existing US and international rules and regulations could adversely affect our
ability to sell our current line of medical products in the United States and
internationally, could increase our costs and could materially adversely impact
our results of operations.

SOME OF OUR LASER SYSTEMS ARE COMPLEX IN DESIGN AND MAY CONTAIN DEFECTS THAT ARE
NOT DETECTED UNTIL DEPLOYED BY OUR CUSTOMERS, WHICH COULD INCREASE OUR COSTS AND
REDUCE OUR REVENUES.

         Laser systems are inherently complex in design and require ongoing
regular maintenance. The manufacture of our lasers, laser products and systems
involves a highly complex and precise process. As a result of the technical
complexity of our products, changes in our or our suppliers' manufacturing
processes or the inadvertent use of defective or contaminated materials by us or
our suppliers could result in a material adverse effect on our ability to
achieve acceptable manufacturing yields and product reliability. To the extent
that we do not achieve such yields or product reliability, our business,
operating results, financial condition and customer relationships would be
adversely affected.

         Our customers may discover defects in our products after the products
have been fully deployed and operated under peak stress conditions. In addition,
some of our products are combined with products from other vendors, which may
contain defects. As a result, should problems occur, it may be difficult to
identify the source of the problem. If we are unable to fix defects or other
problems, we could experience, among other things:

- -        loss of customers;

- -        increased costs of product returns and warranty expenses;

- -        damage to our brand reputation;

- -        failure to attract new customers or achieve market acceptance;

- -        diversion of development and engineering resources; and

- -        legal actions by our customers.

         The occurrence of any one or more of the foregoing factors could
seriously harm our business, financial condition and results of operations.

IF WE FAIL TO ACCURATELY FORECAST COMPONENT AND MATERIAL REQUIREMENTS FOR OUR
PRODUCTS, WE COULD INCUR ADDITIONAL COSTS AND INCUR SIGNIFICANT DELAYS IN
SHIPMENTS, WHICH COULD RESULT IN LOSS OF CUSTOMERS.

                                       8


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

IF WE FAIL TO MANAGE OUR GROWTH EFFECTIVELY, OUR BUSINESS COULD BE DISRUPTED,
WHICH COULD HARM OUR OPERATING RESULTS.

         Our ability to successfully offer our products and implement our
business plan in evolving markets requires an effective planning and management
process. We continue to expand the scope of our operations domestically and
internationally. The growth in employee headcount and in sales, combined with
the challenges of managing geographically-dispersed operations, has placed, and
our anticipated growth in future operations will continue to place, a
significant strain on our management systems and resources, particularly our
information technology systems. We expect that we will need to continue to
improve our information technology systems, financial and managerial controls,
reporting systems and procedures and continue to expand, train and manage our
work force worldwide. The failure to effectively manage our growth could disrupt
our business and harm our operating results.

ANY ACQUISITIONS WE MAKE COULD DISRUPT OUR BUSINESS AND HARM OUR FINANCIAL
CONDITION.

         We have in the past made strategic acquisitions of other corporations,
and we continue to evaluate potential strategic acquisitions of complementary
companies, products and technologies. In the event of any future acquisitions,
we could:

- -        issue stock that would dilute our current stockholders' percentage
         ownership;

- -        pay cash;

- -        incur debt;

- -        assume liabilities; or

- -        incur expenses related to in-process research and development,
         amortization of goodwill and other intangible assets.

         These purchases also involve numerous risks, including:

- -        problems combining the acquired operations, technologies or products;

- -        unanticipated costs or liabilities;

- -        diversion of management's attention from our core businesses;

- -        adverse effects on existing business relationships with suppliers and
         customers; and

- -        potential loss of key employees, particularly those of the purchased
         organizations.

         We cannot assure you that we will be able to successfully integrate any
businesses, products, technologies or personnel that we might acquire in the
future, which may harm our business.

                                       9


RISKS RELATED TO OUR INDUSTRY
- -----------------------------

OUR MARKET IS UNPREDICTABLE AND CHARACTERIZED BY RAPID TECHNOLOGICAL CHANGES AND
EVOLVING STANDARDS, AND, IF WE FAIL TO ADDRESS CHANGING MARKET CONDITIONS, OUR
BUSINESS AND OPERATING RESULTS WILL BE HARMED.

         The photonics industry is characterized by extensive research and
development, rapid technological change, frequent new product introductions,
changes in customer requirements and evolving industry standards. Because this
market is subject to rapid change, it is difficult to predict its potential size
or future growth rate. Our success in generating revenues in this market will
depend on, among other things:

- -        maintaining and enhancing our relationships with our customers;

- -        the education of potential end-user customers about the benefits of
         lasers, laser systems and precision optics; and

- -        our ability to accurately predict and develop our products to meet
         industry standards.

         For our fiscal years ended September 30, 2000, October 2, 1999 and
September 26, 1998, our research and development costs were $57.4 million, or
10% of net sales, $46.8 million, or 10%, of net sales, and $44.5 million, or
11%, of net sales, respectively. We cannot assure you that our expenditures for
research and development will result in the introduction of new products or, if
such products are introduced, that those products will achieve sufficient market
acceptance. Our failure to address rapid technological changes in our markets
could adversely affect our business and results of operations. See "Business--
Research and Development."

A DOWNTURN IN THE SEMICONDUCTOR MANUFACTURING INDUSTRY COULD ADVERSELY AFFECT
OUR BUSINESS, FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

         Our net sales depend in part on the demand for our products by
semiconductor equipment companies. The semiconductor industry is highly cyclical
and has historically experienced periodic and significant downturns, which have
often severely affected the demand for semiconductor manufacturing equipment,
including laser-based tools and systems. If a downturn should occur in the
semiconductor industry in the future, we believe this would result in decreased
demand for semiconductor manufacturing equipment and consequently a decreased
demand for our products. Although such a downturn would reduce our sales, we
would not be able to reduce expenses commensurately, due in part to the need for
continual spending in research and development and the need to maintain
extensive ongoing customer service and support capability. Accordingly, any
downturn in the semiconductor industry could have a material adverse effect on
our financial condition and results of operations.

SOME OF OUR MEDICAL SEGMENT CUSTOMERS' WILLINGNESS TO PURCHASE OUR PRODUCTS
DEPENDS ON THEIR ABILITY TO OBTAIN REIMBURSEMENT FOR MEDICAL PROCEDURES USING
OUR PRODUCTS FROM THIRD-PARTY PAYORS AND OUR REVENUES COULD SUFFER FROM CHANGES
IN THIRD-PARTY COVERAGE AND REIMBURSEMENT POLICIES.

         Our medical segment customers include doctors, clinics, hospitals and
other health care providers whose willingness and ability to purchase our
products depends in part upon their ability to obtain reimbursement for medical
procedures using our products from third-party payors, including private
insurance companies, health maintenance organizations, or HMOs, and federal,
state and local government programs, including Medicare and Medicaid. Many
therapeutic, ophthalmic and surgical procedures performed using our products
currently qualify for reimbursement. However, third-party payors are
increasingly scrutinizing health care costs submitted for reimbursement and
changing coverage levels for reimbursement of medical procedures and equipment.
Payors may deny coverage and reimbursement for the medical procedures made
possible by our products. Failure by doctors, clinics, hospitals and other
health care providers to obtain adequate reimbursement from third-party payors
for medical procedures that use our products or changes in third-party coverage
and reimbursement policies could have a material adverse effect on our sales,
results of operations and financial condition.

A NEW ACCOUNTING PRONOUNCEMENT MAY CAUSE OUR OPERATING RESULTS TO FLUCTUATE.

         In December 1999, the staff of the Securities and Exchange Commission
(SEC) issued Staff Accounting Bulletin No. 101, "Revenue Recognition in
Financial Statements," or SAB 101. SAB 101, as

                                       10


amended, summarizes certain of the SEC's views in applying generally accepted
accounting principles, or GAAP, to revenue recognition in financial statements.
We are required to adopt SAB 101 in the fourth quarter of fiscal 2001. Although
we believe that our revenue recognition policies are in accordance with GAAP, we
are currently studying SAB 101 and have not determined its impact, if any, on
our financial statements.

WE USE STANDARD LABORATORY AND MANUFACTURING MATERIALS THAT COULD BE CONSIDERED
HAZARDOUS; AND WE COULD BE LIABLE FOR ANY DAMAGE OR LIABILITY RESULTING FROM
ACCIDENTAL ENVIRONMENTAL CONTAMINATION OR INJURY.

         Although most of our products do not incorporate hazardous or toxic
materials and chemicals, some of the gases used in our excimer lasers and some
of the liquid dyes used in some of our scientific laser products are highly
toxic. In addition, our operations involve the use of standard laboratory and
manufacturing materials that could be considered hazardous. Also, a facility
fire at the Tampere, Finland site, that spreads to a reactor used to grow
semiconductor wafers, could release highly toxic emissions. Although we believe
that our safety procedures for handling and disposing of such materials comply
with all federal and state regulations and standards, the risk of accidental
environmental contamination or injury from such materials cannot be entirely
eliminated. In the event of such an accident involving such materials, we could
be liable for any damage and such liability could exceed the amount of our
liability insurance coverage and the resources of our business.

IF OUR FACILITIES WERE TO EXPERIENCE CATASTROPHIC LOSS, OUR OPERATIONS WOULD BE
SERIOUSLY HARMED.

         Our facilities could be subject to a catastrophic loss such as fire,
flood or earthquake. A substantial portion of our research and development
activities, manufacturing, our corporate headquarters and other critical
business operations are located near major earthquake faults in Santa Clara,
California, an area with a history of seismic events. Any such loss at any of
our facilities could disrupt our operations, delay production, shipments and
revenue and result in large expenses to repair and replace the facility. While
we have obtained insurance to cover most potential losses at our facilities, we
cannot assure you that our existing insurance coverage will be adequate against
all possible losses.

PROVISIONS OF OUR CHARTER DOCUMENTS, DELAWARE LAW, OUR COMMON SHARES RIGHTS PLAN
AND OUR CHANGE-OF-CONTROL SEVERANCE PLAN MAY HAVE ANTI-TAKEOVER EFFECTS THAT
COULD PREVENT OR DELAY A CHANGE IN CONTROL.

         Provisions of our certificate of incorporation and bylaws may
discourage, delay or prevent a merger or acquisition or make removal of
incumbent directors or officers more difficult. These provisions may discourage
takeover attempts and bids for our common stock at a premium over the market
price. These provisions include:

- -        the ability of our board of directors to alter our bylaws without
         stockholder approval;

- -        limiting the ability of stockholders to call special meetings;

- -        limiting the ability of our stockholders to act by written consent; and

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

         We are subject to Section 203 of the Delaware General Corporation Law,
which prohibits a publicly held Delaware corporation from engaging in a merger,
asset or stock sale or other transaction with an interested stockholder for a
period of three years following the date such person became an interested
stockholder, unless prior approval of our board of directors is obtained or as
otherwise provided. These provisions of Delaware law also may discourage, delay
or prevent someone from acquiring or merging with us without obtaining the prior
approval of our board of directors, which may cause the market price of our
common stock to decline. In addition, we have adopted a change of control
severance plan, which provides for the payment of a cash severance benefit to
each eligible employee based on the employee's position and years of service to
us. If a change of control occurs, our successor or acquiror will be required to
assume and agree to perform all of our obligations under the change of control
severance plan.

                                       11


         Our common shares rights agreement permits the holders of rights to
purchase shares of our common stock to exercise the stock purchase rights
following an acquisition of or merger by us with another corporation or entity,
following a sale of 50% or more of our consolidated assets or earning power, or
the acquisition by an individual or entity of 20% or more of our common stock.
Our successor or acquiror is required to assume all of our obligations and
duties under the common shares rights agreement, including in certain
circumstances the issuance of shares of its capital stock upon exercise of the
stock purchase rights. The existence of our common shares rights agreement may
have the effect of delaying, deferring or preventing a change of control and, as
a consequence, may discourage potential acquirors from making tender offers for
our shares.

WE MAY EXPERIENCE VOLATILITY IN OUR STOCK PRICE, WHICH COULD NEGATIVELY AFFECT
YOUR INVESTMENT.

         The market price of our common stock may fluctuate significantly in
response to a number of factors, some of which are beyond our control,
including:

- -        quarterly variations in operating results;

- -        changes in financial estimates by securities analysts;

- -        changes in market valuations of other similar companies;

- -        announcements by us or our competitors of new products or of
         significant technical innovations, contracts, acquisitions, strategic
         partnerships or joint ventures;

- -        additions or departures of key personnel;

- -        any deviations in net sales or in levels of profitability from levels
         expected by securities analysts; and

- -        future sales of common stock.

         In addition, the stock market has recently experienced extreme
volatility that has often been unrelated to the performance of particular
companies. These market fluctuations may cause our stock price to fall
regardless of our performance.

INDUSTRY BACKGROUND

         The word "laser" is an acronym for "light amplification by stimulated
emission of radiation." A laser works by causing an energy source to excite, or
pump, an optical gain medium, converting the energy from the source into an
emission of photons, the fundamental particles of light. These photons stimulate
the release of more photons in the gain medium as they are reflected back and
forth between the mirrors that make up the laser's resonator. The resulting
build-up in the number of photons is usually emitted in the form of a light
beam, the laser beam, through a partially reflective mirror at the output end of
the laser.

         The four types of lasers commonly available today are gas, liquid,
semiconductor and solid-state, each of which derives its classification from the
lasing material it uses. Laser beams can be emitted in either continuous waves
or in pulses with varying repetition rates, can have different operating
wavelengths and emission bandwidths, and can emit light in a wide range of
energies and powers. Depending on the application, lasers can be designed for a
specific power, pulse width, repetition rate and wavelength. In addition, the
laser's cost of ownership can dictate its suitability for a particular
application.

         As lasers become less expensive, smaller and more reliable, they are
increasingly replacing conventional tools and enabling technological advances in
a variety of applications and industries, including semiconductor inspection,
measurement, test and repair, optical telecommunications, medical,
biotechnology, consumer electronics, industrial process control, materials
processing, printing, and research and development. Examples include:

SEMICONDUCTOR AND RELATED MANUFACTURING--Lasers are increasingly being used in
multiple steps in the semiconductor manufacturing process, including DUV
lithography, a process that is used to print a master image of a circuit layer
onto a semiconductor wafer. Lasers are also used in the inspection, test and
measurement of semiconductors during the manufacturing process.

                                       12


OPTICAL TELECOMMUNICATIONS--Driven by the Internet and the surge of
data-intensive applications, fiber optic networks constantly require greater
bandwidth. Lasers and optical components enable this increased bandwidth by
allowing multiple wavelengths to travel across the same fiber.

MEDICAL--A growing number of physicians, surgeons and researchers are applying
lasers to a wider range of therapeutic and diagnostic medical applications. For
example, lasers are being used in the treatment of eye diseases and afflictions,
including glaucoma and AMD, two of the leading causes of blindness today. Lasers
are also increasingly being used for aesthetic applications, including hair
removal, skin rejuvenation and removal of vascular lesions.

OUR STRATEGY

         We strive to develop innovative and proprietary products and solutions
that meet the needs of our customers based on our core expertise in lasers and
optical technologies. In pursuit of our strategy, we intend to:

     -   LEVERAGE OUR TECHNOLOGY LEADERSHIP TO GROW WITH RAPIDLY EXPANDING
         MARKETS--We have targeted the semiconductor and related manufacturing
         and optical telecommunications markets.

     -   MAINTAIN OUR LEADERSHIP POSITION IN EXISTING MARKETS--There are a
         number of markets where we have historically been at the forefront of
         technological development and product deployment and from which we have
         derived a substantial portion of our revenues. We plan to maintain our
         position as a market leader in these areas.

     -   MAINTAIN AND DEVELOP ADDITIONAL STRONG COLLABORATIVE CUSTOMER AND
         INDUSTRY RELATIONSHIPS--We believe that the Coherent brand name and
         reputation for product quality, technical performance and customer
         satisfaction will help us to further develop our loyal customer base.
         We plan to maintain our current, and develop new, relationships with
         customers that are industry leaders and work together with these
         customers to design and develop innovative product systems and
         solutions as they develop new technologies.

     -   EXPAND SEMICONDUCTOR LASER MARKET OPPORTUNITIES--We are working to
         expand the range and technical capabilities of, and markets for, our
         semiconductor lasers. We continue to develop new lasers to supply a
         broad range of wavelengths and power capabilities. These new products
         enable us to open up markets for new applications based on their
         efficiency, increased reliability and smaller size compared with
         conventional lasers.

     -   DEVELOP AND ACQUIRE NEW TECHNOLOGIES--We will continue to enhance our
         existing technologies and develop new technologies through our internal
         research and development efforts as well as through the acquisition of
         additional complementary technologies, intellectual property,
         manufacturing processes and product offerings.

FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS

         Coherent operates in two industry segments: the design, manufacture and
marketing of electro-optical products such as lasers, optics and related
accessories and medical products such as laser and optical systems used for
surgical and therapeutic applications. Coherent has two operating segments
within the Electro-Optical industry segment: Electro-Optics and Lambda Physik.
The Medical industry segment is also an operating segment. (See Note 13).

PRODUCTS

BUSINESS STRUCTURE
- ------------------

         Coherent's business structure reflects its three major operating
segments: Electro-Optics, Lambda Physik and Medical. Electro-Optics and Lambda
segments serve the needs of commercial and scientific customers (both end users
and OEMs), including customers who purchase components, while Medical serves the
medical-surgical community.

                                       13


APPLICATIONS

         Our products address a broad range of applications. We are now
increasingly focused on several rapidly growing segments of the photonics
market: semiconductor and related manufacturing and optical telecommunications
applications. We also continue to serve other segments of the photonics market,
including printing and reprographics, materials processing, scientific
instrumentation and medical applications.

SEMICONDUCTOR AND RELATED MANUFACTURING
- ---------------------------------------

         The use of semiconductors has expanded beyond computer systems to a
wide array of applications such as telecommunications and data communication
systems, automotive products, consumer goods, medical products, household
appliances and industrial automation and control systems.

         Semiconductor manufacturers are continually seeking to improve their
process and design technologies to manufacture smaller, more powerful and more
reliable devices at a lower cost per function. A major factor in fabricating
such devices is the ability to reduce circuit geometries, measured in microns, a
millionth of a meter, and defined in terms of critical, or smallest, feature
size. Reduced circuit geometries permit semiconductor manufacturers to increase
the number of integrated components per area of silicon.

         Lasers are particularly useful in manufacturing products that require
fine precision and small feature sizes, such as semiconductor and
microelectronic devices, because they can produce extremely small beam size and
deliver energy in pulses of very short duration. We provide lasers to
semiconductor equipment manufacturers for use in lithography, mask writing,
wafer inspection, mask repair and packaging processes for their semiconductor
manufacturing systems.

         Sales of our products for semiconductor and related manufacturing
applications accounted for approximately 20.0% ($113.7 million) of our total net
sales in fiscal 2000 and approximately 14.4% ($67.5) of our total net sales in
fiscal 1999.

DUV LITHOGRAPHY

         Lithography is one of the most critical and expensive steps in the
manufacturing process of complex semiconductor devices fabricated on silicon
wafers. This process requires a system that projects light through a photomask
containing the master image of a particular circuit layer onto a light sensitive
material coated on the wafer. The critical feature size of a semiconductor
device depends upon the resolution capability of the lithography system.
Resolution capability is a function of the projected wavelength of the light
source and the numerical aperture of the lens. A shorter wavelength or higher
numerical aperture enables smaller feature sizes.

         Lithography tools have physical resolution limits approximating the
wavelength of their light source. Mercury arc lamps, which have been the primary
illumination source used for the last decade, can produce critical feature sizes
down to only 0.25 microns. Currently, the only known method capable of reducing
semiconductor geometries below 0.25 microns is with DUV lasers.

         We currently provide lasers, through our 60% owned Lambda Physik AG
subsidiary, for the lithography tools that support critical feature sizes down
to 0.18 microns using DUV light with wavelengths at 248 nanometers, or nm. One
nanometer equals one billionth of a meter. We are also working with stepper and
semiconductor manufacturers to provide the next two generations of lithography
tools to reduce feature sizes to below 0.10 microns using DUV light with
wavelengths at 193nm and 157nm.

LASER DIRECT IMAGING OF PHOTOMASKS AND PRINTED CIRCUIT BOARDS

         The photomask used in the lithography process is made by a laser beam
that directly "writes" a circuit pattern of a semiconductor chip onto a piece of
chrome-coated quartz glass. The mask, which is conceptually similar to a
negative in photography, is used in lithography systems to make numerous copies
of the pattern image on semiconductor wafers. The direct write process is also
used to write circuit patterns directly on printed circuit boards. Our INNOVA
SABRE and INNOVA SABREFRED ion lasers are used in laser systems for these
applications.

                                       14


SEMICONDUCTOR INSPECTION, MEASUREMENT, TEST AND REPAIR

         As semiconductor device geometries decrease in size, devices become
increasingly susceptible to smaller defects during each phase of their
manufacturing process. One of the semiconductor industry's responses to the
increasing vulnerability of semiconductor devices to smaller defects has been to
employ defect detection and inspection that is closely linked to the
manufacturing process. Automated inspection systems are used on-line to detect
and locate defects as small as 0.1 microns, which may not be observable by
conventional optical microscopes. These detection systems use advanced image
processing and innovative laser scanning technologies to achieve high
sensitivity and speed.

         Detecting the presence of defects is only the first step in preventing
their recurrence. After detection, the defects must be examined in order to
identify their size and shape and the process step in which the defect occurred.
This examination is called defect classification. Identification of the sources
of defects in the lengthy and complex semiconductor manufacturing process has
become essential for maintaining high yield production. Semiconductor
manufacturing has become a round-the-clock operation and it is important for
inspection, measurement and testing products to be reliable and have long
lifetimes.

         Our COMPASS 315M and VERDI diode-pumped solid-state, or DPSS, lasers
are used to detect defects in photomasks, semiconductor chips and printed
circuit boards. The INNOVA ILINE argon ion laser is used to inspect the
photomasks and patterned wafers. Our COMPASS 501Q laser is used to repair
defects that may occur in the photomask or semiconductor device.

         The fabrication process typically creates numerous patterned layers on
each wafer. Laser-based systems have been developed to measure the
characteristics of metal or opaque layers in order to determine the
functionality and conformance of these devices. Our VITESSE laser generates an
ultrafast laser light pulse that produces a localized temperature rise in the
materials, which generates a sound wave, a portion of which is reflected back to
the surface. By measuring the returning echos, the laser system can detect layer
thickness, adhesion and composition.

ADVANCED PACKAGING AND INTERCONNECTS

         Lasers are now being used in hole drilling of printed circuit boards
and other advanced component materials like flexible circuits, polyester and
polymide. Historically, holes in printed circuit boards have been made using
mechanical drilling techniques. However, mechanical drills cannot produce holes
less than 50 microns, forcing manufacturers to use laser-based solutions.
Solid-state lasers are increasingly being utilized for this application.

         We have developed the AVIA DPSS laser and DIAMOND carbon dioxide, or
CO(2), family of lasers for this application. The ability of our pulsed
lasers to operate at very high repetition rates translates into faster
drilling speeds and increased throughput in materials processing
applications. Lasers also produce smaller, cleaner holes than conventional
cutting tools, and laser beams do not wear down from use as do conventional
drills.

         Lasers are also increasingly being used in scribing, machining and
drilling microelectronic components and in microelectronics manufacturing to
adjust electronic components. Our COMPASS 501Q, AVIA and DIAMOND lasers are used
for these applications.

FLAT PANEL DISPLAY

         The high volume consumer market is driving the production of flat panel
displays in applications such as camera viewfinders, car navigation systems,
laptops and television monitors. The most common type of flat panel display is
the active-matrix crystal display, which uses a matrix of thin film transistor,
or TFT, switches to control each pixel of the screen.

         The crystallization of amorphous silicon to polycrystalline silicon
induced by excimer lasers, commonly referred to as excimer laser annealing, or
ELA, is a pivotal technology for the next generation of TFT devices. In the ELA
process, the excimer laser light is absorbed into the amorphous silicon without
heating the underlying substrate. As a result, it is possible to use inexpensive
glass substrates, instead of quartz, which makes the ELA process more economical
than previous techniques. Because the ELA technique leaves the substrate
virtually unaffected, there are many potential applications for the ELA process,
including the use of plastic as a substrate material, which would enable
electronics to be integrated directly into plastic housings. The LAMBDA STEEL,
developed and marketed by Lambda Physik, is a high-powered 200 watt excimer
laser designed for industrial TFT annealing.

                                       15


OPTICAL TELECOMMUNICATIONS
- --------------------------

         The widespread availability of the Internet has dramatically increased
demand for high speed and reliable access to large amounts of data, translating
into an increased demand for bandwidth. Innovative technological developments in
optical transmission technology have made it possible to transmit greater
amounts of data over telecommunications networks. In optical transmission,
voice, video or data input is converted into an optical bit stream and
transmitted over a fiber. The generation of the optical signal is done through
the use of lasers, which produce light waves in a very narrow optical wavelength
range. The two main obstacles in transmitting optical signals through fiber are
attenuation, or loss, and dispersion, or spreading, of the signal.

         Dense wave division multiplexing, or DWDM, dramatically increases the
amount of information that can be transmitted over an optical network by
allowing several different light signals, each at a different wavelength, to be
transmitted simultaneously on a single fiber. To overcome the signal
attenuation, a DWDM system requires an erbium doped fiber amplifier, or EDFA,
every 60 to 100 kilometers to boost the light energy on the fiber without having
to convert the light energy to an electronic signal. EDFAs utilize 980nm and
1480nm pump lasers for signal amplification, enabling optical signals to be
transported over long distances without loss of information.

         The move to high channel count systems has generated greater demand for
many critical optical components, including source lasers, modulators, pump
lasers, amplifiers, filters and fiber bragg gratings, all of which are needed in
increasing supply to enable transmission of multiple wavelengths down a single
fiber.

         The optical network can be divided into several broad categories:
optical fiber; optical components, which include active and passive devices,
hybrid or modular devices and subsystems; and optical transport systems, which
include traditional SONET/SDH and DWDM networks.

         Optical components are the pieces that enable the transmission of
high-speed data across fiber optic systems. They are used to create, isolate,
split and channel the light that carries the information across the network. The
increasing deployment of DWDM solutions is one factor driving much of the growth
in demand for optical components. The broad optical components market, which
includes active and passive components, modules and subsystems, is one of the
fastest growing portions of the telecommunications market.

         Active components used in optical telecommunications networks generate,
amplify and detect light. Some examples of active components include:
transmitters, which use a source laser with a wavelength of 1550nm and 1310nm
and a modulator; pump lasers for EDFAs; and receivers. Transmitters generate the
encoded light, pump lasers are used to boost or amplify light and receivers
convert the optical signal to an electronic signal for further processing.

         Recognizing the ever increasing demand for 980 nm edge emitting pump
lasers, the mismatch between supply and demand, and the capability of our
semiconductor technology, we have initiated during fiscal 2000 our own
development of 980 nm chips and modules. We do expect to provide the first
samples of 980 nm edge emitting devices to customers by the middle of fiscal
2001 and start shipments in quantities by of the end of fiscal 2001.

          We are developing a new type of laser, a vertical emitting Optically
Pumped Semiconductor (OPS) laser, which can provide two to three times the power
of commercial available edge emitting pump lasers. Given the current trend in
optical networks, where a combination of pumps at 980 and 1480 nm are used to
optimize the signal to noise ratio, it is unlikely that, in the short term,
there will be a need for power levels such as those afforded by the OPS.
However, the instrumentation market for telecommunications requires such high
powers. Instrumentation is used to manufacture and test network components and
systems. Therefore, we have directed the development of the OPS towards
satisfying the needs for this market.

         Passive optical components route, process and guide beams of light in a
DWDM environment without the use of active electronics. Examples of passive
components include: filters used to allow wavelength selection; attenuators used
to control signal amplitude; couplers used to split or combine light; optical
isolators used to eliminate back reflections; and optical switches used to
direct light to fiber.

                                       16


         Fiber bragg gratings and etalons are used to provide dispersion
compensation for individual wavelengths in the DWDM network. The necessary
combination of beam characteristics and power for fiber bragg grating production
can only be delivered by a frequency-doubled argon ion laser or an excimer
laser. We serve the fiber bragg grating market with a number of lasers,
including our INNOVA SABREFRED ion laser and the L1-FBG excimer laser produced
by Lambda Physik.

         COMETS, our new etalon for telecommunications applications, enhances
the frequency stability of laser transmitters when integrated into DWDM network
components, resulting in tighter frequency packing and increased network
density. COMETS is also used to compensate for dispersion inherent in optical
networks. This technology can be adapted to other DWDM applications including
signal multiplexing and de-multiplexing.

         Sales of our products for optical telecommunications applications
accounted for 2.0% ($11.3 million) of our total net sales in fiscal 2000 and
0.9% ($4.3 million) of our total net sales in fiscal 1999. We intend to
aggressively pursue this rapidly growing market.

PRINTING AND REPROGRAPHICS
- --------------------------

         The printing industry has traditionally depended upon silver-halide
films and chemicals to engrave printing plates. This chemical engraving process
is accomplished in several time consuming steps. Working with professionals in
the printing industry, we design semiconductor and diode-pumped lasers that are
used in complex computer-to-plate printing systems that simplify the engraving
process.

         Our COMPASS 315m DPSS and semiconductor lasers are widely used for
computer-to-plate printing, an environmentally-friendly process that saves
production time by writing directly to plates.

         Our INNOVA ion lasers are used to write data on master disks that are
used to mass produce compact disks and digital video disks for consumer use.

         Our SCANMATE dye laser is widely used in research fields which rely on
high spectral brightness at any desired wavelength of light. It offers a narrow
linewidth and exact wavelength calibration. Examples of its applications are
linear and nonlinear spectroscopy, physical chemistry, photo chemistry and
photobiology.

         Our LPX excimer laser models are high working cycle excimer lasers,
offering high repetition rates for scientific and industrial applications. They
are used for marking surface mounts and medical devices, stripping thin wires in
disk drives, cleaning bare semiconductor wafers and writing fiber braggs on
optical telecommunications.

         Sales of our products for printing and reprographics applications
accounted for and approximately 5.9% ($33.5 million) of our total net sales in
fiscal 2000 and approximately 6.8% ($31.9 million) of our total net sales in
fiscal 1999.

MATERIALS PROCESSING
- --------------------

         Today lasers are used in a wide variety of conventional manufacturing
applications, including cutting, marking and welding materials. Our FAP
semiconductor lasers and DIAMOND CO(2) lasers are well-suited for cutting,
marking, welding and other applications where accuracy, speed and processing
costs are important. They create clean holes and sharp edges, and their
beam-pointing stability assures accurate measurements.

         Sales of our products for materials processing applications accounted
for approximately 10.1% of our total net sales in fiscal 2000 and approximately
12.7% of our total net sales in fiscal 1999.

SCIENTIFIC AND INSTRUMENTATION
- ------------------------------

         The scientific market historically has provided an ideal test market
for leading-edge laser technology, including water-cooled gas lasers, high
energy flash lamp-pumped Yttrium Aluminum Garnet, or YAG, lasers and ultrafast
systems with an installed base of tens of thousands of lasers. Current
applications for lasers in the research and development market include pump
lasers for ultrafast systems, confocal microscopy systems and seed lasers in
amplifier systems.

                                       17


         Our MIRA Titanium Sapphire laser and REGA regenerative amplifier is an
example of an ultrafast laser system used for these applications.

         Our INNOVA ion lasers are also sold to instrument manufacturers, the
largest component of which is bio-instrumentation, for applications such as cell
sorting, DNA and protein sequencing as well as drug and clinical screening.

         Sales of our products for scientific applications accounted for
approximately 25.9% ($147.2 million) of our total net sales in fiscal 2000 and
approximately 30.5% ($143.2 million) of our total net sales in fiscal 1999.

MEDICAL
- -------

         The medical industry has increasingly used lasers for a variety of
therapeutic and diagnostic medical applications. We pioneered the development of
lasers used in medical applications 30 years ago and remain a leader and
innovator in the aesthetic, ophthalmic and surgical markets. Our medical laser
technology has provided benefits to the ophthalmic market, paving the way for a
host of surgical alternatives to treat many sight-threatening diseases, from
diabetic retinopathy in the early 1970s to AMD today. In addition to developing
the first laser system for skin resurfacing in the early 1990s, we have more
recently developed lasers used in the aesthetic market for hair removal, tattoo
removal and the treatment of vascular and pigmented lesions. Additionally, our
lasers are used in surgical applications, including urology, orthopedics and
gynecology.

         Sales of our products for medical applications accounted for
approximately 36.1% ($205.0 million) of our total net sales in fiscal 2000 and
approximately 34.7% ($162.7 million) of our total net sales in fiscal 1999.

OPHTHALMIC APPLICATIONS

         Lasers are used to treat a growing number of eye diseases and
afflictions, including glaucoma, cataracts, myopia, hyperopia, AMD, diabetic
retinopathy and other retinal diseases. Our laser systems are used in
photodisruption for the treatment of secondary cataracts, photocoagulation for
the treatment of retinal diseases and photodynamic therapy, or PDT, for the
treatment of AMD. AMD is a leading cause of blindness in the elderly, with
approximately 150,000 new cases of the wet "classical" form arising each year in
the United States.

         Our OPAL PHOTOACTIVATOR, when used in conjunction with the drug
Visudyne, marketed and sold by CIBA Vision Corporation, offers a non-invasive
and painless two-step procedure for the treatment of the wet "classical" form of
AMD. This treatment procedure, approved in April 2000, represents the first
FDA-approved drug therapy for the treatment of AMD. Previously, there was no
treatment for the wet "classical" form of AMD.

         We also developed the first argon photocoagulator system that achieved
widespread acceptance by the medical community for treatment of retinal diseases
and glaucoma. The ULTIMA 2000 and the NOVUS OMNI represent two of our products
sold for these applications.

AESTHETIC APPLICATIONS

         We are a leading supplier of lasers to the aesthetic market. The target
customers for our aesthetic medical laser products currently include plastic
surgeons, dermatologists, gynecologists and ophthalmologists. We produce a
complete line of innovative laser products for aesthetic procedures, including
hair removal, skin rejuvenation, removal of benign vascular lesions, or
unsightly veins of the legs and face, removal of benign pigmented lesions,
including brown spots, age spots, sunspots and tattoos, and cosmetic eye
surgery. Of these applications, the laser hair removal market is currently the
largest segment of the aesthetic medical laser market.

         In response to the needs of our customers, we have developed the
LIGHTSHEER family of hair removal products that we market to a range of medical
practitioners from infrequent users to higher volume practitioners at a variety
of prices. These laser systems are well-suited for permanent hair reduction and,
when combined with the CHILLTIP contact skin cooling system and variable pulse
duration, allow for treatment of a wide range of patients with different skin
colors. The LIGHTSHEER was the first semiconductor laser system that received
clearance from the FDA to claim permanence in hair reduction.

                                       18


SURGICAL APPLICATIONS

         The use of surgical laser systems has provided alternative treatments
to conventional surgery in a number of medical fields, including urology,
gynecology and orthopedics. Lasers offer a less invasive procedure with similar
surgical results. The use of surgical lasers has resulted in reduced surgical
trauma, shorter hospitalization and a quicker recovery, thus improving the
quality of patient care and frequently decreasing overall healthcare costs
compared to conventional procedures.

         Our family of VERSAPULSE Power Suite Holmium and double wavelength
surgical lasers is intended for ablation, vaporization, excision, incision and
immediate hemostases of soft tissue through scope or open access. The VERSAPULSE
Power Suite lasers are primarily used for urological and orthoscopic procedures.
In urology, the main applications for the VERSAPULSE include resection of the
prostate and lithotripsy. Our ULTRAPULSE lasers are primarily used for
gynecological procedures.

                                       19


PRODUCTS

         We design, manufacture and market lasers, laser-based systems,
precision optics and related accessories for a diverse group of customers. The
following table shows selected products together with their applications, the
markets they serve and the technologies upon which they are based.



- -------------------------------------------------------------------------------------------------------------------
        MARKET SEGMENT                 APPLICATION                 PRODUCTS                   TECHNOLOGY
- -------------------------------------------------------------------------------------------------------------------
                                                                            
Semiconductor and              DUV lithography             NovaLine series           Excimer
related manufacturing          ------------------------------------------------------------------------------------
                               Mask writing                SabreFreD                 Frequency doubled ion
                               ------------------------------------------------------------------------------------
                               Semiconductor inspection    Vitesse                   Ultrafast
                                                           Compass series            DPSS
                                                           Enterprise                Ion
                               ------------------------------------------------------------------------------------
                               Marking                     Avia                      DPSS
                               ------------------------------------------------------------------------------------
                               Flat panel display          Lambda STEEL series       Excimer
                               (TFT annealing)             Lambda 4000/5000 series   Excimer
                               ------------------------------------------------------------------------------------
                               Advanced packaging and      Avia                      DPSS
                               interconnects               Diamond                   CO(2)
                                                           FAP family                Semiconductor
- -------------------------------------------------------------------------------------------------------------------
Optical                        Fiber bragg gratings        SabreFreD                 Frequency doubled ion
telecommunications                                         L1 FBG                    Excimer
                               ------------------------------------------------------------------------------------
                               DWDM etalons                ComEts                    Optical fabrication and
                                                                                     coating
                               ------------------------------------------------------------------------------------
                               Pump sources                OPS                       Semiconductor
- -------------------------------------------------------------------------------------------------------------------
Printing and reprographics     Computer-to-plate printing  DCP                       Semiconductor
                                                           Diode bars                Semiconductor
                                                           Compass series            DPSS
                               ------------------------------------------------------------------------------------
                               Writing data to master      Innova family             Ion
                               disks
                               ------------------------------------------------------------------------------------
                               Entertainment               Innova family             Ion
- -------------------------------------------------------------------------------------------------------------------
Materials processing           Marking, welding, cutting   FAP family                Semiconductor
                               and drilling                Diamond                   CO(2)
                                                           Gator 2000                DPSS
- -------------------------------------------------------------------------------------------------------------------
Scientific and                 Pump source for             FAP family                Semiconductor
instrumentation                solid-state lasers          Diode bars                Semiconductor
                               ------------------------------------------------------------------------------------
                               Confocal microscopy         Mira                      Ultrafast
                                                           Vitesse                   Ultrafast
                               ------------------------------------------------------------------------------------
                               Cell sorting                Innova family             Ion
                               ------------------------------------------------------------------------------------
                               DNA and protein sequencing  Innova family             Ion
                               ------------------------------------------------------------------------------------
                               Pollution Analysis          COMpex                    Excimer
                               ------------------------------------------------------------------------------------
                               DNA Analysis                StarLine                  Diode pumped solid-state
                               ------------------------------------------------------------------------------------
                               Oncology                    ScanMate                  Dye
                               (Cancer research)
                               ------------------------------------------------------------------------------------
                               Metrology (Measuring        OPTex, COMPex             Excimer
                               Technology)
                               ------------------------------------------------------------------------------------
                               Spectroscopy                ScanMate, COMPex,         Dye, Excimer,
                                                           StarLine                  Diode pumped solid-state
                               ------------------------------------------------------------------------------------
                               Physical chemistry          ScanMate, COMPex          Dye, Excimer
                               ------------------------------------------------------------------------------------
                               Photochemistry              ScanMate, COMPex          Dye, Excimer
                               ------------------------------------------------------------------------------------
                               Medical (OEM)               OPTex, COMPex             Excimer
                               ------------------------------------------------------------------------------------
                               Laser diagnostics and       Modemaster                Electronics
                               measurement                 Fieldmaster               Electronics
                                                           Labmaster                 Electronics
                               ------------------------------------------------------------------------------------
                               Thermal imaging             Infrared optics           Optical fabrication and
                                                                                     coating
                               ------------------------------------------------------------------------------------
                               Laser components            Optics for lasers         Optical fabrication and
                                                                                     coating
- -------------------------------------------------------------------------------------------------------------------


                                       20



- -----------------------------------------------------------------------------------------------------------------
       MARKET SEGMENT                APPLICATION                   PRODUCTS                  TECHNOLOGY
- -----------------------------------------------------------------------------------------------------------------
                                                                            
Medical:
- -----------------------------------------------------------------------------------------------------------------
  Ophthalmic                 Treatment of wet             Opal Photoactivator        Semiconductor
                             "classical" AMD
                             ------------------------------------------------------------------------------------
                             Treatment of retinal         Ultima 2000                Ion
                             diseases and glaucoma        Novus 2000                 Ion
                                                          Novus Verdi (1)            DPSS
                                                          Novus Omni                 Ion
                                                          Selecta 7000               Solid-state (lamp-pumped)
                             ------------------------------------------------------------------------------------
                             Treatment of secondary       Aura (1)                   Solid-state (lamp-pumped)
                             cataracts
- -----------------------------------------------------------------------------------------------------------------
  Aesthetic                  Hair removal                 LightSheer family          Semiconductor
                             ------------------------------------------------------------------------------------
                             Skin rejuvenation            UltraPulse series          CO(2)
                                                          UltraFine                  Solid-state (lamp-pumped)
                             ------------------------------------------------------------------------------------
                             Removal of tattoos,          VersaPulse family          Solid-state (lamp-pumped)
                             pigmented lesions and        * VPC
                             vascular lesions (veins in   * VPW
                             legs and face)
- -----------------------------------------------------------------------------------------------------------------
  Surgical                   Urology (BPH and             VersaPulse family          Solid-state (lamp-pumped)
                             lithotripsy)                 * VersaPulse Select
                             Orthopedics                  * VersaPulse Select
                                                            Dual Wave Length
                             Gynecology                   UltraPulse                 CO(2)
- -----------------------------------------------------------------------------------------------------------------


 (1) Manufactured by a third party and distributed by Coherent.

         We design, manufacture and market a wide variety of lasers, laser-based
systems and optical components and instruments, some of which are described
below.

LASER PRODUCTS
- --------------

SEMICONDUCTOR LASERS

         Semiconductor lasers use the same principles as more conventional types
of lasers but miniaturize the entire assembly into a monolithic structure using
semiconductor wafer fabrication processes. The advantages of this type of laser
include smaller size, longer life, enhanced reliability and greater efficiency.
We manufacture a wide range of semiconductor laser products with wavelengths
ranging from 650nm to 1000nm and output powers ranging from 60 watts for
individual bars, to several hundred watts for stacked bars. These products are
available in various forms of complexity, including the following: bare diodes
on heat sinks; fiber-coupled single emitters and bars; stacked bars; and fully
integrated modules and microprocessor-controlled units that contain power
supplies and active coolers. Our infrared semiconductor lasers, which are
manufactured from proprietary materials grown in our facility in Tutcore,
Finland, differ from other lasers in that they contain no aluminum in the active
region. This provides our lasers with longer lifetimes and the ability to
operate at broader temperature ranges.

         Our recently announced OPS laser is a semiconductor chip that is pumped
by a semiconductor laser. A wide range of wavelengths can be achieved by varying
the materials used in this device and doubling the frequency of the laser beam.
The OPS is a compact, rugged, high power, single-mode laser that has promise in
the optical telecommunications industry. Our frequency doubled OPS lasers are
all solid-state devices operating continuously in the blue region of the optical
spectrum, and are particularly well-suited to the bio instrumentation and
graphic art markets.

         Another primary application for our semiconductor lasers is for use in
computer-to-plate printing machines. These machines contain a series of
semiconductor lasers that are used to direct the printing of computer images
directly to paper, without the need for film or developing chemicals.

                                       21


         Our semiconductor lasers are also used in machine-processing
applications, such as soldering connections on printed circuit boards and
welding flat panel displays, and in medical applications for the treatment of
the wet "classical" form of AMD and hair removal. They are also used as the pump
laser in DPSS laser systems that are manufactured by us and several of our
competitors.

DIODE-PUMPED SOLID-STATE LASERS

         DPSS lasers use semiconductor lasers to pump a crystal to produce a
laser beam. By changing the energy, optical components and the types of crystals
used in the laser, different wavelengths and types of laser light can be
produced.

         The efficiency, reliability, longevity and relatively low cost of DPSS
lasers make them ideally suited for a wide range of OEM and end-user
applications, particularly those requiring 24-hour operations. Our DPSS systems
are compact, self-contained, sealed units. Unlike conventional tools and other
lasers, our DPSS lasers require minimal maintenance since they do not have
internal controls or components that require adjusting and cleaning to maintain
consistency. They are also less affected by environmental changes in temperature
and humidity, which can alter alignment and inhibit performance in many systems.

         We manufacture a variety of types of DPSS lasers for different
applications, including semiconductor inspection, repair, test and measurement,
printing and reprographics, micro-machining, rapid prototyping, holography, DNA
sequencing, flow cytometry, interferometry, laser pumping, light scattering,
non-destructive testing, particle counting and spectroscopy.

SALES AND MARKETING

         We market our products domestically through a direct sales force. Our
foreign sales are made principally to customers in Europe, Japan and other
Asia-Pacific countries. We sell internationally through direct sales personnel
located in Japan, the United Kingdom, Germany, Italy, Austria, France, Belgium,
the Netherlands, Sweden, Finland, the People's Republic of China and Hong Kong,
as well as through independent representatives in other parts of the world.
Foreign sales accounted for 58% of our total net sales in fiscal 2000 and fiscal
1999. Sales made to independent representatives and distributors are generally
priced in US dollars. Foreign sales that we make directly are generally priced
in local currencies and are therefore subject to currency exchange fluctuations.
Foreign sales are also subject to other normal risks of foreign operations, such
as protective tariffs, export and import controls and political instability. Our
products are broadly distributed, and no one customer accounted for more than
10% of total net sales during fiscal 2000 or fiscal 1999.

         We maintain a customer support and field service staff in major markets
in the United States, Europe, Japan and other Asia-Pacific countries. This
organization works closely with customers, customer groups and independent
representatives in servicing equipment, training customers to use our products
and exploring additional applications of our technologies. We have also
implemented a 24-hour-a-day service station, where customers can call a number
at any time and receive service on their particular products.

         We typically provide one year parts and service warranties on our
lasers, laser systems, optical and laser components, precision optics, and
related accessories and services. Warranties on some of our products and
services may be longer than one year. To date, warranty reserves, as reflected
on our balance sheet, have been sufficient to cover product warranty repair and
replacement costs.

RESEARCH AND DEVELOPMENT

         We are committed to the development of new products as well as the
improvement and refinement of existing products. We are primarily focusing our
research and development efforts on the development of excimer lasers for DUV
lithography, component products for the optical telecommunications and
semiconductor-related markets and new medical products. Expenditures for fiscal
2000 were $57.4 million, or 10% of net sales, compared to $46.7 million, also
10% of net sales, for fiscal 1999. We maintain separate research and development
staffs for each of our three reportable business segments. We work closely with
customers, both individually and through our sponsored seminars, to develop
products to meet customer application and performance needs. In addition, we are
working with leading research and educational institutions to develop new
photonics-based solutions.

                                       22


MANUFACTURING

STRATEGIES
- ----------

         One of our core strategies is to tightly control our supply of key
parts, components and assemblies. We believe this is essential to maintain high
quality and enable rapid development and deployment of new products and
technologies.

         Committed to quality and customer satisfaction, we design and produce
many of our own components and sub-assemblies to retain quality control. We
provide customers with 24-hour technical expertise and quality that is ISO 9000
certified at our principal manufacturing sites.

         We have designed and implemented proprietary manufacturing tools,
equipment and techniques in an effort to provide products that are
differentiable from our competitors' products. These proprietary manufacturing
techniques are utilized in a number of our product lines, including both ion and
CO(2) laser production, optics fabrication, coating and assembly operations, as
well as the wafer growth for our semiconductor laser product family.

         Raw materials or sub-components required in the manufacturing process
are generally available from several sources. However, we currently purchase
several key components and materials, including exotic materials and crystals,
used in the manufacture of our products from sole source or limited source
suppliers. Some of these suppliers are relatively small private companies that
may discontinue their operations at any time. We typically purchase our
components and materials through purchase orders and we have no guaranteed
supply arrangement with any of these suppliers. We may fail to obtain these
supplies in a timely manner in the future. We may experience difficulty
identifying alternative sources of supply for certain components used in our
products. Once identified, we would experience further delays from evaluating
and testing the products of these potential alternative suppliers. Furthermore,
financial or other difficulties faced by these suppliers or significant changes
in demand for these components or materials could limit their availability. Any
interruption or delay in the supply of any of these components or materials, or
the inability to obtain these components and materials from alternate sources at
acceptable prices and within a reasonable amount of time, would impair our
ability to meet scheduled product deliveries to our customers and could cause
customers to cancel orders.

         We rely exclusively on our own production capability to manufacture
certain strategic components, optics and optical systems, semiconductor lasers,
lasers and laser-based systems. Because we manufacture, package and test these
components, products and systems at our own facilities, and such components,
products and systems are not readily available from other sources, any
interruption in our manufacturing would adversely affect our business. In
addition, our failure to achieve adequate manufacturing yields at our
manufacturing facilities may materially and adversely affect our operating
results and financial condition.

OPERATIONS
- ----------

         Our electro-optical products are manufactured at sites in Santa Clara
and Auburn California; Lubeck, Germany; Leicester and Watford, England; Glasgow,
Scotland; Barendrecht, the Netherlands and Tampere, Finland. Our ion and CO(2)
lasers, some of our DPSS lasers, such as VERDI, AVIA and VITESSE, semiconductor
lasers and ultrafast scientific lasers are manufactured in Santa Clara,
California. Our optical component products and laser instrumentation products
are manufactured at our facility in Auburn, California.

         Our LIGHTSHEER family of hair removal products are manufactured in
Pleasanton, California. The remainder of our medical products are manufactured
at our facility in Santa Clara, California.

         Our excimer laser products, including the lasers used in DUV
lithography systems, are manufactured at Lambda Physik's facility in Gottingen,
Germany. Lambda Physik's DPSS product is manufactured in Fort Lauderdale,
Florida.

         We make DPSS lasers at our facility in Lubeck, Germany, including the
315M and 501Q lasers. Our facility in Tampere, Finland grows the aluminum-free
materials that are incorporated into our semiconductor lasers. Additional
optical fabrication, coatings and electro-optical assemblies are processed and
manufactured at our sites in Leicester and Watford, England. We make a range of

                                       23


advanced solid-state lasers used in developing applications, including
scientific research and semiconductor test equipment, in Glasgow, Scotland. Our
newest facility is in Barendrecht, the Netherlands, where we manufacture
micro-machining systems that incorporate lasers manufactured in Santa Clara,
California.

INTELLECTUAL PROPERTY

         We rely on a combination of patent, copyright, trademark and trade
secret laws and restrictions on disclosure to protect our intellectual property
rights. We currently hold approximately 390 US and foreign patents, and we have
approximately 210 additional pending patent applications that have been filed.
The issued patents cover various products in all of the major markets that we
serve.

         As part of our acquisition of Star Medical in December 1999, we
acquired a non-exclusive sublicense of a patent that covers a method for hair
removal using contact cooling. Under the terms of the sublicense agreement, we
pay royalties at a rate equal to 7.5% of net product sales of the LIGHTSHEER
product family.

         We cannot assure you that our patent applications will be approved,
that any patents that may issue will protect our intellectual property or that
any issued patents will not be challenged by third parties. Other parties may
independently develop similar or competing technology or design around any
patents that may be issued to us. We cannot be certain that the steps we have
taken will prevent the misappropriation of our intellectual property,
particularly in foreign countries where the laws may not protect our proprietary
rights as fully as in the United States.

         We believe that we own or have the right to use the basic patents
covering our products. However, the laser industry is characterized by a very
large number of patents, many of which are of questionable validity and some of
which appear to overlap with other issued patents. As a result, there is a
significant amount of uncertainty in the industry regarding patent protection
and infringement. Because patent applications are maintained in secrecy in the
United States until such patents are issued and are maintained in secrecy for a
period of time outside the United States, we can conduct only limited searches
to determine whether our technology infringes any patents or patent applications
of others.

         In recent years, there has been a significant amount of litigation in
the United States involving patents and other intellectual property rights. In
the future, we may be a party to litigation to protect our intellectual property
or as a result of an alleged infringement of others' intellectual property.
These claims and any resulting lawsuit, if successful, could subject us to
significant liability for damages and invalidation of our proprietary rights.
These lawsuits, regardless of their success, would likely be time-consuming and
expensive to resolve and would divert management time and attention. Any
potential intellectual property litigation also could force us to do one or more
of the following:

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

- -        obtain from the owner of the infringed intellectual property right a
         license to sell or use the relevant technology, which license may not
         be available on reasonable terms, or at all; or

- -        redesign the products that use the technology.

         If we are forced to take any of these actions, our business may be
seriously harmed. Although we carry general liability insurance, our insurance
may not cover potential claims of this type or may not be adequate to indemnify
us for all liability that may be imposed.

         We may in the future initiate claims or litigation against third
parties for infringement of our proprietary rights to protect these rights or to
determine the scope and validity of our proprietary rights or the proprietary
rights of competitors. These claims could result in costly litigation and the
diversion of our technical and management personnel.

COMPETITION

         Competition in the various laser markets in which we provide products
is very intense. In the semiconductor and related manufacturing market, we
compete against a number of companies, including SDL, Inc., Spectra-Physics
Lasers, Inc., Cymer, Inc. and Gigaphoton. In the optical telecommunications
market, we compete, or expect to compete, against SDL, Inc., JDS Uniphase
Corporation and Spectra-Physics Lasers, Inc., among others. Our medical products
compete against products offered by ESC

                                       24


Medical Systems Ltd., Candela Corporation and The Carl Zeiss Group, among
others. Some of our competitors are large companies that have significant
financial, technical, marketing and other resources. These competitors may be
able to devote greater resources than we can to the development, promotion, sale
and support of their products. Several of our competitors have large market
capitalizations or cash reserves, and are much better positioned than we are to
acquire other companies in order to gain new technologies or products that may
displace our product lines. Any of these acquisitions could give our competitors
a strategic advantage. Any business combinations or mergers among our
competitors, forming larger competitors with greater resources, could result in
increased competition, price reductions, reduced margins or loss of market
share, any of which could materially and adversely affect our business, results
of operations and financial condition.

         Additional competitors may enter the market, and we are likely to
compete with new companies in the future. We expect to encounter potential
customers that, due to existing relationships with our competitors, are
committed to the products offered by these competitors. As a result of the
foregoing factors, we expect that competitive pressures may result in price
reductions, reduced margins and loss of market share.

GOVERNMENT REGULATION

MEDICAL DEVICE REGULATION
- -------------------------

         Our medical products are subject to various federal, state and
international rules and regulations governing the medical products industry. In
the United States, we are subject to the federal regulation by the Food and Drug
Administration, or FDA, pursuant to the Federal Food, Drug and Cosmetic Act. The
FDA regulates the clinical testing, manufacture, labeling, sale, distribution
and promotion of medical devices.

         The FDA classifies medical devices into one of three classes on the
basis of the controls deemed to be necessary to reasonably ensure their safety
and effectiveness:

- -        Class I--general controls--including labeling, pre-market
         notification and adherence to good manufacturing practices, or GPM,
         quality system regulation;

- -        Class II--general controls and special controls--including
         performance  standards  and  post-market surveillance; and

- -        Class III--pre-market approval.

         Before being introduced into the market, our products must obtain
market clearance through either the 510(k) pre-market notification process or
the pre-market approval, or PMA, application process. Approvals may include
clinical testing, limitations on the number of sales, controls of end-user
purchase price and controls on the extent of product commercialization. A 510(k)
clearance typically will be granted if a company demonstrates to the FDA that
its device is substantially equivalent in intended use, safety and effectiveness
to a legally marketed Class I or II medical device or to a Class III device
marketed prior to 1976 for which the FDA has not yet required the submission of
a PMA. In some cases, clinical trials may be required to support a claim of
substantial equivalence. It generally takes from four to 12 months from the date
of submission to obtain clearance of a 510(k) submission, but it may take
longer.

         After a device receives 510(k) clearance, any modification that could
significantly affect its safety or effectiveness, or that would constitute a
major change in its intended use, requires a new 510(k) clearance or could
require a PMA approval. The FDA requires each manufacturer to make this
determination in the first instance, but the FDA can review such decision. If
the FDA disagrees with the manufacturer's decision, the agency may retroactively
require the manufacturer to seek 510(k) clearance or PMA approval. The FDA also
can require the manufacturer to cease marketing and/or recall the modified
device until clearance or approval is obtained.

         If a medical device does not qualify for the 510(k) pre-market
notification process, a company must file a PMA application. The PMA application
process requires more extensive pre-filing testing than required for a 510(k)
pre-market notification and is more costly, lengthy and uncertain. The PMA
application process requires the manufacturer to prove the safety and
effectiveness of the device to the FDA's satisfaction through extensive
pre-clinical and clinical trial data, as well as information about the device
and its components, including, among other things, device design, manufacturing
and labeling.

                                       25


After any PMA approval, a new PMA application or PMA supplement is required in
the event of certain modifications to the device, its labeling, intended use or
indication, or its manufacturing process.

ADDITIONAL FDA REGULATION
- -------------------------

         Numerous regulatory requirements apply to our marketed devices. These
requirements include the FDA's quality system regulation, or QSR, which requires
manufacturers to follow elaborate design testing, control, documentation and
other quality assurance procedures; the Medical Device Reporting regulation,
which requires that manufacturers report to the FDA certain types of adverse
events involving their products; and labeling regulations, which prohibit
promotion of products for unapproved or off-label uses. Unanticipated changes in
existing regulatory requirements or adoption of new requirements could hurt our
business, financial condition and results of operations.

         Compliance with regulatory requirements is expensive and
time-consuming. Non-compliance with applicable requirements can result in, among
other things, fines, injunctions, civil penalties, recall or seizure of
products, total or partial suspension of production, failure of the government
to grant pre-market clearance or pre-market approval for devices, withdrawal of
marketing approvals and criminal prosecution. The FDA also has the authority to
require that we repair, replace, recall or withdraw our existing products from
the market.

         Our medical products are also subject to state and local laws and
additional similar regulations in most of the international markets in which we
sell our products. Our competitors in the medical device field are subject to
the same regulations.

         Changes to existing US or international medical rules and regulations
could adversely affect our ability to sell our current line of medical products
in the United States and internationally, could increase our costs resulting
from FDA-mandated repair, replacement or recall programs and could materially
adversely impact our results of operations.

ENVIRONMENTAL REGULATION
- ------------------------

         Our operations are also subject to various federal, state and local
environmental protection regulations governing the use, storage, handling and
disposal of hazardous materials, chemicals, various radioactive materials and
certain waste products. In the United States, we are subject to the federal
regulation and control of the Environmental Protection Agency. Comparable
authorities are involved in other countries. We believe that compliance with
federal, state and local environmental protection regulations will not have a
material adverse effect on our capital expenditures, earnings and competitive
and financial position.

         Although we believe that our safety procedures for using, handling,
storing and disposing of such materials comply with the standards required by
state and federal laws and regulations, we cannot completely eliminate the risk
of accidental contamination or injury from these materials.

BACKLOG

         At September 30, 2000, our backlog of orders scheduled for shipment was
approximately $173.8 million, compared to $101.6 million at October 2, 1999 and
$87.8 million at September 26, 1998. Orders used to compute backlog are
generally cancelable without substantial penalties. Historically, the rate of
cancellation experienced by us has not been significant; however, since orders
are cancelable, the backlog of orders, at any one time, is not necessarily
indicative of future revenues. We anticipate filling the present backlog within
the next 12 months. Backlog at September 30, 2000 was higher than backlog at
October 2, 1999 in the Electro-Optics and Lambda Physik reportable business
segments. Backlog at October 2, 1999 was higher than at September 26, 1998, in
all three operating segments.

EMPLOYEES

         As of September 30, 2000, we had 2,839 full-time employees.
Approximately 353 are involved in research and development, 1,323 in operations,
manufacturing and quality assurance, and 1,163 in finance, legal, sales,
marketing and other administrative functions. Our success will depend in large
part upon our ability to attract and retain employees. We face competition in
this regard from other companies, research and academic institutions, government
entities and other organizations.

                                       26


FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES

        Financial information relating to foreign and domestic operations for
the three years ended September 30, 2000, is set forth in Note 13, "Operating
Segments", of the Notes to Consolidated Financial Statements.

ITEM 2.  PROPERTIES

         At the end of fiscal 2000, our primary locations were as follows:

         Our corporate headquarters and major Electro-Optics facility is located
in Santa Clara, California, consisting of approximately 8.5 acres of land and a
200,000 square-foot building that we own.

         Additional Electro-Optics facilities are located in Auburn, California.
The Auburn facilities consist of two 60,000 square-foot buildings and a
50,000-square-foot building, all of which we own, as well as a 1,500-
square-foot building leased under a short-term lease.

         Our principal Medical products facility is located in Santa Clara,
California consisting of a building of approximately 216,000 square feet of
floor area leased until December 2001.

         Our Star Medical facility is located in Pleasanton, California
consisting of five buildings totaling 30,299 square feet with leases expiring
from 2002 to 2004.

         During fiscal 1993, we sold the net assets of Coherent General, Inc.
The sale did not include land consisting of approximately 36 acres (11 developed
acres) and facilities consisting of a 58,000-square-foot building owned by us in
Sturbridge, Massachusetts. This building is currently leased (through December
2002) to Convergent Prima, Inc.

         Lambda Physik GmbH's facility in Gottingen, Germany consists of four
owned buildings totaling 119,500 square feet on 7.1 acres of owned land.

         Lambda Physik's domestic facility is located in Fort Lauderdale,
Florida, consisting of a 28,312-square-foot building leased until August 2002.

         Lambda Physik Japan's facilities are located in Yokohama, Japan,
consisting of a 7,081-square-foot building leased through October 2002 and a
1,478-square-foot building leased through October 2002.

         Coherent GmbH's facility in Dieburg, Germany consists of a
33,598-square-foot building leased until February 2003 with a five year renewal
option.

         Coherent Lubeck's facility in Lubeck, Germany consists of a
30,694-square-foot building leased through September 2002.

         Coherent Optics Europe Ltd.'s facilities consist of two leased
buildings (four units) in Leicester, England totaling 34,537 square feet leased
until 2007.

         Coherent Ealing Electro-Optics Ltd.'s facility consists of one owned
building in Watford, England totaling 37,900 square feet on 1.6 acres of owned
land.

         Coherent Tutcore's facility is located in Tampere, Finland where they
manufacture semiconductor wafers. The facility is 21,464 square feet and is
leased through December 2000, at which time we are exercising our option to
purchase the building for $1.0 million.

         Coherent Japan's facilities include 40,113 square feet consisting of
four buildings leased until January 2002.

         During fiscal 2000, we acquired Microlase Optical Systems, Ltd.
(Coherent Scotland) in Glasgow, Scotland and Lasertec BV in Barendrecht,
Netherlands. Coherent Scotland's facility consists of a 5,000-square-foot
building that we own. Lasertec's facility consists of a 3,210-square-foot
building leased until January 2003 with a 5 year renewal option.

         We maintain sales and service offices under varying leases expiring
from 2003 through 2014 in France, Italy, the United Kingdom and the Netherlands,
and under short-term leases in Mexico, Hong Kong, Sweden, Japan and the People's
Republic of China.

                                       27


         In general, our facilities are considered both suitable and adequate to
provide for current and near term requirements.


ITEM 3.  LEGAL PROCEEDINGS

         We are not currently subject to any material legal proceedings.

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

         Not applicable.

                                       28

                                     PART II

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

         Our common stock is quoted on the Nasdaq National Market under the
symbol "COHR". The following table sets forth the high and low closing prices
for each quarterly period during the past two fiscal years as reported on the
Nasdaq National Market.



                                                           Quarters Ended
                    -------------------------------------------------------------------------------------------
                                   Fiscal 2000                                          Fiscal 1999
                    --------------------------------------------      -----------------------------------------
                     Jan. 1      Apr. 1      July 1    Sept. 30        Dec. 26    Apr. 3     July 3     Oct. 2
                    --------------------------------------------      -----------------------------------------
                                                                               
 Closing Price:
 High                $29.88     $106.00      $83.88     $89.19         $13.91     $16.88     $18.94     $22.31
 Low                 $18.38     $ 25.69      $46.63     $57.38         $ 7.75     $11.75     $12.25     $16.00


         The number of stockholders of record as of November 15, 2000 was 1,737.
No cash dividends have been declared or paid since Coherent was founded and we
have no present intention to declare or pay cash dividends. Our agreements with
the banks restrict the payment of dividends on its Common Stock. See Note 5,
"Short-term Borrowings", of Notes to Consolidated Financial Statements.

         On July 26, 2000, we completed a public offering of 1,500,000 shares of
common stock at an offering price of $65.00 per share. The net proceeds to us,
after deducting underwriting discounts and offering expenses was approximately
$91,852,000. These net proceeds will be used for acquisitions of or investments
in businesses, technologies and products, continued development of new
technologies and general corporate purposes.

         The Board of Directors declared a 2-for-1 stock split of its common
stock effected in the form of a 100% stock dividend distributed on March 2, 1998
to holders of record as of February 17, 1998. The financial statements, notes
and other references to share and per share data reflect the stock split for all
periods presented.

ITEM 6.  SELECTED CONSOLIDATED FINANCIAL DATA



                                                                     FISCAL YEARS ENDED
                                    ----------------------------------------------------------------------------
CONSOLIDATED FINANCIAL                     SEPT. 30,        OCT. 2,      SEPT. 26,      SEPT. 27,      SEPT. 28,
DATA                                        2000(4)         1999(3)       1998(2)        1997(1)          1996
- ----------------------------------------------------------------------------------------------------------------
                                                              (IN THOUSANDS, EXCEPT PER SHARE DATA)
                                                                                        
Net sales                                  $568,272       $468,869       $410,449       $391,038       $364,430
Gross profit                                278,217        218,675        196,496        204,543        186,605
Income from operations                       56,218         18,077         24,132         42,310         44,700
Net income                                 $ 69,937       $ 11,841       $ 18,811       $ 26,292       $ 30,314

Net income per share(5):
         Basic                             $   2.77       $   0.49       $   0.80       $   1.16       $   1.37
         Diluted                           $   2.56       $   0.48       $   0.79       $   1.12       $   1.31
Shares used in computation(5):
         Basic                               25,252         23,957         23,374         22,664         22,128
         Diluted                             27,319         24,633         23,749         23,480         23,084

Total assets                               $744,836       $495,468       $390,761       $361,650       $311,516
Long-term obligations                        68,647         74,745         12,828          9,665          3,921
Other long-term liabilities                  29,570         16,819         12,599         13,927         12,403
Minority interest in subsidiaries            48,855          3,945          3,664          4,348          2,738
Stockholders' equity                       $462,215       $277,305       $262,623       $231,233       $197,587


(1)      Includes a $9.0 million, or $0.38 per diluted share, after-tax charge
         for the write-off of purchased in-process research and development.

                                       29


(2)      Includes a $2.7 million, or $0.11 per diluted share, tax benefit
         associated with a favorable IRS ruling.

(3)      Includes a $10.7 million, or $0.44 per diluted share, after-tax charge
         for the write-off of purchased in-process research and development.

(4)      Includes a $33.5 million, or $1.23 per diluted share, after-tax gain
         on issuance of stock by our Lambda Physik subsidiary.

(5)      See Note 1 of Notes to Consolidated Financial Statements for an
         explanation of the determination of the number of shares used in
         computing net income per share.

                                       30


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

OVERVIEW

         We are one of the world's leading suppliers of photonics-based
solutions in a broad range of commercial, medical, scientific and telecom
markets. We design, manufacture and market lasers, laser-based systems,
precision optics and related accessories for a diverse group of customers. Since
inception in 1966, we have grown through a combination of internal expansion and
strategic acquisitions of companies with related technologies and products.

         We have three reportable business segments: Electro-Optics, Medical and
Lambda Physik, which work with customers to provide cost-effective
photonics-based solutions. In addition to the semiconductor and related
manufacturing and optical telecommunications markets, the Electro-Optics segment
focuses on markets such as materials processing, micro-machining, scientific
research, printing and reprographics and advanced packaging. Our Medical segment
focuses on the aesthetic, ophthalmic and surgical markets, with an emphasis in
the aesthetic market on hair removal and in the ophthalmic market on the
treatment of retinal diseases, including age-related macular degeneration, or
AMD. Lambda Physik focuses on lithography, with other target markets including
lasers for flat panel display, refractive surgery, scientific research,
materials processing and micro-machining applications.

         We operate in a technologically advanced, dynamic and highly
competitive environment. Our future operating results are, and will continue to
be, subject to quarterly variations based on a variety of factors, many of which
are beyond our control. While we attempt to identify and respond to these
conditions in a timely manner, such conditions represent significant risks to
our performance.

         We conduct a significant portion of our business internationally.
International sales accounted for 58%, 58% and 55% of our net sales for fiscal
2000, fiscal 1999 and fiscal 1998, respectively. We anticipate that
international sales will continue to account for a significant portion of our
net sales in the foreseeable future. A large portion of our international sales
occurs through our international sales subsidiaries and the remainder of our
international sales results from exports to foreign distributors and resellers.
As a result, our international sales and operations are subject to the risks of
conducting business internationally. See "Risk factors--We face risks
associated with our international sales that could harm our financial condition
and results of operations." We are also subject to the risks of fluctuating
foreign exchange rates, which could materially adversely affect the sales price
of our products in foreign markets as well as the costs and expenses of our
international subsidiaries. While we use forward exchange contracts, currency
swap contracts, currency options and other risk management techniques to hedge
our currency exposure, we remain exposed to the economic risks of foreign
currency fluctuations. There can be no assurance that such factors will not
adversely impact our operations in the future or require us to modify current
business practices.

RESULTS OF OPERATIONS - FISCAL YEARS ENDED SEPTEMBER 30, 2000, OCTOBER 2, 1999
AND SEPTEMBER 26, 1998

CONSOLIDATED SUMMARY
- --------------------

         During fiscal 2000, our net income was $69.9 million, or $2.56 per
diluted share, which includes the fourth quarter $33.5 million, or $1.23 per
diluted share, after-tax gain (the Lambda gain) as a result of an increase in
the value of our 60.4% ownership interest in Lambda Physik following its initial
public offering. Pro forma net income, exclusive of the Lambda gain, for fiscal
2000 was $36.4 million, or $1.33 per diluted share. During fiscal 1999, our net
income was $11.8 million, or $0.48 per diluted share, which includes the third
quarter $10.7 million, or $0.44 per diluted share, after tax write-off of
purchased in-process research and development (IPR&D) resulting from the
acquisition of Star Medical. Pro forma net income, exclusive of this write-off,
for fiscal 1999 was $22.6 million, or $0.92 per diluted share. Fiscal 1998 net
income was $18.8 million, or $0.79 per diluted share, including a $2.7 million,
or $0.11 per diluted share, non-recurring tax benefit.

         Pro forma income before income taxes and minority interest, excluding
the Lambda gain, increased by $23.9 million, or 72%, to $57.3 million for fiscal
2000 compared to pro forma income before income taxes and minority interest,
excluding the write-off of IPR&D, of $33.3 million in fiscal 1999, which
increased by $8.7 million, or 35%, compared to income before income taxes and
minority interest of $24.6

                                       31


million for fiscal 1998. The fiscal 2000 increase was primarily attributable to
increases in sales volumes and higher gross profit as a percentage of sales. The
fiscal 1999 increase over fiscal 1998 was primarily attributable to increases in
international sales volumes and lower selling, general and administrative
expenses as a percentage of net sales.

NET SALES

         The following table sets forth for the periods indicated the amount of
net sales for our operating segments and net sales as a percentage of total net
sales.



                                                         FISCAL YEARS ENDED
                       ------------------------------------------------------------------------------------------
                             SEPT. 30, 2000                 OCT. 2, 1999                  SEPT. 26, 1998
                       ---------------------------  -----------------------------  ------------------------------
                                      PERCENTAGE                     PERCENTAGE                    PERCENTAGE
                                       OF TOTAL                       OF TOTAL                      OF TOTAL
                           AMOUNT      NET SALES          AMOUNT      NET SALES       AMOUNT        NET SALES
                                                          (Dollars in thousands)
- ---------------------------------------------------------------------------------------------------------------
                                                                                  
Consolidated:
     Domestic             $236,091        41.5%          $198,599        42.4%       $185,004         45.1%
     International         332,181        58.5%           270,270        57.6%        225,445         54.9%
                          ---------      ------          ---------      ------       ---------       ------
     Total                $568,272       100.0%          $468,869       100.0%       $410,449        100.0%
                          =========      ======          =========      ======       =========       ======


Electro-Optics:
     Domestic             $114,962        20.2%          $ 95,399        20.3%       $ 87,119         21.2%
     International         154,522        27.2%           137,658        29.4%        106,319         25.9%
                          ---------      ------          ---------      ------       ---------       ------
     Total                $269,484        47.4%          $233,057        49.7%       $193,438         47.1%
                          =========      ======          =========      ======       =========       ======

Medical:
     Domestic             $100,600        17.7%           $82,433        17.6%       $ 78,893         19.3%
     International         104,441        18.4%            80,286        17.1%         76,797         18.7%
                          ---------      ------          ---------      ------       ---------       ------
     Total                $205,041        36.1%          $162,719        34.7%       $155,690         38.0%
                          =========      ======          =========      ======       =========       ======

Lambda Physik:
     Domestic             $ 20,529         3.6%          $ 20,767         4.5%       $ 18,992          4.6%
     International          73,218        12.9%            52,326        11.1%         42,329         10.3%
                          ---------      ------          ---------      ------       ---------       ------
     Total                $ 93,747        16.5%          $ 73,093        15.6%       $ 61,321         14.9%
                          =========      ======          =========      ======       =========       ======


CONSOLIDATED

         During fiscal 2000, net sales increased by $99.4 million, or 21%, to
$568.3 million from $468.9 million in fiscal 1999, primarily as a result of
higher sales volumes in all three operating segments. International sales grew
at a higher rate than domestic sales for a total increase of $61.9 million, or
23%. In particular, Asia-Pacific sales increased by 25% while European sales
increased 17%. International sales were 58% of net sales in both fiscal 2000 and
fiscal 1999.

         During fiscal 1999, net sales increased by $58.5 million, or 14%, to
$468.9 million from $410.4 million in fiscal 1998, primarily as a result of
increased sales volumes in the Electro-Optics and Lambda Physik segments.
International sales grew at a higher rate than domestic sales for a total
increase of $44.8 million, or 20%. In particular, Asia-Pacific sales increased
by 26% while European sales increased 16%. The increase in Asia-Pacific sales
resulted primarily from economic recovery in that region. Accordingly,
international sales were 58% of net sales in fiscal 1999 compared to 55% in
fiscal 1998.

ELECTRO-OPTICS

         Electro-Optics net sales increased by $36.4 million, or 16%, in fiscal
2000 to $269.5 million from $233.1 million in fiscal 1999. Domestic sales
increased by $19.5 million, or 21%, and international sales increased by $16.9
million, or 12%, in fiscal 2000. Sales increased primarily due to higher sales
volumes in commercial solid state products, including semiconductor lasers to
the non-metal printed circuit board

                                       32


or PCB, hole drilling, optical telecommunications and computer-to-plate markets.
Fiscal 2000 optical telecommunications market sales increased 164% to $11.3
million from the prior year.

         Electro-Optics net sales increased by $39.7 million, or 20%, in fiscal
1999 to $233.1 million from $193.4 million in fiscal 1998. Domestic sales
increased by $8.3 million, or 10%, and international sales increased by $31.3
million, or 29%, in fiscal 1999. Sales increased primarily due to higher sales
volumes in commercial solid-state products and in commercial systems.

MEDICAL

         Medical net sales increased by $42.3 million, or 26%, to $205.0
million in fiscal 2000 from $162.7 million in fiscal 1999. International
sales increased by $24.1 million, or 30%, and domestic sales increased by
$18.2 million, or 22%, in fiscal 2000. This increase in sales was primarily
due to strong sales growth in Ophthalmic products, including the OPAL-TM-
Photoactivator-TM- which received FDA clearance on ApriL 13, 2000, and due to
the acquisition of Star Medical in May 1999, where we now recognize the full
sales value of the LightSheer-TM-family of hair removal systems instead of
only the commission revenue recognition through May 1999.

         Medical net sales increased by $7.0 million, or 5%, to $162.7 million
in fiscal 1999 from $155.7 million in fiscal 1998. International sales increased
by $3.5 million, or 5%, and domestic sales increased by $3.5 million, or 4%, in
fiscal 1999. This increase in sales was primarily due to an increase of almost
$28 million in sales of LightSheer hair removal systems partially offset by
lower sales of non-hair removal aesthetic products and the expiration of our
agreement to distribute ophthalmic refractive systems for a German manufacturer.

LAMBDA PHYSIK

         Lambda Physik net sales increased by $20.6 million, or 28%, in fiscal
2000 to $93.7 million from $73.1 million in fiscal 1999. International sales
increased by $20.9 million, or 40%, while domestic sales decreased by $0.3
million, or 1%. The increase in sales was primarily due to increased shipments
of commercial products, primarily lasers used in lithography systems.

         Lambda Physik net sales increased by $11.8 million, or 19%, in fiscal
1999 to $73.1 million from $61.3 million in fiscal 1998. International sales
increased by $10.0 million, or 24%, and domestic sales increased by $1.8
million, or 9%. The increase in sales was primarily due to increased shipments
of commercial products, primarily lasers used in lithography systems.

GROSS MARGIN

CONSOLIDATED

         The gross margin rate increased to 49.0% for fiscal 2000 compared to
46.6% for fiscal 1999. The increase in the overall margin resulted primarily
from higher sales volumes, lower warranty expenses and lower inventory
provisions in the Electro-Optics segment and higher sales and increased sales of
higher margin OPAL and hair removal systems in the Medical segment.

         The gross margin rate decreased to 46.6% for fiscal 1999 compared to
47.9% for fiscal 1998. The deterioration in the overall margin resulted
primarily from higher sales of lower margin lithography systems at Lambda Physik
and inventory obsolescence write-downs of $1.3 million in the Lambda Physik
segment.

ELECTRO-OPTICS

         The gross margin rate increased by 3.7% to 50.6% in fiscal 2000 from
46.9% in fiscal 1999. The increase was primarily due to increased sales of
higher margin commercial solid-state products, higher sales volumes relative to
fixed overhead costs and higher sales volume without corresponding increases in
warranty expense and inventory provisions.

         The gross margin rate decreased by 0.3% to 46.9% in fiscal 1999 from
47.2% in fiscal 1998. The decrease was primarily due to increased inventory
obsolescence write-downs for our catalog business, partially offset by higher
sales volumes without a corresponding increase in fixed costs.

                                       33


MEDICAL

         The gross margin rate increased by 1.6% to 49.9% in fiscal 2000 from
48.3% in fiscal 1999. The improvement was primarily due to higher sales and a
better mix of product sales, primarily our OPAL Photoactivator to treat the "wet
classical" form of age-related macular degeneration and our hair removal
systems.

         The gross margin rate decreased by 0.2% to 48.3% in fiscal 1999 from
48.5% in fiscal 1998. The decrease was primarily due to lower sales of higher
margin aesthetic products.

LAMBDA PHYSIK

         The gross margin rate was flat, decreasing 0.1% to 41.9% in fiscal 2000
from 42.0% in fiscal 1999.

         The gross margin rate decreased to 42.0% in fiscal 1999 from 48.3% in
fiscal 1998. The decrease from fiscal 1998 resulted primarily from higher sales
of lower margin lithography systems, lower average selling prices for sales of
scientific products and additional provisions for inventory obsolescence of $1.3
million.

OPERATING EXPENSES



                                                          FISCAL YEARS ENDED
                             -----------------------------------------------------------------------------
                                  SEPT. 30, 2000             OCT. 2, 1999            SEPT. 26, 1998
                             ------------------------- ------------------------ --------------------------
                                           PERCENTAGE               PERCENTAGE                PERCENTAGE
                                           OF TOTAL                  OF TOTAL                  OF TOTAL
                                AMOUNT     NET SALES      AMOUNT     NET SALES     AMOUNT      NET SALES
                                                       (Dollars in thousands)
- ----------------------------------------------------------------------------------------------------------
                                                                              
Research and development        $ 57,436     10.1%       $ 46,759      10.0%      $ 44,534       10.9%
In-process research and
    development                                            16,000       3.4%
Selling, general and
    administrative               155,626     27.4%        132,138      28.2%       123,186       30.0%
Intangibles amortization           8,937      1.6%          5,701       1.2%         4,644        1.1%
                                --------     -----       --------      -----      --------       -----
Total operating expenses        $221,999     39.1%       $200,598      42.8%      $172,364       42.0%
                                ========     =====       ========      =====      ========       =====


         Fiscal 2000 operating expenses increased by $21.4 million, or 11%, from
fiscal 1999. As a percentage of net sales, operating expenses decreased to 39.1%
in fiscal 2000 from 42.8% in fiscal 1999. Exclusive of the third quarter fiscal
1999 write-off of purchased in-process research and development, operating
expenses increased by $37.4 million, or 20%, but as a percentage of net sales
decreased to 39.1% from 39.4%.

         Fiscal 1999 operating expenses increased by $28.2 million, or 16%, from
fiscal 1998. As a percentage of net sales, operating expenses increased to 42.8%
in fiscal 1999 from 42.0% in fiscal 1998. Exclusive of the third quarter fiscal
1999 write-off of purchased in-process research and development, operating
expenses increased by $12.2 million, or 7%, but as a percentage of net sales
decreased to 39.4% from 42.0%.

RESEARCH AND DEVELOPMENT

         Fiscal 2000 research and development expenses increased by $10.7
million, or 23%, from fiscal 1999 and increased to 10.1% from 10.0% of net
sales. The increase was primarily due to increased spending on lithography,
optical telecommunication and other projects, the acquisition of Star Medical in
May 1999 and an increased number of employees.

         Fiscal 1999 research and development expenses increased by $2.2
million, or 5%, from fiscal 1998 but decreased to 10.0% from 10.9% of net sales.
The absolute dollar increase was primarily due to increased headcount and
spending on projects in the Electro-Optics segment.

                                       34


IN-PROCESS RESEARCH AND DEVELOPMENT

         Fiscal 1999 in-process research and development expenses of $16.0
million resulted from our acquisition of Star Medical. See Note 2 of Notes to
Consolidated Financial Statements.

SELLING, GENERAL AND ADMINISTRATIVE

         Fiscal 2000 selling, general and administrative expenses increased by
$23.5 million, or 18%, from fiscal 1999, but decreased as a percentage of net
sales from 28.2% to 27.4%. The dollar increase was primarily due to higher
commissions as a result of higher sales, higher marketing expenses for new and
pending product introductions, increased investments in information technology
and higher payroll-related expenses.

         Fiscal 1999 selling, general and administrative expenses increased by
$9.0 million, or 7%, from fiscal 1998, but decreased as a percentage of net
sales from 30.0% to 28.2%. The dollar increase was primarily due to increases in
the number of employees and related payroll costs in the Electro-Optics segment
to support increased sales volumes. This dollar increase was also due in part to
increased investments in information technology, outside consulting costs and
increased payroll related costs offset partially by the non-recurrence of fiscal
1998 charges, which included:

       - restructuring costs of $2.9 million related to the Medical segment;

       - the relocation of the Medical segment to a new facility; and

       - the costs associated with launching an Electro-Optics catalog.

INTANGIBLES AMORTIZATION

         Fiscal 2000 intangibles amortization expenses increased by $3.2
million, or 57%, primarily due to the acquisition of Star Medical.

         Fiscal 1999 intangibles amortization expenses increased by $1.1
million, or 23%, primarily due to the acquisition of Star Medical.

OTHER INCOME (EXPENSE)

         Other income, net of other expenses, increased by $56.9 million during
fiscal 2000 compared to fiscal 1999. The increase was primarily due to our $55.1
million gain as a result of an increase in the value of our ownership interest
in Lambda Physik AG following its initial public offering as well as increased
interest income on increased investments and non-recurrence of other
miscellaneous expenses, partially offset by increased interest expense on the
Star acquisition debt. Our ownership interest in Lambda Physik decreased from
80.0% to 60.4% as a result of the initial public offering.

         Other expenses, net of other income, increased by $1.2 million during
fiscal 1999 compared to fiscal 1998. The increase was primarily due to increased
interest expense related to financing of the Star Medical acquisition, partially
offset by increased interest income.

MINORITY INTEREST IN SUBSIDIARIES EARNINGS

         Minority interest in subsidiaries earnings increased by $0.8 million
during fiscal 2000 compared to fiscal 1999. The increase was primarily due to
the increased profitability of our Lambda Physik subsidiaries and our Tutcore
subsidiary.

         Minority interest in subsidiaries earnings increased by $0.2 million
during fiscal 1999 compared to fiscal 1998. The increase was primarily due to
the liquidation of our investment in CFX Communications and increased
profitability of our Tutcore subsidiary, partially offset by decreased
profitability of our Lambda Physik subsidiaries.

INCOME TAXES

         The effective tax rate for fiscal 2000 was 36.1%. The pro forma tax
rate for fiscal 2000, excluding the $33.5 million after-tax gain on the issuance
of Lambda Physik subsidiary stock was 33.1%. The pro

                                       35


forma effective tax rate for fiscal 1999, excluding the $10.7 million after-tax
write-off of purchased in-process research and development, was 29.0%. The pro
forma effective tax rate increased as a result of higher profit before income
taxes in fiscal 2000, changes in the distribution of taxable income among
jurisdictions with varying rates offset by higher foreign tax credits.

         The effective tax rate for fiscal 1999 was 25.3% and the pro forma
effective tax rate for fiscal 1999, excluding the $10.7 million write-off of
purchased in-process research and development, was 29.0%. The pro forma
effective tax rate for fiscal 1998, excluding the $2.7 million non-recurring tax
benefit, was 30.9%. The pro forma effective tax rate decreased as a result of
the non-recurrence of reserves for exposure items offset by changes in the
distribution of taxable income among jurisdictions with varying tax rates.

FINANCIAL CONDITION

LIQUIDITY AND CAPITAL RESOURCES

         At September 30, 2000, our primary sources of liquidity were cash, cash
equivalents and short-term investments of $258.2 million. Additional sources of
liquidity were a multi-currency line of credit and bank credit facilities
totaling $71.8 million as of September 30, 2000, of which $68.6 million was
unused and available. During fiscal 2000, these credit facilities were used in
Japan and Europe. Because of our low debt to equity ratio, we believe that
additional cash could be borrowed if necessary; however, cash flow from
operations, cash and equivalents, short-term investments and available lines of
credit are expected to be sufficient to fund operations for at least the next 12
months. We are subject to certain financial covenants related to our lines of
credit. At September 30, 2000, we were in compliance with these covenants.

         During the first quarter of fiscal 1997, we signed a lease for 216,000
square feet of office, research and development and manufacturing space for our
Medical segment headquarters in Santa Clara, California. The lease expires in
December 2001. We have an option to purchase the property for $24.0 million, or
at the end of the lease arrange for the sale of the property to a third party
while retaining an obligation to the owner for the difference between the sale
price, if less than $20.8 million, and $20.8 million, subject to certain
provisions of the lease. If we do not purchase the property or arrange for its
sale as discussed above, we would be obligated for an additional lease payment
of approximately $20.8 million. We occupied the building in July 1998 and
commenced lease payments at that time. The lease requires that we maintain
specified financial covenants. At September 30, 2000, we were in compliance with
these covenants.

         We have committed approximately $26 million to build an additional
building at our Electro-Optics facility in Auburn, California to enable us to
expand our manufacturing capacity for optical telecommunications products and to
provide coating equipment at this facility. At September 30, 2000, $6 million
had been spent on this project. We have also committed approximately $10 million
to expand our Lambda Physik manufacturing facility in Gottingen, Germany to
expand our manufacturing capacity for DUV lithography systems. We have committed
approximately $10 million at our Electro-Optics facility in Tampere, Finland to
setup a separate facility for the growth and development of telecommunications
products.

         In September 1997, Coherent signed a lease for 17,438 square feet of
office and manufacturing space in Tampere, Finland for the Semiconductor
Division of its Electro-Optics segment. The lease agreement contained an option
for us to purchase the building in December 2000 for $1,040,000. During fiscal
2000, we signed an agreement to exercise the option and purchase the building in
December 2000.

CHANGES IN FINANCIAL CONDITION

         Cash, cash equivalents and short-term investments increased $189.3
million, or 275%, in fiscal 2000.

         Cash and cash equivalents, at September 30, 2000, increased by $120.2
million, or 314%, from October 2, 1999. Operations and changes in exchange rates
used $43.9 million, including $69.1 million, net, used to purchase short-term
investments. Investing activities used $33.9 million, including $33.0 million
used to acquire property and equipment, net, $4.4 million used to acquire
businesses and $3.5 million, net, used for other investing activities. Financing
activities provided $194.5 million with net proceeds of $92.7 million from the
initial public offering of our Lambda Physik AG subsidiary, net proceeds

                                       36


of $91.9 million from our secondary offering, $17.8 million from the sale of
shares under our employee stock plans and other, $2.0 million, offset by net
debt repayments of $9.9 million.

         Net accounts receivable increased $17.4 million, or 18%, from October
2, 1999 to September 30, 2000 primarily due to increases in the Medical and
Electro-Optics segments as a result of increased sales volumes.

         Net inventories increased $28.1 million, or 29%, from October 2, 1999
to September 30, 2000 primarily due to increases in the Lambda Physik segment to
support the lithography business and due in part to increases in the
Electro-Optics and Medical segments to support increased sales.

         Net property, plant and equipment increased $12.6 million, or 14%, from
October 2, 1999 to September 30, 2000 primarily due to investments in increased
production facilities and equipment in our optical telecommunications business
in the Electro-Optics segment and our lithography business in the Lambda Physik
segment.

         Short-term borrowings decreased $10.2 million, or 71%, from October 2,
1999 to September 30, 2000 primarily due to increased cash available to pay down
borrowings in international subsidiaries, particularly due to Lambda Physik's
initial public offering.

         Trade accounts payable increased $10.9 million, or 60%, from October 2,
1999 to September 30, 2000 primarily due to increased inventory levels and other
purchases to support increased sales volumes.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

INTEREST RATE SENSITIVITY

         We maintain a short-term investment portfolio consisting mainly of
income securities with an average maturity of less than one year. These trading
securities are subject to interest rate risk and will fall in value if market
interest rates increase. If market interest rates were to increase immediately
and uniformly by 10 percent from levels at September 30, 2000, the fair value of
the portfolio would decline by an immaterial amount. We have the ability to
generally hold our fixed income investments until maturity and therefore we
would not expect our operating results or cash flows to be affected to any
significant degree by the effect of a sudden change in market interest rates on
our securities portfolio.

         At September 30, 2000, we had fixed rate long-term debt of
approximately $72.7 million, and a hypothetical 10% decrease in interest rates
would not have a material impact on the fair market value of this debt. We do
not hedge any interest rate exposures.

FOREIGN CURRENCY EXCHANGE RISK

         We maintain operations in various countries outside of the United
States and foreign subsidiaries that sell and manufacture our products in
various global markets. As a result, our earnings and cash flows are exposed to
fluctuations in foreign currency exchange rates. We attempt to limit these
exposures through operational strategies and financial market instruments. We
utilize hedge instruments, primarily forward contracts with maturities of twelve
months or less, to manage our exposure associated with firm intercompany and
third-party transactions and net asset and liability positions denominated in
non-functional currencies. We do not use derivative financial instruments for
trading purposes.

         We had $24.4 million of short-term forward exchange contracts,
denominated in major foreign currencies, which approximated the fair value of
such contracts and their underlying transactions at September 30, 2000. Gains
and losses related to these instruments at September 30, 2000 were not material.
Looking forward, we do not anticipate any material adverse effect on our
consolidated financial position, results of operations or cash flows resulting
from the use of these instruments. There can be no assurance that these
strategies will be effective or that transaction losses can be minimized or
forecasted accurately.

         The following table provides information about our foreign exchange
forward contracts at September 30, 2000. The table presents the value of the
contracts in US dollars at the contract exchange rate as of the contract
maturity date. Due to the short-term nature of these contracts, the fair value
approximates the weighted average contractual foreign currency exchange rate
value of the contracts at September 30, 2000.

                                       37


Forward contracts to sell (buy) foreign currencies for U.S. dollars (in
thousands, except contract rates):



                                         AVERAGE CONTRACT     US NOTIONAL
                                               RATE              AMOUNT            FAIR VALUE
                                         ----------------     -----------          ----------
                                                                          
Euro                                          0.989             $10,113              $9,027
British Pound Sterling                        1.572               7,830               7,353
Swedish Krone                                 8.982               4,275               3,986
Japanese Yen                                102.533               1,756               1,664
Hong Kong Dollar                              7.792               1,591               1,590
Norwegian Kroner                              8.867                 406                 397
Danish Kroner                                 8.022                 374                 355


RECENT ACCOUNTING PRONOUNCEMENTS

         In December 1999, the staff of the SEC issued Staff Accounting Bulletin
No. 101, "Revenue Recognition in Financial Statements," or SAB 101. SAB 101, as
amended, summarizes certain of the SEC's views in applying generally accepted
accounting principles, or GAAP, to revenue recognition in financial statements.
We are required to adopt SAB 101 in the fourth quarter of fiscal 2001. Although
we believe that our revenue recognition policies are in accordance with GAAP, we
are currently studying SAB 101 and have not yet determined its impact, if any,
on our financial statements.

         In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement requires companies to record
derivatives on the balance sheet as assets or liabilities, measured at fair
value. Gains or losses resulting from changes in the value of those derivatives
would be accounted for depending on the use of the derivative and whether it
qualifies for hedge accounting. In May 1999, SFAS 133 was amended to defer its
effective date. SFAS 133 will be effective for our first quarter filing of
fiscal 2001. Adoption of this new accounting standard will result in a
cumulative after-tax increase in net income of approximately $0.3 million and
other comprehensive expense of approximately $0.4 million in the first quarter
of fiscal 2001.

 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

         See Item 14 (a) for an index to the Consolidated Financial Statements
and Supplementary Financial Information, which are attached hereto.

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

         Not Applicable.

                                       38

                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

         Information regarding our directors will be set forth under the caption
"Election of Directors--Nominees" in our proxy statement for use in connection
with the Annual Meeting of Stockholders to be held in March 2001, (the "2000
Proxy Statement") and is incorporated herein by reference. The 2000 Proxy
Statement will be filed with the Securities and Exchange Commission within 120
days after the end of our fiscal year.

         Set forth below is the name, age, position and a brief account of the
business experience of each of our executive officers:



        Name                                    Age                             Office Held
- -------------------------------------------------------------------------------------------------------------------
                                                                   
Bernard J. Couillaud, PhD                       56                       President and Chief Executive
                                                                         Officer

Robert J. Quillinan                             53                       Executive Vice President
                                                                         and Chief Financial Officer

John R. Ambroseo, PhD                           39                       Executive Vice President,
                                                                         President and General Manager,
                                                                         Coherent Photonics Group

Vittorio Fossati-Bellani, PhD                   53                       Executive Vice President,
                                                                         President and General Manager,
                                                                         Coherent Telecom-Actives Group

James Taylor                                    51                       Executive Vice President,
                                                                         President and General Manager,
                                                                         Coherent Medical Group

Kevin McCarthy                                  44                       Executive Vice President and
                                                                         Chief Information Officer

Ron Victor                                      55                       Executive Vice President,
                                                                         Human Resources

Dennis C. Bucek                                 55                       Senior Vice President,
                                                                         Treasurer and Assistant Secretary

Scott H. Miller                                 46                       Senior Vice President and General
                                                                         Counsel


         There are no family relationships between any of the executive officers
and directors.

         Dr. Couillaud has served as our President and Chief Executive Officer
as well as a member of our Board of Directors since July 1996. Dr. Couillaud
served as Vice President and General Manager of Coherent Laser Group from March
1992 to July 1996. From July 1990 to March 1992, Dr. Couillaud served as Manager
of our Advanced Systems Business Unit, and from September 1987 to July 1990, he
served as Director of Research & Development for the Coherent Laser Group. From
November 1983, when he joined us, to September 1987, Dr. Couillaud held various
managerial position with us. Dr. Couillaud received his PhD in Chemistry from
Bordeaux University, Bordeaux, France.

         Mr. Quillinan has served as our Executive Vice President and Chief
Financial Officer since July 1984. Mr. Quillinan served as Vice President and
Treasurer from March 1982 to July 1984 and as Corporate Controller from May 1980
to March 1982. Mr. Quillinan received his MS degree in Accounting from Clarkson
University and is a CPA.

         Dr. Ambroseo has served as our Executive Vice President and as
President and General Manager of the Coherent Photonics Group since September
2000. From September 1997 to September 2000, Dr. Ambroseo served as our
Executive Vice President and as President and General Manager of the Coherent
Laser Group. From March 1997 to September 1997, Dr. Ambroseo served as our
Scientific Business Unit

                                       39


Manager. From August 1988, when Dr. Ambroseo joined us, until March 1997, he
served as a Sales Engineer, Product Marketing Manager, National Sales Manager
and Director of European Operations. Dr. Ambroseo received his PhD in Chemistry
from the University of Pennsylvania.

         Dr. Fossati-Bellani has served as our Executive Vice President and as
President and General Manager of the Coherent Telecom-Actives Group since
September 2000. From September 1997 to September 2000, Dr. Fossati-Bellani
served as our Executive Vice President and as President and General Manager of
the Coherent Semiconductor Group. From May 1992 to September 1997, Dr.
Fossati-Bellani served as our Diode Laser Business Unit Manager. From December
1979, when he joined our Italian office, to May 1992, Dr. Fossati-Bellani served
in the capacity of Scientific Sales Engineer, Product Manager, Director of
Marketing, Director of Business Development, Scientific Business Unit Manager
and Diode Laser Business Unit Manager for the Coherent Laser Group. Dr.
Fossati-Bellani received his PhD degree in Physics from the University of
Milano, Italy.

         Mr. Taylor has served as our Executive Vice President and as President
and General Manager of the Coherent Medical Group since February 1999. From
April 1997 to February 1999, Mr. Taylor served as President and Chief Executive
Officer of Andros, Inc., an analytical instruments company headquartered in
Berkeley, California. From January 1995 through April 1997, Mr. Taylor served as
President of the Medical Systems Division of Ohmeda Medical, Inc., a
manufacturer of anesthesia delivery and monitoring systems and from April 1993
to December 1994 as Vice President, Marketing of the Medical Systems Division of
Ohmeda. Mr. Taylor received a BS degree from the US Naval Academy in 1970, a MS
degree from John Hopkins University in 1982 and attended the Stanford Executive
Institute.

         Mr. McCarthy was appointed our Executive Vice President and Chief
Information Officer in May 2000. From August 1999 to May 2000, he was Chief
Information Officer for Unisphere Solutions, Inc., a subsidiary of Siemens AG, a
large diversified industrial company. From September 1993 to July 1999, he was
Vice President Information Technology for General Instrument, Inc., a company
that develops and sells interactive video, voice and data products. Mr. McCarthy
received a BS degree from Lafayette College and an MBA from the Wharton School
of Business.

         Mr. Victor was appointed our Executive Vice President of Human
Resources in May 2000. From August 1999 to May 2000, he was our Corporate Vice
President of Human Resources. He was Vice President of Human Resources for the
Coherent Medical Group from September 1997 to August 1999. Between November 1996
and September 1997, he was Vice President Human Resources for Netsource
Communication, Inc., an internet advertisement and communication company. From
November 1995 to November 1996, Mr. Victor served as Vice President of Human
Resources for Micronics Computers, Inc., a manufacturer of computer components.
Between January 1982 and September 1995 he was Vice President of Human Resources
of Syntex, a pharmaceutical company. Mr. Victor received a BA degree from
American International College and a MA degree from Springfield College.

         Mr. Bucek has served as our Senior Vice President, Treasurer and
Assistant Secretary since August 1985. He received his BA degree from Mankato
State University and is a CPA.

         Mr. Miller has served as our General Counsel since October 1988 and as
our Senior Vice President since March 1994. Mr. Miller received a BA degree in
Economics from UCLA and a JD from Stanford Law School.

ITEM 11. EXECUTIVE COMPENSATION

         Information regarding remuneration of our directors and executive
officers will be set forth under the caption "Election of Directors--Executive
Compensation" in our 2000 Proxy Statement and is incorporated herein by
reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

         Information regarding security ownership of certain beneficial owners
and management will be set forth under the captions "Information Concerning
Solicitation and Voting--Record Date and Share Ownership" and "Election of
Directors--Security Ownership of Management" in our 2000 Proxy Statement and is
incorporated herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         Information regarding certain relationships and related transactions
will be set forth under the caption "Election of Directors--Certain
Transactions" in our 2000 Proxy Statement and is incorporated herein by
reference.

                                       40


                                     PART IV


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



                                                                                                           Page
                                                                                                        
(a)      1.  INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

         The following Consolidated Financial Statements of
         Coherent, Inc. and its subsidiaries are filed
         as part of this report on Form 10-K:

               Management's Responsibility for Financial Reporting                                           45

               Independent Auditors' Report                                                                  46

               Consolidated Balance Sheets - September 30, 2000
               and October 2, 1999                                                                           47

               Consolidated Statements of Income - Years ended September 30,
               2000, October 2, 1999 and September 26, 1998                                                  48

               Consolidated Statements of Stockholders' Equity - Years ended
               September 30, 2000, October 2, 1999 and September 26, 1998                                    49

               Consolidated Statements of Cash Flows - Years ended September 30,
               2000, October 2, 1999 and September 26, 1998                                                  50

               Notes to Consolidated Financial Statements                                                    52

         2.  CONSOLIDATED FINANCIAL STATEMENT SCHEDULES

         Schedule II - Valuation and Qualifying Accounts                                                     69

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

         3.  EXHIBITS





           Exhibit
           Numbers
           -------
                             
           2.1*                 Agreement and Plan of Merger. (Previously filed as Exhibit 2.1 to Form 10-K for
                                the fiscal year ended September 29, 1990.)

           3.1*                 Restated and Amended Certificate of Incorporation. (Previously filed as Exhibit
                                3.1 to Form 10-K for the fiscal year ended September 29, 1990.)

           3.2*                 Bylaws, as amended. (Previously filed as Exhibit 3.2 to Form 10-K for the fiscal
                                year ended September 29, 1990.)


                                       41

        EXHIBITS CONTINUED


           Exhibit
           Numbers
                             
           4.1*                 Amended and Restated Common Shares Rights Agreement dated November 2, 1989
                                between Coherent and the Bank of Boston. (Previously filed as Exhibit 4.1 to
                                Form 8-K filed on November 3, 1989.)

           10.18*               1987 Incentive Stock Option Plan and forms of agreement. (Previously filed as
                                Exhibit 10.18 to Form 10-K for the fiscal year ended September 30, 1989.)

           10.19*               Productivity Incentive Plan, as amended. (Previously filed as Exhibit 10.19 to
                                Form 10-K for the fiscal year ended October 1, 1988.)

           10.20*               Employee Stock Purchase Plan and form of Subscription Agreement, as amended.
                                (Previously filed as Exhibit 10.20 to Form 10-K for the fiscal year ended October
                                1, 1988.)

           10.21*               Coherent Employee Retirement and Investment Plan. (Previously filed as Exhibit
                                10.23 to Form 8, Amendment No. 1 to Annual Report on Form 10-K for the fiscal
                                year ended September 25, 1982.)

           10.30*               Patent License Agreements by and between Coherent, Inc. and Patlex Corporation,
                                effective as of July 1, 1988. (Previously filed as Exhibit 10.30 to Form 10-K for
                                the fiscal year ended October 1, 1988.)

           10.31*               Agreement by and between Coherent, Inc. and Dr. Dirk Basting, dated as of
                                September 15, 1988. (Previously filed as Exhibit 10.31 to Form 10-K for the
                                fiscal year ended October 1, 1988.)

           10.34*               1995 Stock Plan and forms of agreement. (Previously filed as Exhibit 10.34 to
                                Form 10-K for the fiscal year ended September 28, 1996.)

           10.36*               Note Purchase Agreement by and between Coherent, Inc. and the purchasers of $70
                                million series notes dated May 18, 1999. (Previously filed as Exhibit 10.36 to
                                Form 10-K for the fiscal year ended October 2, 1999.)

           10.37                1998 Director Option Plan

           21.1                 Subsidiaries.

           23.1                 Independent Auditors' Consent.

           27.1                 Financial Data Schedules.



(b)      REPORTS ON FORM 8-K

         None



* These exhibits were previously filed with the Commission as indicated and are
incorporated herein by reference.


                                       42


                                   SIGNATURES

         Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized on December 14, 2000.




                                          COHERENT, INC.
                                          BERNARD COUILLAUD
                                          -------------------------------------
                                          By:  Bernard Couillaud
                                          President and Chief Executive Officer

                                       43



                                POWER OF ATTORNEY

         KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Bernard J. Couillaud and Robert J.
Quillinan, jointly and severally, his attorneys-in-fact, each with the power of
substitution for him in any and all capacities, to sign any amendments to this
report, and to file the same, with exhibits thereto and other documents in
connection therewith, with the Securities and Exchange Commission, hereby
ratifying and confirming that each of said attorneys-in-fact, or his substitute
or substitutes, may do or cause to be done by virtue hereof.

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



                                                             

/s/ BERNARD J. COUILLAUD                                            December 14, 2000
- -----------------------------------------------------------     -------------------------
Bernard J. Couillaud                                                      Date
(Director, President & Chief Executive Officer)


/s/ ROBERT J. QUILLINAN                                             December 14, 2000
- -----------------------------------------------------------     -------------------------
Robert J. Quillinan                                                       Date
(Executive Vice President & Chief Financial Officer)


/s/ HENRY E. GAUTHIER                                               December 14, 2000
- -----------------------------------------------------------     -------------------------
Henry E. Gauthier                                                         Date
(Director, Chairman of the Board)


/s/ CHARLES W. CANTONI                                              December 14, 2000
- -----------------------------------------------------------     -------------------------
Charles W. Cantoni                                                        Date
(Director)


/s/ FRANK CARRUBBA                                                  December 14, 2000
- -----------------------------------------------------------     -------------------------
Frank Carrubba                                                            Date
(Director)


/s/ THOMAS SLOAN NELSEN                                             December 14, 2000
- -----------------------------------------------------------     -------------------------
Thomas Sloan Nelsen                                                       Date
(Director)


/s/ JERRY E. ROBERTSON                                              December 14, 2000
- -----------------------------------------------------------     -------------------------
Jerry E. Robertson                                                        Date
(Director)


/s/ JOHN H. HART                                                    December 14, 2000
- -----------------------------------------------------------     -------------------------
John H. Hart                                                              Date
(Director)



                                       44


               MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL REPORTING

         Management is responsible for the preparation and integrity of the
financial statements included in this report. The financial statements have been
prepared in conformity with accounting principles generally accepted in the
United States of America and include amounts based on management's best judgment
where necessary. Financial information included elsewhere in this report is
consistent with these financial statements.

         Management maintains a system of internal controls and procedures
designed to provide reasonable assurance that transactions are executed in
accordance with proper authorization, that transactions are properly recorded in
our records, that assets are safeguarded and that accountability for assets is
maintained. The concept of reasonable assurance is based on the recognition that
the cost of maintaining our system of internal accounting controls should not
exceed benefits expected to be derived from the system. Internal controls and
procedures are periodically reviewed and revised, when appropriate, due to
changing circumstances and requirements. Independent auditors are appointed by
our Board of Directors and ratified by our shareholders to audit the financial
statements in accordance with auditing standards generally accepted in the
United States of America and to independently assess the fair presentation of
our financial position, results of operations and cash flows. Their report
follows in this report.

         The Audit Committee, all of whose members are outside directors,
provides oversight to our financial accounting and reporting processes. The
Audit Committee meets periodically with management and the independent auditors
to ensure that each is properly discharging its responsibilities. The
independent auditors have full and free access to the Committee without the
presence of management to discuss the results of their audits, the adequacy of
internal accounting controls and the quality of financial reporting.




Bernard J. Couillaud
President & Chief Executive Officer



Robert J. Quillinan
Executive Vice President & Chief Financial Officer




                                       45


                         INDEPENDENT AUDITORS' REPORT


To the Stockholders and Board of Directors of Coherent, Inc.:

         We have audited the accompanying consolidated balance sheets of
Coherent, Inc. and its subsidiaries, as of September 30, 2000 and October 2,
1999, and the related consolidated statements of income, stockholders' equity
and cash flows for each of the three years in the period ended September 30,
2000. Our audits also included the consolidated financial statement schedule
listed in Item 14.(a)2. These financial statements and the financial statement
schedule are the responsibility of Coherent's management. Our responsibility is
to express an opinion on the financial statements and the financial statement
schedule based on our audits.

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

         In our opinion, such consolidated financial statements present fairly,
in all material respects, the financial position of Coherent, Inc. and its
subsidiaries at September 30, 2000 and October 2, 1999, and the results of their
operations and their cash flows for each of the three years in the period ended
September 30, 2000 in conformity with accounting principles generally accepted
in the United States of America. Also, in our opinion, such financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.




DELOITTE  & TOUCHE LLP

San Jose, California
October 30, 2000


                                       46


                                           COHERENT, INC. AND SUBSIDIARIES
                                             CONSOLIDATED BALANCE SHEETS
                                           (In thousands, except par value)


                                                                               September 30,         October 2,
                                                                                  2000                  1999
- ------------------------------------------------------------------------------------------------------------------
                                                                                              
ASSETS
- ------

CURRENT ASSETS:
   Cash and equivalents                                                         $158,488              $ 38,279
   Short-term investments                                                         99,681                30,637
   Accounts receivable - net of allowances
     of $6,763 (2000) and $4,592 (1999)                                          112,401                95,003
   Inventories                                                                   125,968                97,902
   Prepaid expenses and other assets                                              22,989                18,738
   Deferred tax assets                                                            38,886                37,014
- ------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS                                                             558,413               317,573
- ------------------------------------------------------------------------------------------------------------------

PROPERTY AND EQUIPMENT                                                           188,235               165,630
ACCUMULATED DEPRECIATION AND AMORTIZATION                                        (85,645)              (75,676)
- ------------------------------------------------------------------------------------------------------------------
   Property and equipment - net                                                  102,590                89,954
- ------------------------------------------------------------------------------------------------------------------
GOODWILL - net of accumulated amortization of
   $14,405 (2000) and $9,372 (1999)                                               38,555                39,490
OTHER ASSETS                                                                      45,278                48,451
- ------------------------------------------------------------------------------------------------------------------
                                                                                $744,836              $495,468
==================================================================================================================

LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------

CURRENT LIABILITIES:
   Short-term borrowings                                                       $   4,211              $ 14,371
   Current portion of long-term obligations                                        7,687                 8,599
   Accounts payable                                                               29,282                18,343
   Income taxes payable                                                            5,415                 8,221
   Other current liabilities                                                      88,954                73,120
- -----------------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES                                                        135,549               122,654
- -----------------------------------------------------------------------------------------------------------------

LONG-TERM OBLIGATIONS                                                             68,647                74,745
OTHER LONG-TERM LIABILITIES                                                       29,570                16,819
MINORITY INTEREST IN SUBSIDIARIES                                                 48,855                 3,945

STOCKHOLDERS' EQUITY:
   Common stock, par value $.01:
     Authorized - 50,000 shares
     Outstanding - 27,102 shares (2000) and 24,142 shares (1999)                     270                   240
   Additional paid-in capital                                                    227,973               106,748
   Notes receivable from stock sales                                              (1,392)                 (557)
   Accumulated other comprehensive income (loss)                                  (5,311)                  136
   Retained earnings                                                             240,675               170,738
- ------------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY                                                       462,215               277,305
- ------------------------------------------------------------------------------------------------------------------
                                                                                $744,836              $495,468
==================================================================================================================

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

                                       47


                                          COHERENT, INC. AND SUBSIDIARIES
                                         CONSOLIDATED STATEMENTS OF INCOME
                                       (In thousands, except per share data)


                                                                                Years Ended
                                                            -------------------------------------------------------
                                                              Sept. 30,            Oct. 2,              Sept. 26,
                                                                2000                1999                  1998
- -------------------------------------------------------------------------------------------------------------------
                                                                                             
NET SALES                                                      $568,272           $468,869              $410,449
COST OF SALES                                                   290,055            250,194               213,953
- -------------------------------------------------------------------------------------------------------------------
GROSS PROFIT                                                    278,217            218,675               196,496
- -------------------------------------------------------------------------------------------------------------------

OPERATING EXPENSES:
     Research and development                                    57,436             46,759                44,534
     In-process research and development                                            16,000
     Selling, general and administrative                        155,626            132,138               123,186
     Intangibles amortization                                     8,937              5,701                 4,644
- -------------------------------------------------------------------------------------------------------------------
TOTAL OPERATING EXPENSES                                        221,999            200,598               172,364
- -------------------------------------------------------------------------------------------------------------------
INCOME FROM OPERATIONS                                           56,218             18,077                24,132

OTHER INCOME (EXPENSE):
     Gain on issuance of stock by subsidiary                     55,148
     Interest and dividend income                                 5,968              3,042                 1,274
     Interest expense                                            (6,295)            (3,755)               (1,236)
     Foreign exchange loss                                         (648)              (163)                 (711)
     Other - net                                                  2,027                147                 1,154
- -------------------------------------------------------------------------------------------------------------------
TOTAL OTHER INCOME (EXPENSE), NET                                56,200               (729)                  481
- -------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES
         AND MINORITY INTEREST                                  112,418             17,348                24,613
PROVISION FOR INCOME TAXES                                       40,527              4,389                 4,894
- -------------------------------------------------------------------------------------------------------------------
INCOME BEFORE MINORITY INTEREST                                  71,891             12,959                19,719
MINORITY INTEREST IN SUBSIDIARIES EARNINGS                       (1,954)            (1,118)                 (908)
- -------------------------------------------------------------------------------------------------------------------
NET INCOME                                                     $ 69,937           $ 11,841              $ 18,811
===================================================================================================================

NET INCOME PER SHARE:
     Basic                                                     $   2.77           $   0.49              $   0.80
     Diluted                                                   $   2.56           $   0.48              $   0.79
===================================================================================================================

SHARES USED IN COMPUTATION:
     Basic                                                       25,252             23,957                23,374
     Diluted                                                     27,319             24,633                23,749
===================================================================================================================

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

                                       48

                             COHERENT, INC. AND SUBSIDIARIES
                    CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
         Years ended September 30, 2000, October 2, 1999 and September 26, 1998
                                    (In thousands)


                                                                                               Accum.
                                         Common Stock                                          Other
                                         ------------        Add.   Notes Rec.                  Comp.                Total
                                                  Par      Paid-in  From Stock   Retained      Income                Comp.
                                         Shares  Value     Capital    Sales      Earnings      (Loss)     Total     Income
- ---------------------------------------------------------------------------------------------------------------------------
                                                                                           
BALANCE, SEPTEMBER 27, 1997               22,926  $228     $90,750      $(98)    $140,086        $267   $231,233

Net income                                                                         18,811                 18,811   $18,811
Other comprehensive income:
     Translation adjustment, net of tax                                                         1,064      1,064     1,064
                                                                                                                   -------
     Total comprehensive income                                                                                    $19,875
                                                                                                                   =======
Sales of shares under Employee Stock
     Option Plan                             459     5       3,692      (212)                              3,485
Productivity Incentive Plan distributions     17               401                                           401
Sales of shares under Employee
     Stock Purchase Plan                     209     2       3,355                                         3,357
Tax benefit of Employee Stock
     Option Plan                                             1,397                                         1,397
Issuance of shares pursuant to
     1995 business acquisition               125     1       2,874                                         2,875
- ----------------------------------------------------------------------------------------------------------------
BALANCE, SEPTEMBER 26, 1998               23,736   236     102,469      (310)     158,897       1,331    262,623

Net income                                                                         11,841                 11,841   $11,841
Other comprehensive income:
     Translation adjustment, net of tax                                                        (1,195)    (1,195)   (1,195)
                                                                                                                   -------
     Total comprehensive income                                                                                    $10,646
                                                                                                                   =======
Sales of shares under Employee Stock
     Option Plan                             201     2       1,974      (247)                              1,729
Productivity Incentive Plan distributions     25               329                                           329
Sales of shares under Employee
     Stock Purchase Plan                     180     2       1,540                                         1,542
Tax benefit of Employee Stock
     Option Plan                                               436                                           436
- ----------------------------------------------------------------------------------------------------------------
BALANCE, OCTOBER 2, 1999                  24,142   240     106,748      (557)     170,738         136    277,305

Net income                                                                         69,937                 69,937   $69,937
Other comprehensive income:
     Translation adjustment, net of tax                                                        (5,505)    (5,505)   (5,505)
     Unrealized loss on available for
        sale securities                                                                            58         58        58
                                                                                                                  --------
     Total comprehensive income                                                                                    $64,490
                                                                                                                  ========
Issuance of common stock related
     to public offering, net of issuance
     costs                                 1,500    15      91,837                                        91,852
Sales of shares under Employee Stock
     Option Plan                             903     9      14,527    (1,179)                             13,357
Productivity Incentive Plan distributions     17               651                                           651
Sales of shares under Employee Stock
     Purchase Plan                           540     6       4,456                                         4,462
Tax benefit of Employee Stock
     Option Plan                                             9,754                                         9,754
Collection of notes receivable                                           344                                 344
- ----------------------------------------------------------------------------------------------------------------
BALANCE, SEPTEMBER 30, 2000               27,102  $270    $227,973   $(1,392)    $240,675     $(5,311)  $462,215
================================================================================================================

SEE ACCOMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

                                       49


                                          COHERENT, INC. AND SUBSIDIARIES
                                       CONSOLIDATED STATEMENTS OF CASH FLOWS
                                                  (In thousands)


                                                                                        Years Ended
                                                                         -----------------------------------------
                                                                          Sept. 30,        Oct. 2,      Sept. 26,
                                                                            2000            1999          1998
- ------------------------------------------------------------------------------------------------------------------
                                                                                              
CASH FLOWS FROM OPERATING ACTIVITIES:
    Net income                                                            $  69,937     $  11,841      $  18,811
    Adjustments to reconcile net income to net cash
       provided by (used in) operating activities:
         Purchased in-process research and development                                     16,000
         Write-off impaired intangible assets                                 1,504
         Purchases of short-term trading investments                       (248,030)     (118,933)      (139,943)
         Proceeds from sales of short-term trading
           investments                                                      178,909       105,250        133,171
         Depreciation and amortization                                       17,221        14,155         12,535
         Intangibles amortization                                             8,937         5,701          4,644
         Issuance of common stock under
           Productivity Incentive Plan                                          651           329            401
         Deferred income taxes                                                4,542       (10,453)        (7,755)
         Minority interest in subsidiaries                                    1,954         1,118            909
         Dividends paid to minority stockholders                               (306)       (1,196)        (1,421)
         Equity in income of joint ventures                                    (165)         (436)          (131)
         Gain on issuance of stock by subsidiary                            (55,148)
         Changes in assets and liabilities:
           Accounts receivable                                              (21,499)         (824)         8,958
           Inventories                                                      (32,804)        7,914        (16,030)
           Prepaid expenses and other assets                                 (5,163)          387         (3,887)
           Tax benefit from stock option exercises                            9,754           436          1,397
           Accounts payable                                                  12,165          (895)          (500)
           Taxes payable                                                        474          (879)          (224)
           Other current liabilities                                         13,020         9,105          7,417
- ----------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES                         (44,047)       38,620         18,352
- ----------------------------------------------------------------------------------------------------------------

CASH FLOWS FROM INVESTING ACTIVITIES:
     Purchases of property and equipment                                    (37,549)      (24,225)       (22,351)
     Proceeds from dispositions of property and equipment                     4,532         2,934            102
     Acquisition of businesses, net of cash acquired                         (4,422)      (64,012)          (841)
     Other - net                                                              3,567        (4,910)        (3,126)
- ----------------------------------------------------------------------------------------------------------------
NET CASH USED FOR INVESTING ACTIVITIES                                      (33,872)      (90,213)       (26,216)
- ----------------------------------------------------------------------------------------------------------------

                                                                    (continued)

                                       50


                         COHERENT, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (CONCLUDED)
                                 (In thousands)


                                                                                        Years Ended
                                                                         ------------------------------------------
                                                                          Sept. 30,       Oct. 2,        Sept. 26,
                                                                            2000           1999            1998
- -------------------------------------------------------------------------------------------------------------------
                                                                                               
CASH FLOWS FROM FINANCING ACTIVITIES:
    Long-term debt borrowings                                             $  3,286       $ 71,784       $  4,301
    Long-term debt repayments                                               (8,769)        (1,333)        (1,347)
    Short-term borrowings                                                   28,259         18,271         24,018
    Short-term repayments                                                  (34,742)       (17,084)       (30,843)
    Cash overdrafts                                                          4,188            694
    Repayments of capital lease obligations                                   (441)          (163)
    Proceeds from public offering, net of issuance costs                    91,852
    Proceeds from subsidiary's initial public offering,
      net of issuance costs                                                 92,715
    Sales of shares under employee stock option
      and purchase plans, net                                               17,819          3,271          6,842
    Collection of notes receivable from stock sales                            344
- -------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES                                  194,511         75,440          2,971
- -------------------------------------------------------------------------------------------------------------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND EQUIVALENTS                      3,617         (1,512)          (618)
- -------------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS                            120,209         22,335         (5,511)
    Cash and equivalents, beginning of year                                 38,279         15,944         21,455
- -------------------------------------------------------------------------------------------------------------------
CASH AND EQUIVALENTS, END OF YEAR                                         $158,488       $ 38,279       $ 15,944
===================================================================================================================

SUPPLEMENTAL DISCLOSURE OF CASH FLOW
     INFORMATION:
     Cash paid during the year for:
             Interest                                                     $  6,295       $  3,755       $  1,236
             Income taxes                                                 $ 23,436       $ 14,972       $ 10,282
===================================================================================================================

NONCASH INVESTING AND FINANCING ACTIVITIES:
     Issuance of common stock for 1995 acquisition
         obligation                                                                                     $  2,875
     Equipment acquired under capital leases                              $  1,459       $  1,278
     Issuance of common stock for notes receivable                                       $    247       $    212
     Conversion of note payable to minority interest holder to
         contributed capital                                              $  1,713
====================================================================================================================

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.


                                       51



                         COHERENT, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.   SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION

     The consolidated financial statements include the accounts of Coherent,
Inc. and its majority owned subsidiaries (collectively, the Company, we, our, or
Coherent). All significant intercompany balances and transactions have been
eliminated. Investments in business entities in which we do not have control,
but have the ability to exercise significant influence over operating and
financial policies (generally 20-50% ownership), are accounted for by the equity
method.

FISCAL YEAR

     Our fiscal year for 2000 included 52 weeks; fiscal 1999 included 53 weeks;
and fiscal 1998 included 52 weeks.

USE OF ESTIMATES

     The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Such estimates include, but are not limited to, allowances for
uncollectible accounts receivable and sales returns reserves, inventory
reserves, warranty costs, depreciation and amortization, taxes and
contingencies. Actual results could differ from those estimates.

RECENTLY ISSUED ACCOUNTING STANDARDS

     In December 1999, the staff of the Securities and Exchange Commission (SEC)
issued Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial
Statements" (SAB 101). SAB 101, as amended, summarizes certain of the SEC's
views in applying generally accepted accounting principles (GAAP) to revenue
recognition in financial statements. We are required to adopt SAB 101 in the
fourth quarter of fiscal 2001. Although the we believe our revenue recognition
policies are in accordance with GAAP, we are currently studying SAB 101 and have
not yet determined its impact, if any, on our financial statements.

     In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities". This statement
requires companies to record derivatives on the balance sheet as assets or
liabilities, measured at fair value. Gains or losses resulting from changes in
the values of those derivatives would be accounted for depending on the use of
the derivative and whether it qualifies for hedge accounting. In May 1999, SFAS
133 was amended to defer its effective date. SFAS 133 will be effective our
first quarter filing of fiscal 2001. Adoption of this new accounting standard
will result in a cumulative after-tax increase in net income of approximately
$0.3 million and other comprehensive expense of approximately $0.4 million in
the first quarter of fiscal 2001.

FOREIGN CURRENCY TRANSLATION

     The functional currencies of our foreign subsidiaries are their respective
local currencies. Accordingly, gains and losses from the translation of the
financial statements of the foreign subsidiaries are reported as a separate
component of accumulated other comprehensive income. Foreign currency
transaction gains and losses are included in net earnings.

CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS

     Our policy is to invest in various short-term debt instruments including
certificates of deposit, bankers acceptances and repurchase agreements of major
banks and institutions, obligations of the U.S. Treasury and U.S. Government
agencies, tax-exempt municipal securities and commercial paper with long-term
credit ratings of A or short-term credit ratings of A1 or P1 at time of
purchase. All highly liquid debt instruments purchased with a remaining maturity
of three months or less are classified as cash equivalents.


                                       52




INVENTORIES

     Inventories are stated at the lower of cost (first-in, first-out) or
market. Inventories are as follows (in thousands):





                                                          2000                   1999
- ---------------------------------------------------------------------------------------
                                                                         
Purchased parts and assemblies                          $ 41,670                $26,200
Work-in-process                                           43,799                 33,098
Finished goods                                            40,499                 38,604
- ---------------------------------------------------------------------------------------
Inventories                                             $125,968                $97,902
=======================================================================================

PROPERTY AND EQUIPMENT

     Property and equipment are stated at cost and are generally depreciated or
amortized using the straight-line method. Cost and estimated useful lives are as
follows (in thousands):

                                                          2000                   1999           Useful Life
- -----------------------------------------------------------------------------------------------------------
                                                                                    
Land                                                    $  7,294               $   7,212
Buildings and improvements                                48,157                  41,939        20-40 years
Equipment, furniture and fixtures                        120,508                 103,373         3-10 years
Leasehold improvements                                    12,276                  13,106     Terms of lease
- ----------------------------------------------------------------------------------------------------------
Property and equipment                                  $188,235               $165,630
==========================================================================================================


GOODWILL

     Goodwill relates to acquired subsidiaries and is being amortized on a
straight-line basis over estimated useful lives of three to forty years. We
evaluate our long-lived assets, including goodwill, for impairment whenever
events or changes in circumstances indicate that the carrying value of an asset
may not be recoverable.

INTANGIBLE ASSETS

     Intangible assets, recorded as other assets, include distribution rights,
acquired existing technology, licenses and patents and are amortized on a
straight-line basis over estimated useful lives of two to seventeen years. We
evaluate our long-lived assets, including intangible assets, for impairment
whenever events or changes in circumstances indicate that the carrying value of
an asset may not be recoverable.

WARRANTY

     We warrant certain of our products and provide for estimated product
warranty costs at the time of sale.

REVENUE RECOGNITION

     We generally recognize revenue from product sales upon shipment or title
transfer, if later, and from service upon performance or over the terms of the
service contract as appropriate.

CONCENTRATION OF CREDIT RISK

     Financial instruments which may potentially subject us to concentrations of
credit risk consist principally of cash equivalents, short-term investments and
accounts receivable. We invest only in U.S. Treasury or federal agency
obligations or with high credit quality financial institutions and, by policy,
limit the amount of credit exposure to any one institution. At September 30,
2000, the majority of our short-term investments are in corporate obligations,
repurchase agreements, bank certificates of deposit and federal agency
obligations. The majority of our accounts receivable are derived from sales to
customers for commercial, medical and scientific research applications. We
perform ongoing credit evaluations of our customers' financial condition and
limit the amount of credit extended when deemed necessary but generally require
no collateral. We maintain reserves for potential credit losses.

INCOME TAXES

     We account for income taxes using the asset and liability method. Deferred
tax assets and liabilities are recognized for the future tax consequences of
temporary differences between the financial statement


                                       53




carrying amounts and the tax bases of assets and liabilities. A valuation
allowance is established to reduce the deferred tax asset if it is "more likely
than not" that the related tax benefits will not be realized in the future.

     Federal income taxes have not been provided on a portion of the unremitted
earnings of foreign subsidiaries either because such earnings are intended to be
permanently reinvested or because foreign tax credits are available to offset
any planned distributions of such earnings. The total amount of unremitted
earnings of foreign subsidiaries was approximately $39,519,000 at September 30,
2000. Withholding taxes of approximately $2,225,000 would be payable upon
repatriation of such earnings which would result in additional foreign tax
credits.

DERIVATIVES

     We enter into forward exchange contracts to minimize the short-term impact
of foreign currency fluctuations on assets and liabilities and firm commitments
denominated in currencies other than the functional currency of the reporting
entity. All foreign exchange forward contracts are designated as and effective
as a hedge and are highly inversely correlated to the hedged item as required by
generally accepted accounting principles. Gains and losses on the contracts that
hedge foreign currency assets and liabilities are included in other income and
offset foreign exchange gains or losses from the revaluation of intercompany
balances or other current assets and liabilities denominated in currencies other
than the functional currency of the reporting entity. The cash flow impact of
our derivative hedges offsets the cash flow impact of the foreign exchange
movements on the underlying exposed asset and liability. Gains and losses on
contracts that hedge firm commitments of foreign currency purchases or sales are
deferred and recognized at the time the hedged transaction is recorded as an
offset to the amount of the related purchase or sale. Fair values of foreign
exchange contracts are determined by obtaining quoted market prices of
comparable contracts, adjusted through interpolation where necessary for
maturity differences.

EARNINGS PER SHARE

     Earnings per share (EPS) are computed as basic EPS using the weighted
average number of common shares outstanding and diluted EPS using the weighted
average number of common and dilutive common shares outstanding.

COMPREHENSIVE INCOME

     On September 27, 1998, we adopted SFAS No. 130, "Reporting Comprehensive
Income," which establishes standards for reporting and displaying comprehensive
income and its components. Comprehensive income is defined as the change in
equity of a business enterprise during a period from transactions and other
events and circumstances from non-owner sources and is presented in our
Statements of Stockholders' Equity.

STOCK-BASED COMPENSATION

     As permitted under SFAS 123, "Accounting for Stock-Based Compensation" we
account for stock-based awards to employees using the intrinsic value method in
accordance with Accounting Principles Board Opinion No. 25 (APB 25), "Accounting
for Stock Issued to Employees". (See Note 9).

GAINS AND LOSSES ON ISSUANCE OF SUBSIDIARY STOCK

     Gains and losses on the issuance of subsidiary stock are recognized
directly in the Company's Consolidated Statements of Income.

RECLASSIFICATIONS

     Certain prior year amounts have been reclassified to conform with the
current year presentation. Such reclassifications had no impact on net income or
stockholders' equity for any year presented.

2.   ACQUISITIONS

     During the three fiscal years ended September 30, 2000, we made the
acquisitions described in the following paragraphs, each of which has been
accounted for as a purchase. The consolidated financial statements include the
operating results of each business from the date of acquisition. Proforma
results of operations have not been presented, except for the acquisition of
Star Medical Technologies, Inc., because the effects of these acquisitions were
not material on either an individual or an aggregate basis. The amounts
allocated to purchased in-process research and development were determined
through established valuation techniques in the high technology industry and
were expensed upon acquisition, because technological feasibility had not been
established and no future alternative uses existed. Research and development
costs to


                                       54




complete development of the research and development from these acquired
companies to technological feasibility are not expected to have a material
impact on our future results of operations or cash flows. Amounts allocated to
goodwill and other intangibles arising from such acquisitions are amortized on a
straight-line basis over periods ranging from three to fifteen years.

     In May 2000, we acquired the net assets of Lasertec BV, in Barendrecht,
Netherlands, for approximately $1.3 million cash. Lasertec provides us with a
subsytem strategy to process materials for customers using a variety of laser
technologies. The acquisition was accounted for as a purchase, and accordingly,
we have recorded the approximately $1.3 million excess of the purchase price
over the fair value of assets acquired as goodwill, which is amortized over 3
years.

     In December 1999, we acquired the remaining 75% interest of Microlase
Optical Systems, Ltd (Microlase), in Glasgow, Scotland, for approximately $3.2
million cash. We now own 100% of the share capital of Microlase. Microlase is
the manufacturer of a range of advanced solid-state lasers that are used in a
number of developing applications including scientific research and
semiconductor test equipment. The acquisition was accounted for as a purchase
and, accordingly, we have recorded the approximately $2.5 million excess of the
purchase price over the fair value of net assets acquired as goodwill and other
intangible assets, which are amortized over 5 years.

     In April 1999, we acquired all of the outstanding shares of Star Medical
Technologies, Inc. (Star) for approximately $67.0 million (consisting of $65.0
million in cash, $1.7 million of unamortized distribution rights and $0.3
million of acquisition costs) from Palomar Medical Technologies, Inc. and from
certain Star employees. Star, based in Pleasanton, California, manufactures
LightSheer-TM- laser diode systems, which have received FDA approval for hair
removal and the treatment of leg veins. The acquisition was treated as a
purchase and, accordingly, the acquired assets and liabilities were recorded at
their fair market values at the date of acquisition.

     The aggregate purchase price of $67.0 million (including acquisition costs)
has been allocated to the assets and in-process research and development
acquired. The total purchase price was allocated among the assets acquired
(including acquired in-process research and development) as follows (in
thousands):


       Purchase price allocation:
                                                      
       Tangible assets                                   $11,214
       In-process research and development                16,000
       Intangible assets:
                 Goodwill                                 30,868
                 Existing technology                      19,200
                 Workforce                                 1,700
       Liabilities assumed                               (10,841)
       Deferred tax liabilities                           (1,170)
                                                         -------
       Total                                             $66,971
                                                         =======


     The goodwill is being amortized over its estimated useful life of 15 years.
The existing technology and workforce assets are being amortized over their
estimated useful lives of 7 and 3 years, respectively.

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

     As indicated above, we recorded a one-time charge of $16,000,000
($10,734,000 net of tax) in 1999 for purchased in-process research and
development related to five development projects. The charge related to the
portion of these products, excluding existing technology, that had not reached
technological feasibility, had no alternative future use and for which
successful development was uncertain. Management's conclusion that the
in-process development effort had no alternative future use was reached in
consultation with the engineering personnel from both Coherent and Star.

                                       55



     The first of these projects is a new product in the LightSheer family that
results in a 50% increase in power and twice the coverage by incorporating a new
heat exchanger, thermoelectric cooling system, sapphire tip and software. At the
time of acquisition, the development was 86% complete and the estimated cost to
complete was $0.2 million. We began shipping the product in May 1999. The second
of these projects is a next generation LightSheer product that incorporates a
new microprocessor and touch-screen as well as redesigns the packaging to
improve serviceability. At the time of acquisition, the development was 78%
complete and the estimated cost to complete was $0.5 million. We began shipping
the product in July 1999. The third of these projects is a new product in the
LightSheer family that will result in increased coverage and will require a new
clinical trial. At the time of acquisition, the development was 72% complete and
the estimated cost to complete was $0.6 million. We began shipping the product
in December 1999. The fourth project is a new application of the semiconductor
diode array technology, originally developed for hair removal, in a laser-based
diagnostic system. At the time of acquisition, the development was 58% complete
and the estimated cost to complete was $1.0 million. Management has cancelled
the project. The fifth development project is an ensemble of diode array
products. At the time of acquisition, the development was 54% complete and the
estimated cost to complete was $1.4 million. Management expects that the product
will become available for sale in fiscal 2001, however, no assurances can be
given as to the availability, if any.

     We will begin to benefit from the acquired research and development of
these products once they begin shipping. Failure to reach successful completion
of these projects could result in impairment of the associated capitalized
intangible assets and could require us to accelerate the time period over which
the intangibles are being amortized, which could have a material adverse effect
on our business, financial condition, or results of operation.

     Significant assumptions used to determine the value of in-process research
and development included several factors, including the following: (i) forecast
of net cash flows that were expected to result from the development effort using
projections prepared by our and Star's management; (ii) percentage complete for
the projects estimated by considering a number of factors, including the costs
invested to date relative to total cost of the development effort and the amount
of progress completed as of the acquisition date, on a technological basis,
relative to the overall technological achievements required to achieve the
functionality of the eventual product. The technological issues were addressed
by engineering representatives from both Coherent and Star, and when estimating
the value of the technology, the projected financial results of the acquired
assets were estimated on a stand-alone basis without any consideration to
potential synergic benefits or "investment value" related to the acquisition.
Accordingly, separate projected cash flows were prepared for both the existing
as well as the in-process projects. These projected results were based on the
number of units sold times average selling price less the associated costs.
After preparing the estimated cash flows from the products being developed, a
portion of these cash flows were attributed to the existing technology, which
was embodied in the in-process product lines and enabled a quicker and more
cost-effective development of these products. When estimating the value of the
existing and in-process technologies, discount rates of 15% and 30% were used,
respectively. The discount rates considered both the status and risks associated
with the respective cash flows at the acquisition date.

     Selected unaudited proforma combined results of operations for the years
ended October 2, 1999 and September 26, 1998, assuming the Star acquisition had
occurred on September 28, 1997 are as follows:




                                         1999                    1998
                                         ----                    ----
                                (In thousands, except per share amounts)
                                                        
     Net sales                          $485,617               $422,387
     Net income                           22,334                    980
     Net income per diluted share       $   0.91               $   0.04


     In May 1999, we issued $70 million of Senior Notes in a private bond
placement to finance the acquisition of Star. $44 million of the notes are due
in annual installments from May 2000 through May 2006, at a fixed interest rate
of 6.7%, and $26 million of the notes are due in annual installments from May
2004 through May 2006, at a fixed interest rate of 6.91%.

     In December 1997, we entered into a joint venture agreement with Fiber
Optic Network Solutions Corporation (FONS) and Fiber Optic Transmission Systems
Corporation to engage in the business of the design, development, production and
marketing of fiber optic transmission and distribution systems in the field of
CATV, telecommunications and high-speed data transmission. A limited liability
company was formed, CFX Communication Systems, LLC, to which we paid $0.5
million to FONS' owners in exchange for 60% ownership of CFX. We recorded $0.4
million of goodwill associated with the purchase. The CFX joint venture was
unable to achieve its business objectives and ceased operations in May 1999. The
related goodwill has been fully amortized.


                                       56




     In March 1998, we issued 124,645 shares of Company stock ($2,875,000) as
payment for the remaining obligation relating to the 1995 acquisition of Adlas
GmbH and Co. KG, located in Lubeck, Germany.

3.   BALANCE SHEET DETAILS

     Prepaid expenses and other assets consist of the following (in thousands):



                                                            Sept. 30,                  Oct. 2,
                                                              2000                      1999
- -----------------------------------------------------------------------------------------------------------
                                                                                 
Prepaid income taxes                                          $10,777                   $ 4,943
Prepaid expenses and other                                     12,212                    13,795
- -----------------------------------------------------------------------------------------------------------
Prepaid expenses and other assets                             $22,989                   $18,738
===========================================================================================================

     Other assets consist of the following (in thousands):



                                                           Sept. 30,                   Oct. 2,
                                                              2000                      1999
- ------------------------------------------------------------------------------------------------------------
                                                                                 
Intangible assets                                             $19,479                   $24,729
Deferred compensation                                          18,115                    11,233
Other assets                                                    6,506                    11,237
Assets held for investment                                      1,178                     1,252
- -----------------------------------------------------------------------------------------------------------
Other assets                                                  $45,278                   $48,451
===========================================================================================================


     Assets held for investment at September 30, 2000 and October 2, 1999
include our former manufacturing facility in Sturbridge, Massachusetts which we
are leasing to Convergent Prima, Inc. Accumulated amortization of intangible
assets is $13,455,000 and $8,534,000 at September 30, 2000 and October 2, 1999,
respectively.

     Other current liabilities consist of the following (in thousands):



                                                           Sept. 30,                   Oct. 2,
                                                              2000                      1999
- -----------------------------------------------------------------------------------------------------------
                                                                                 
Accrued payroll and benefits                                  $29,482                   $25,132
Accrued expenses and other                                     26,251                    22,567
Reserve for warranty                                           17,538                    13,269
Deferred income                                                11,827                     9,695
Customer deposits                                               3,856                     2,457
- -----------------------------------------------------------------------------------------------------------
Other current liabilities                                     $88,954                   $73,120
===========================================================================================================


     Other long-term liabilities consist of the following (in thousands):



                                                           Sept. 30,                   Oct. 2,
                                                              2000                      1999
- -----------------------------------------------------------------------------------------------------------
                                                                                 
Deferred compensation                                         $18,115                   $11,233
Deferred income and other                                       3,067                     3,435
Environmental remediation costs                                   917                     1,169
Deferred tax liabilities                                        7,471                       982
- -----------------------------------------------------------------------------------------------------------
Other long-term liabilities                                   $29,570                   $16,819
===========================================================================================================


4.   FINANCIAL INSTRUMENTS

FAIR VALUE OF FINANCIAL INSTRUMENTS

     The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
that value.

     Cash equivalents and short-term investments are stated at fair market value
based on quoted market prices.

     The recorded carrying amount of our long-term obligations approximates fair
market value.


                                       57





     The carrying amount and fair value of foreign exchange contracts was $24.7
million and $24.4 million at September 30, 2000, respectively. The carrying
amount and fair value of foreign exchange contracts was $24.1 million at October
2, 1999. The fair value of foreign exchange contracts is estimated by obtaining
quoted market prices of comparable contracts, adjusted through interpolation
where necessary for maturity differences.

FOREIGN EXCHANGE CONTRACTS

     In the normal course of business, we have exposures to foreign currency
fluctuations arising from foreign currency sales and purchases and intercompany
transactions, among other things. We use foreign exchange forward contracts to
limit our exposure to foreign exchange losses arising from nonfunctional
currency payables and receivables and firm commitments. We evaluate our net
exposure therefrom and enter into forward contracts to hedge the net exposure
over a specified amount. These contracts are executed with credit-worthy
financial institutions and are denominated in currencies of major industrial
nations. Gains and losses on these contracts serve as hedges in that they offset
fluctuations that would otherwise impact our financial results. Costs associated
with entering into such contracts are generally amortized over the life of the
instruments and are not material to our financial results.

     At September 30, 2000 and October 2, 1999, we had foreign currency forward
contracts outstanding to hedge foreign currency accounts receivable and accounts
payable and sales backlog usually shippable within 90 days. These contracts have
maturities, which typically range from 90 to 360 days and are intended to reduce
exposure to foreign currency exchange risk. The aggregate fair value and
unrealized gain (loss) of foreign exchange contracts are as follows (in
thousands):




                                         Sept. 30, 2000                     Oct. 2, 1999
                                                   Unrealized                        Unrealized
                                     Fair Value    Gain (Loss)         Fair Value    Gain (Loss)
                                     -------------------------         -------------------------
                                                                              
Euro                               $ 9,027            $  388            $  9,635           $ (302)
British Pound Sterling               7,353               334               3,060              (80)
Swedish Krone                        3,986               283               1,511              (27)
Japanese Yen                         1,664                23               8,528             (703)
Hong Kong Dollar                     1,590                 1                 579
Norwegian Kroner                       397                12                 234               (7)
Danish Kroner                          355                24                 404               (9)
Canadian Dollar                                                              169
                                   -------            ------             -------          --------
                                   $24,372            $1,065             $24,120          $(1,128)
                                   =======            ======             =======          ========

5.   SHORT-TERM BORROWINGS

     Short-term borrowings consist of the following (in thousands):





                                                           Sept. 30,                   Oct. 2,
                                                              2000                      1999
- -------------------------------------------------------------------------------------------------
                                                                             
Borrowings under bank lines                                $2,999                   $11,850
Note payable to minority stockholder in subsidiary          1,212                     2,521
- -------------------------------------------------------------------------------------------------
Short-term borrowings                                      $4,211                   $14,371
=================================================================================================


     The note payable to minority stockholder interest in subsidiary is due upon
four weeks notice from the noteholder and bears interest at EURIBOR (Euro
Interbank Offered Rate) plus 0.5% with a maximum of 9.0%.

     We maintain lines of credit worldwide with several banks. Our primary
domestic line of credit is a $20,000,000 unsecured revolving account from Bank
of America, which expires April 23, 2002. In addition, we have several foreign
lines of credit which allow us to borrow in the applicable local currency. At
September 30, 2000, these lines of credit total $51,836,000 and were
concentrated in Germany and Japan. Our lines of credit generally provide
borrowing at the bank reference rate or better, which varies depending on the
country where the funds are borrowed. Amounts outstanding at September 30, 2000
were at a weighted average interest rate of 2.8%. Our domestic lines of credit
are generally subject to standard covenants related to financial ratios,
profitability and dividend payments. We were in compliance with all financial
covenants at September 30, 2000.

                                       58




6.   INCOME TAXES

     The provision for income taxes consists of the following (in thousands):




                                                                          2000            1999             1998
- --------------------------------------------------------------------------------------------------------------------
                                                                                                
Currently payable:
     Federal                                                             $ 1,643        $ 5,138           $ 5,126
     State                                                                 1,656           (853)               65
     Foreign                                                              18,435         10,367             7,171
- --------------------------------------------------------------------------------------------------------------------
                                                                          21,734         14,652            12,362
- --------------------------------------------------------------------------------------------------------------------
Deferred:
     Federal                                                              17,923         (9,772)           (7,069)
     State                                                                 3,167           (342)             (757)
     Foreign                                                              (2,297)          (149)              358
- --------------------------------------------------------------------------------------------------------------------
                                                                          18,793        (10,263)           (7,468)
- --------------------------------------------------------------------------------------------------------------------
Provision for income taxes                                               $40,527         $4,389           $ 4,894
====================================================================================================================


     The components of income before income taxes and minority interest consist
of (in thousands):



                                                                          2000             1999             1998
- --------------------------------------------------------------------------------------------------------------------
                                                                                               
United States                                                           $ 85,598       $ (3,619)          $ 7,662
Foreign                                                                   26,820         20,967            16,951
- --------------------------------------------------------------------------------------------------------------------
Income before income taxes and minority interest                        $112,418        $17,348           $24,613
====================================================================================================================


     The reconciliation of the statutory federal income tax rate to the
effective rate is as follows:



                                                                          2000             1999             1998
- --------------------------------------------------------------------------------------------------------------------
                                                                          % of             % of             % of
                                                                          Pretax          Pretax           Pretax
                                                                          Income          Income           Income
- --------------------------------------------------------------------------------------------------------------------
                                                                                                 
Federal statutory tax rate                                                35.0%           35.0%            35.0%
Benefit from favorable IRS ruling                                                                         (10.3)
Foreign tax rates in excess of U.S. rates                                  6.4            19.8              7.8
Foreign tax credit                                                        (6.2)          (13.6)            (8.6)
Foreign sales corporation benefit                                         (0.6)           (1.8)
State income taxes, net of federal income tax benefit                      2.8            (4.8)            (1.9)
Goodwill                                                                                                    1.1
Research and development credit                                           (1.4)           (2.6)            (4.7)
Other                                                                      0.1            (6.7)             1.5
- --------------------------------------------------------------------------------------------------------------------
Provision for income taxes                                                36.1%           25.3%            19.9%
====================================================================================================================


     The significant components of deferred tax assets and liabilities were (in
thousands):



                                                                       Sept. 30,             Oct. 2,
                                                                          2000                 1999
- --------------------------------------------------------------------------------------------------------------------
                                                                                      
Deferred tax assets:
      Reserves and accruals not currently deductible                      $36,252            $26,600
      Operating loss carry forwards and tax credits                         9,453              6,464
      Intercompany profit                                                   1,477              2,240
      Deferred service revenue                                              3,616              2,813
      Depreciation and amortization                                         3,610              5,891
      Other                                                                 3,397              2,685
- --------------------------------------------------------------------------------------------------------------------
                                                                           57,805             46,693
Valuation allowance                                                        (2,300)            (2,300)
- --------------------------------------------------------------------------------------------------------------------
                                                                           55,505             44,393
Deferred tax liabilities:
      Gain on issuance of stock by subsidiary                              21,339
      Other                                                                 1,761              2,735
- --------------------------------------------------------------------------------------------------------------------
                                                                           23,100              2,735
- --------------------------------------------------------------------------------------------------------------------
Total deferred tax assets and liabilities                                 $32,405            $41,658
====================================================================================================================



                                       59




     The total net deferred tax asset is classified on the balance sheet as
follows (in thousands):





                                                                          Sept. 30,          Oct. 2,
                                                                            2000              1999
- --------------------------------------------------------------------------------------------------------------------
                                                                                      
Current deferred income tax assets                                        $38,886            $37,014
Non-current deferred income tax assets                                        990              5,626
Non-current deferred income tax liabilities                                (7,471)              (982)
- --------------------------------------------------------------------------------------------------------------------
Net deferred tax assets                                                   $32,405            $41,658
====================================================================================================================


     Total net operating losses of $1,855,000 for tax return purposes expire in
2004. Of the total tax credits of $2,343,000 for tax return purposes, $679,000
expire in fiscal 2007 and $1,664,000 have no expiration date.

7.   LONG-TERM OBLIGATIONS

     The components of long-term obligations are as follows (in thousands):



                                                                          Sept. 30,            Oct. 2,
                                                                            2000                 1999
- -------------------------------------------------------------------------------------------------------------------
                                                                                      
Notes payable                                                             $70,356            $77,142
Bonds payable                                                               1,600              1,800
Capital leases                                                              2,207              1,297
Deferred acquisition payment (Note 2)                                       2,065              3,105
Other                                                                         106
- --------------------------------------------------------------------------------------------------------------------
                                                                           76,334             83,344
Current portion                                                            (7,687)            (8,599)
- --------------------------------------------------------------------------------------------------------------------
Long-term obligations                                                     $68,647            $74,745
====================================================================================================================


     NOTES PAYABLE - At September 30, 2000, notes payable consists of $63.7
million ($37.7 million at 6.7% and $26.0 million at 6.9%) to finance the Star
acquisition, $1.7 million at 8.0% for the mortgage on the CEEL facility, $1.0
million at 5.5% of outside financing at CEEL, $2.2 million at 1.0% to 8.7% of
outside financing for Tutcore, $1.5 million at 3.1% of outside financing for
Lambda GmbH and $0.3 million at 8.5% of outside financing for Scotland. Notes
payable are generally secured by the related assets financed.

     BONDS PAYABLE - Bonds payable were issued to finance the construction of
certain facilities and acquisition of equipment, which secure repayment of the
bonds. The bonds are payable in installments through 2008 with a variable
interest rate (4.50% at September 30, 2000) not to exceed 12%. The bonds are
guaranteed by a letter of credit issued by Union Bank with an annual fee of
1.5%.

     Annual maturities of debt are: $7,209,000 in 2001, $9,607,000 in 2002,
$7,301,000 in 2003, $16,787,000 in 2004, $15,667,000 in 2005 and thereafter
$17,556,000.

8.   STOCKHOLDERS' EQUITY

     On July 26, 2000, we completed a public offering of 1,500,000 shares of
common stock at an offering price of $65.00 per shares. The net proceeds to us,
after deducting underwriting discounts and offering expenses, was approximately
$91,852,000.

     Each outstanding share of our common stock carries a stock purchase right
(right) issued pursuant to a dividend distribution declared by our Board of
Directors and distributed to stockholders of record on November 17, 1989. When
exercisable, each right entitles the stockholder to buy one share of our common
stock at an exercise price of $80. The rights will become exercisable following
the tenth day after a person or group announces acquisition of 20% or more of
our common stock or announces commencement of a tender offer, the consummation
of which would result in ownership by the person or group of 30% or more of the
common stock. We will be entitled to redeem the rights at $.01 per right at any
time on or before the 10th day following the acquisition by a person or group of
20% or more of our common stock.

     If, prior to redemption of the rights, we are acquired in a merger or other
business combination in which we are the surviving corporation, or a person or
group acquires 20% or more of our common stock, each right owned by a holder of
less than 20% of the common stock will entitle its owner to purchase, at the
right's then current exercise price, a number of shares of common stock of
Coherent having a fair market value equal to twice the right's exercise price.
If we sell more than 50% of our assets or earning power or are acquired in a
merger or other business combination in which we are not the surviving
corporation, the acquiring person must


                                       60




assume the obligations under the rights and the rights will become exercisable
to acquire common stock of the acquiring person at the discounted price.

9.   EMPLOYEE STOCK OPTION AND BENEFIT PLANS

PRODUCTIVITY INCENTIVE PLAN

     The Productivity Incentive Plan (Plan) provides for quarterly distributions
of common stock and cash to each eligible employee. The amounts of the
distributions are based on consolidated pre-tax profit, the market price of our
common stock and the employee's salary. The fair market value of common stock
and cash that are earned under the Plan are charged to expense. For fiscal 2000,
14,238 shares (fair market value of $755,000) and $4,946,000 were accrued for
the benefit of employees. For fiscal 1999, 25,097 shares (fair market value of
$402,000) and $3,080,000 were accrued for the benefit of employees. For fiscal
1998, 20,674 shares (fair market value of $347,000) and $2,468,000 were accrued
for the benefit of employees. At September 30, 2000, we had 108,425 shares of
our common stock reserved for future issuance under the Plan.

COHERENT EMPLOYEE RETIREMENT AND INVESTMENT PLAN

     Under the Coherent Employee Retirement and Investment Plan, we match
employee contributions to the Plan up to a maximum of 6% of the employee's
individual earnings. Employees become eligible for participation and for Company
matching contributions after completing one year of service. Our contributions
(net of forfeitures) for fiscal 2000, 1999, and 1998 were $3,825,000,
$3,757,000, and $3,322,000, respectively.

SUPPLEMENTAL RETIREMENT PLAN

     We have a Supplemental Retirement Plan for senior management personnel
which permits the participants to contribute up to 24% of their before tax
earnings to a trust. We will match these contributions up to an amount equal to
6% of such participants' earnings less any amounts contributed by us to such
participant under the Coherent Employee Retirement and Investment Plan. Our
contributions (net of forfeitures) for fiscal 2000, 1999, and 1998 were $28,000,
$18,000 and $14,000, respectively.

EMPLOYEE STOCK PURCHASE PLAN

     We have an Employee Stock Purchase Plan whereby eligible employees may
authorize payroll deductions of up to 10% of their regular base salary to
purchase shares at the lower of 85% of the fair market value of the common stock
on the date of commencement of the offering or on the last day of the
twelve-month offering period. In fiscal 2000, 540,371 shares were purchased by
and distributed to employees at an average price of $8.26 per share. In fiscal
1999, 180,295 shares were purchased by and distributed to employees at an
average price of $8.55 per share. In fiscal 1998, 208,270 shares were purchased
by and distributed to employees at an average price of $16.11 per share.

     At September 30, 2000, $4,640,000 had been contributed by employees that
will be used to purchase a maximum of 273,544 shares in fiscal 2001 at a price
determined under the terms of the Plan. At September 30, 2000, we had 1,683,000
shares of our common stock reserved for future issuance under the plan.


STOCK OPTION PLANS

     We have two Stock Option Plans and a non-employee Directors' Stock Option
Plan. Under these plans, Coherent may grant options to purchase up to 9,000,000
and 400,000 shares of common stock, respectively. Employee options are generally
exercisable three years from the grant date, at the fair market value of the
common stock on the date of the grant; however, initial grants to employees vest
25% annually. Director options are automatically granted to our non-employee
directors. Such directors initially receive a stock option for 20,000 shares
exercisable over a four-year period. Additionally, the non-employee directors
receive an annual grant of 5,000 shares exercisable four years from the date of
grant. Grants under all plans expire six years from the original grant date.


                                       61





Option activity for all plans is summarized as follows:




                                                                              OUTSTANDING OPTIONS
                                                                              -------------------
                                                                        Number of    Weighted Average Exercise
                                                                         Shares          Price per share
                                                                       -----------   -----------------------
                                                                                            
OUTSTANDING, SEPTEMBER 27, 1997 (634,900 EXERCISABLE
         AT A WEIGHTED AVERAGE PRICE OF $8.58)                         2,619,800                  $16.17
Options granted (weighted average fair value of $5.25)                   983,900                   11.71
Options exercised                                                       (473,800)                   8.68
Options canceled                                                        (247,600)                  18.56
                                                                       ---------                  ------
OUTSTANDING, SEPTEMBER 26, 1998 (757,500 EXERCISABLE
         AT A WEIGHTED AVERAGE PRICE OF $14.00)                        2,882,300                   15.67
Options granted (weighted average fair value of $6.82)                 1,405,300                   14.71
Options exercised                                                       (201,000)                   9.83
Options canceled                                                        (393,100)                  17.58
                                                                       ---------                  ------
OUTSTANDING, OCTOBER 2, 1999 (1,099,000 EXERCISABLE
         AT A WEIGHTED AVERAGE PRICE OF $16.59)                        3,693,500                   15.40
Options granted (weighted average fair value of $29.45)                1,388,900                   50.23
Options exercised                                                       (905,300)                  16.20
Options canceled                                                        (262,600)                  20.15
                                                                       ---------                  ------
OUTSTANDING, SEPTEMBER 30, 2000 (945,000 EXERCISABLE
         AT A WEIGHTED AVERAGE PRICE OF $17.61)                        3,914,500                  $27.28
                                                                       =========                  ======


     At September 30, 2000, 1,657,835 options were available for future grant
under all plans. The following table summarizes information about fixed stock
options outstanding at September 30, 2000:




                                   OPTIONS OUTSTANDING                          OPTIONS EXERCISABLE
                              -----------------------------------------------------------------------------
                                       WEIGHTED
                                        AVERAGE
                                       REMAINING         WEIGHTED                              WEIGHTED
  RANGE OF             NUMBER         CONTRACTUAL        AVERAGE             NUMBER            AVERAGE
EXERCISE PRICES     OUTSTANDING       LIFE (YEARS)     EXERCISE PRICE      EXERCISABLE       EXERCISE PRICE
- ---------------     -----------       ------------     --------------      -----------       --------------
                                                                                
$  8.81  -   8.94      564,200           3.92             $ 8.94              136,950           $ 8.94
   9.00  -  13.75      444,550           3.45              13.05              138,250            13.44
  13.81  -  15.88      707,090           4.57              15.26               38,550            15.49
  15.94  -  19.63      525,820           2.66              19.22              427,300            19.51
  19.94  -  27.63      451,540           3.49              23.54              185,950            22.22
  27.75  -  49.38      102,600           6.85              42.99               18,000            27.75
  49.88  -  49.88      892,000           5.35              49.88                   --             0.00
  50.00  -  89.75      224,700           5.93              68.13                   --             0.00
  96.56  -  96.56        2,000           5.41              96.56                   --             0.00
- ------------------   ---------           ----             ------             --------           ------
$  8.81  -  96.56    3,914,500           4.28             $27.28              945,000           $17.61
                     =========                                               ========           ======


     Our subsidiary, Lambda Physik, implemented a stock-based incentive award
plan for its employees during fiscal 2000. Under the plan, during fiscal 2000,
Lambda Physik issued options to purchase 119,800 shares of Lambda Physik AG
common stock at a weighted average price of $35.42 per share were issued to
employees; all options issued in fiscal 2000 were outstanding at September 30,
2000. No additional options are available for grant under this plan.

     SFAS No. 123, "Accounting for Stock-Based Compensation," requires the
disclosure of pro forma net income (loss) and earnings (loss) per share had we
adopted the fair value method as of the beginning of fiscal 1996. Under SFAS
123, the fair value of stock-based awards to employees is calculated through the
use of option pricing models, even though such models were developed to estimate
the fair value of freely tradable, fully transferable options without vesting
restrictions, which significantly differ from our stock option awards. These
models also require subjective assumptions, including future stock price
volatility and expected time to exercise, which greatly affect the calculated
values.

     Our calculations were made using the Black-Scholes option pricing model
with the following weighted average assumptions:


                                       62







                                                        2000           1999           1998
                                                        ----           ----           ----

                                                                         
         Expected life in years                     4.30 - 4.52     3.82 - 4.08    3.87 - 3.98

         Expected volatility                              67.0%           52.3%          50.2%

         Risk-free interest rate                           6.7%            5.3%           5.5%

         Expected dividends                                NONE           none            none


     The fair market value of the Lambda Physik options granted in fiscal 2000
was calculated using the Black-Scholes option pricing model with the following
weighted average assumptions: expected life of 2 years, risk-free interest rate
of 5.08%, volatility of 80% and no dividends during the expected term. The
resulting expense is included in the pro forma net income amounts noted below.

     Our calculations are based on a single option valuation approach and
forfeitures are recognized as they occur. If the computed fair values of the
2000, 1999 and 1998 awards had been amortized to expense over the vesting period
of the awards, proforma net income and earnings per share would appear as
follows (in thousands, except per share data):





                                                    2000              1999            1998
                                                    ----              ----            ----

                                                                         
Net income                         As reported     $69,937          $11,841          $18,811
                                   Pro forma       $59,871          $ 7,306          $15,283

Net income per diluted share       As reported       $2.56          $  0.48          $  0.79
                                   Pro forma         $2.19          $  0.30          $  0.64


     The impact of outstanding non-vested stock options granted prior to fiscal
1996 has been excluded from the proforma calculation; accordingly, the fiscal
2000, 1999 and 1998 proforma amounts are not indicative of future period
proforma amounts, when the calculation will apply to all applicable stock
options.

NOTES RECEIVABLE FROM STOCK SALES

     Notes receivable from stock sales result from the exercise of stock
options for notes. The notes are full recourse promissory notes bearing
interest at 4.7 to 7.1% and are collateralized by the stock issued upon exercise
of the stock options. Interest is payable annually and principal is due through
2005.

10.  EARNINGS PER SHARE

     Basic earnings per share is computed based on the weighted average number
of shares outstanding during the period. Diluted earnings per share is computed
based on the weighted average number of shares outstanding during the period
increased by the effect of dilutive stock options and stock purchase contracts,
using the treasury stock method, and shares issuable under the Productivity
Incentive Plan.


                                       63






     The following table presents information necessary to calculate basic and
diluted earnings per common and common equivalent share (in thousands, except
per share data):





                                                                     2000             1999              1998
                                                                     ----             ----              ----
                                                                                             
         Weighted average shares outstanding-Basic                  25,252            23,957           23,374
             Common stock equivalents                                1,883               435              354
             Employee stock purchase plan equivalents                  184               241               21
                                                                   -------           -------           ------
         Weighted average shares and equivalents-Diluted            27,319            24,633           23,749
                                                                   =======           =======           ======

         Net income for basic and diluted
             earnings per share computation                        $69,937           $11,841          $18,811
                                                                   =======           =======          =======

         Net income per share - basic                                $2.77            $ 0.49          $  0.80
         Net income per share - diluted                              $2.56            $ 0.48          $  0.79


     A total of 68,000, 1,602,000, and 1,546,000 anti-dilutive weighted shares
have been excluded from the dilutive share equivalents calculation at September
30, 2000, October 2, 1999 and September 26, 1998, respectively.

11.  OTHER INCOME (EXPENSE)

     Other income (expense) is as follows (in thousands):



                                                                                          Years Ended
                                                                          ------------------------------------------
                                                                          Sept. 30,        Oct. 2,        Sept. 26,
                                                                            2000            1999            1998
- --------------------------------------------------------------------------------------------------------------------
                                                                                                  
Royalty income                                                              $  576           $328           $  683
Equity in income of joint ventures                                             165            436              131
Gain (loss) on investments, net                                                123           (224)              45
Other -  net                                                                 1,163           (393)             295
- --------------------------------------------------------------------------------------------------------------------
Other income (expense) net                                                  $2,027           $147           $1,154
====================================================================================================================


12.  COMMITMENTS AND CONTINGENCIES

COMMITMENTS

     We lease several of our facilities under operating leases. In addition, we
lease the land for our Auburn manufacturing facilities under long-term fixed
leases.

     During the first quarter of fiscal 1997, we signed a lease for 216,000
square feet of office, research and development and manufacturing space for our
Medical Group headquarters in Santa Clara, California. The lease expires in
December 2001. We have an option to purchase the property for $24.0 million, or
at the end of the lease arrange for the sale of the property to a third party
with Coherent retaining an obligation to the owner for the difference between
the sale price, if less than $20.8 million, and $20.8 million, subject to
certain provisions of the lease. If we do not purchase the property or arrange
for its sale as discussed above, we would be obligated for an additional lease
payment of approximately $20.8 million (included in future minimum lease
payments below). We occupied the building in July 1998 and commenced lease
payments at that time. The lease requires us to maintain specified financial
covenants, all of which we were in compliance with as of September 30, 2000.

     Future minimum payments under our leases at September 30, 2000 are as
follows (in thousands):




                                                         Capital               Operating
           Fiscal Years Ending                            Leases                Leases
- -----------------------------------------------------------------------------------------------
                                                                       
                  2001                                     $  608             $ 4,568
                  2002                                        586              24,749
                  2003                                        585               1,436
                  2004                                        747                 811
                  2005                                          6                 682
               Thereafter                                      --               4,616
- -----------------------------------------------------------------------------------------------
                  Total                                     2,532             $36,862
                  Amount representing interest                325             =======
                                                           ------
                  Present value of minimum lease
                      payments                             $2,207
                                                           ======



                                       64





     Rent expense was $9,711,000 in fiscal 2000, $8,986,000 in fiscal 1999, and
$7,593,000 in fiscal 1998.

     In September 1988, we entered into several patent license agreements with
Patlex Corporation (Patlex) relating to laser-related patents owned by Dr.
Gordon Gould that had been assigned to Patlex. Under the terms of the
agreements, we pay royalties to Patlex ranging from 3.5% to 5.0% for specified
categories of domestic sales and 2.0% of specified categories for international
sales, subject to certain exceptions and limitations. Royalty expense under
these agreements was $827,000 in fiscal 2000, $699,000 in fiscal 1999, and
$893,000 in fiscal 1998. The patents expire on various dates through May 2005.

     We have committed approximately $15 million to build an additional building
at our Electro-Optics facility in Auburn, California to enable us to expand our
manufacturing capacity for optical telecommunications products. Additionally, we
have committed approximately $11 million to provide coating equipment at this
facility. We have also committed approximately $10 million to expand our Lambda
Physik manufacturing facility in Gottingen, Germany to expand our manufacturing
capacity for DUV lithography systems. We have committed approximately $10
million at our Electro-Optics facility in Tampere, Finland to setup a separate
facility for the growth and development of telecommunications products.

     In September 1997, Coherent signed a lease for 17,438 square feet of office
and manufacturing space in Tampere, Finland for its Semiconductor Division. The
lease agreement contained an option for us to purchase the building in December
2000 for $1,040,000. During fiscal 2000, we signed an agreement to exercise the
option and purchase the building in December 2000.

CONTINGENCIES

     Certain claims and lawsuits have been filed or are pending against us. In
the opinion of management, all such matters have been adequately provided for,
are without merit, or are of such kind that if disposed of unfavorably, would
not have a material adverse effect on our consolidated financial position or
results of operations.

     We, along with several other companies, have been named as a party to a
remedial action order issued by the California Department of Toxic Substance
Control relating to soil and groundwater contamination at and in the vicinity of
the Stanford Industrial Park in Palo Alto, California, where our former
headquarters facility is located. The responding parties to the Regional Order
(including Coherent) have completed Remedial Investigation and Feasibility
Reports, which were approved by the State of California. The responding parties
have installed four remedial systems and have reached agreement with responding
parties on final cost sharing.

     We were was also named, along with other parties, to a remedial action
order for the Porter Drive facility site itself in Stanford Industrial Park. The
State of California has approved the Remedial Investigation Report, Feasibility
Study Report, Remedial Action Plan Report and Final Remedial Action Report,
prepared by us for this site. We have been operating remedial systems at the
site to remove subsurface chemicals since April 1992. During fiscal 1997, we
settled with the prior tenant and neighboring companies, on allocation of the
cost of investigating and remediating the site at 3210 Porter Drive, Palo Alto
and the bordering site at 3300 Hillview Avenue, Palo Alto.

     Management believes that our probable, nondiscounted net liability at
September 30, 2000 for remaining costs associated with the above environmental
matters is $0.8 million, which has been previously accrued. This amount consists
of total estimated probable costs of $1.0 million ($0.1 million included in
other current liabilities and $0.9 million included in other long-term
liabilities) reduced by minimum probable recoveries of $0.2 million included in
other assets from other parties named to the order.

13.  OPERATING SEGMENTS

     In fiscal 1999, we adopted SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." The statement establishes standards for
reporting information about operating segments and related disclosures about
products, geographic information and major customers.

     We are organized around four separately managed business units: the
Photonics Group, the Telecom-Actives Group, the Medical Group and Lambda Physik.
Consistent with the rules of SFAS No. 131, we have aggregated these four
business units into three reportable segments. The Telecom-Actives Group was
combined with the Photonics Group in the Electro-Optics segment as they have
similar economic characteristics and are similar in the following: nature of
products/services, nature of production process, type/class of customer,
distribution methods and nature of regulatory environment. The Electro-Optics
segment focuses on markets such as material processing, scientific research,
printing and reprographics and advanced packaging. The Medical segment focuses
on the aesthetic, ophthalmic and surgical markets, with an emphasis in the
aesthetic market on hair removal and in the ophthalmic market on the treatment
of retinal diseases, including age-related macular degeneration, or AMD. The
Lambda Physik segment focuses on


                                       65





lithography, with other target markets including lasers for the production of
flat panel displays, inkjet printers and fiber bragg gratings, refractive
surgery, scientific research, materials processing and micro-machining
applications.

     Our Chief Executive Officer and Chief Financial Officer have been
identified as the chief operating decision makers (CODMs) for SFAS 131 purposes
as they assess the performance of the business units and decide how to allocate
resources to the business units. Pretax income is the measure of profit and loss
that our CODMs use to assess performance and make decisions. Pretax income
represents the sales less the cost of sales and direct expenses incurred within
the operating segments. In addition, our corporate expenses, except for
depreciation of corporate assets and general legal expenses, are allocated to
the operating segments and are included in the results below. Corporate expenses
not allocated to the groups (depreciation of corporate assets and general legal
expenses) are included in Corporate and Other in the reconciliation of operating
results. Further, interest expense, interest income and the provision for income
taxes are included in Corporate and Other in the reconciliation of operating
results.

     Intersegment sales are accounted for primarily at domestic selling prices.
As the CODMs monitor headcount, depreciation and amortization expense and
capital expenditures by operating segment, these amounts are presented below.
The CODMs do not review total assets by segment, but they do review net trade
receivables, net inventories and net property and equipment by operating
segment. The accounting policies for reported segments are the same as for
Coherent as a whole (see Note 1).

REPORTABLE OPERATING SEGMENTS

     Information on reportable segments for the three years ended September 30,
2000, October 2, 1999 and September 26, 1998 is as follows (in thousands, except
headcount):





                                         Electro-                       Lambda         Corporate
2000                                     Optics         Medical         Physik        and Other           Total
- --------------------------------------------------------------------------------------------------------------------
                                                                                        
Net Sales                                $269,484      $205,041        $93,747                          $568,272
Intersegment Net Sales                     28,457         1,900          1,188                            31,545
Gross Profit                              136,481       102,411         39,325                           278,217

Research & Development Expense             28,364        16,775         12,297                            57,436
Selling, General & Administration          66,189        71,963         16,390           1,084           155,626
Intangibles Amortization                    3,408         5,375            154                             8,937
                                        ---------     ---------       --------         -------         ---------
Total Operating Expenses                   97,961        94,113         28,841           1,084           221,999

Income (Loss) Before Income Taxes          37,880         8,870          7,895          55,819           110,464

Depreciation & Amortization                14,020         8,336          3,153             649            26,158
Capital Expenditures                       22,207         3,024          8,988           3,330            37,549
Net Trade Receivables                      51,269        38,876         22,378            (122)          112,401
Net Inventories                            54,437        40,862         30,694             (25)          125,968
Net Property & Equipment                 $ 74,615      $  7,355        $15,645          $4,975          $102,590
Headcount                                   1,688           694            363              94             2,839


                                         Electro-                       Lambda         Corporate
1999                                     Optics         Medical         Physik         and Other           Total
- --------------------------------------------------------------------------------------------------------------------
Net Sales                                $233,057      $162,719       $ 73,093                          $468,869
Intersegment Net Sales                     20,823           934            999                            22,756
Gross Profit                              109,291        78,662         30,722                           218,675

Research & Development Expense             22,694        14,661          9,404                            46,759
In-process Research & Development           4,000        12,000                                           16,000
Selling, General & Administration          55,679        60,616         15,118          $ 725            132,138
Intangibles Amortization                    2,241         3,295            165                             5,701
                                       ----------    ----------       --------         -------         ---------
Total Operating Expenses                   84,614        90,572         24,687             725           200,598

Income (Loss) Before Income Taxes          23,998       (11,633)         5,480          (1,615)           16,230

Depreciation & Amortization                10,747         5,848          2,624             637            19,856
Capital Expenditures                       16,456         2,754          3,587           1,428            24,225
Net Trade Receivables                      45,404        34,599         17,924            (334)           95,003
Net Inventories                            43,398        41,143         19,025             (25)           97,902
Net Property & Equipment                 $ 67,971       $ 7,631       $ 11,668          $2,684          $ 89,954
Headcount                                   1,347           698            291              81             2,417




                                       66






                                         Electro-                       Lambda         Corporate
1998                                     Optics         Medical         Physik         and Other         Total
- --------------------------------------------------------------------------------------------------------------------
                                                                                      
Net Sales                                $193,438      $155,690       $ 61,321                        $410,449
Intersegment Net Sales                     23,612           566          2,688                          26,866
Gross Profit                               91,284        75,584         29,628                         196,496

Research & Development Expense             20,472        15,427          8,635                          44,534
Selling, General & Administration          46,911        61,105         14,505          $  665         123,186
Intangibles  Amortization                   2,280         2,183            181                           4,644
                                       ----------    ----------       --------         -------      ----------
Total Operating Expenses                   69,663        78,715         23,321             665         172,364

Income (Loss) Before Income Taxes          21,761        (2,667)         4,416             195          23,705

Depreciation & Amortization                10,361         4,698          1,742             378          17,179
Capital Expenditures                       12,166         4,295          5,647             243          22,351
Net Trade Receivables                      37,096        35,658         14,190            (122)         86,822
Net Inventories                            43,398        41,143         19,025             (25)        103,541
Net Property & Equipment                $  63,463       $ 7,843       $ 11,157          $  394        $ 82,857
Headcount                                   1,276           656            279              50           2,261


GEOGRAPHIC INFORMATION

     Our foreign operations consist primarily of sales offices and manufacturing
facilities in Europe and Asia-Pacific. Sales, marketing and customer service
activities are conducted through sales subsidiaries throughout the world.
Geographic sales information for the last three fiscal years is based on the
location of the end customer. Geographic long-lived asset information presented
below is based on the physical location of the assets at the end of each fiscal
year.


     Sales to unaffiliated customers are as follows (in thousands):




                                                 2000                  1999                     1998
- ----------------------------------------------------------------------------------------------------------
                                                                                     
SALES
- -----
United States                                  $236,091             $198,599                   $185,004
Japan                                           124,471              104,096                     75,464
Europe, other                                    96,114               70,632                     61,089
Germany                                          53,762               57,124                     49,584
Asia-Pacific, other                              30,045               19,793                     22,274
Rest of World                                    27,789               18,625                     17,034
                                               --------            ---------                  ---------
Total Sales                                    $568,272             $468,869                   $410,449
                                               ========             ========                   ========


For the fiscal years 2000, 1999 and 1998, no one customer accounted for 10% or
more of total net sales.

Long-lived assets by geographic region are as follows (in thousands):



                                              Sept. 30,               Oct. 2,                 Sept. 26,
                                                  2000                  1999                     1998
                                          ----------------------------------------------------------------
                                                                                    
LONG-LIVED ASSETS
- -----------------
United States                                  $ 94,554             $ 77,896                  $  72,641
Germany                                          16,474               12,605                     11,382
Europe, other                                    11,211               11,781                      9,217
Asia-Pacific                                      3,570                4,190                      3,316
                                               --------             --------                  ---------
Total Long-lived Assets                        $125,809             $106,472                  $  96,556
                                               ========             ========                  =========



14.  ISSUANCE OF SUBSIDIARY STOCK BY SUBSIDIARY

     On September 21, 2000, our Lambda Physik subsidiary issued 3,890,000 shares
of its common stock in an initial public offering on Germany's Neuer Markt.
Proceeds from the offering of shares, based on the offering price of
approximately $31 per share, totalled $100,310,000 ($92,715,000 net of offering
expenses and before a tax benefit of $3,982,000 relating to those expenses). We
own 8,000,000 outstanding shares of Lambda Physik's common stock. As a result of
the initial public offering, our ownership interest was reduced from 80.0% to
60.4% of Lambda Physik. We recognized a pretax gain of $55,148,000 (after-tax
gain of


                                       67





$33,551,000) on the increase in the value of our investment in Lambda Physik as
a result of their public offering.

15.  SUBSEQUENT EVENTS

     In November 2000, we acquired Crystal Associates, Inc. of East Hanover, New
Jersey for approximately $7.1 million in cash. Crystal Associates manufactures
exotic crystals, which are utilized in a wide variety of photonics applications.
The acquisition will be accounted for as a purchase and, accordingly, we will
preliminarily record the $5.5 million excess of the purchase price over the fair
value of net assets acquired as goodwill and other intangibles, which will be
amortized over periods up to 10 years.

     In December 2000, we purchased two buildings, for $9.9 million, on 38.3
acres in Lincoln, California, near our existing Auburn Electro-Optical
facilities. We have committed to spend approximately $9 million for improvements
to these buildings.

16.  QUARTERLY FINANCIAL DATA (UNAUDITED)

     Summarized quarterly financial data for fiscal 2000 and 1999 are as follows
(in thousands, except per share amounts):





                                                    First               Second               Third            Fourth
                                                    Quarter             Quarter              Quarter          Quarter
- ---------------------------------------------------------------------------------------------------------------------
                                                                                            
YEAR ENDED SEPTEMBER 30, 2000:

Net sales                                           $127,194          $136,681              $149,436       $154,961
Gross profit                                          61,541            68,362                73,732         74,582
Net income (loss)                                      6,673             8,403                 9,897         44,964
Net income (loss) per diluted share                     0.26              0.31                  0.36           1.57
Net income (loss) per basic share                       0.27              0.34                  0.39           1.71
=====================================================================================================================

YEAR ENDED OCTOBER 2, 1999:

Net sales                                           $105,631          $116,537              $115,051       $131,650
Gross profit                                          50,451            53,692                54,246         60,286
Net income (loss)                                      4,266             5,380                (5,064)         7,259
Net income (loss) per diluted share                     0.18              0.22                 (0.21)          0.29
Net income (loss) per basic share                       0.18              0.22                 (0.21)          0.30
=====================================================================================================================



                                       68







                        VALUATION AND QUALIFYING ACCOUNTS
            FOR THE YEARS ENDED SEPTEMBER 30, 2000, OCTOBER 2, 1999,
                             AND SEPTEMBER 26, 1998
                                 (In thousands)

                                                                  Additions
                                              Balance at          Charged to       Deductions       Balance
                                              Beginning           Costs and         from            at End
                                              of Period           Expenses         Reserves (1)     of Period
- --------------------------------------------------------------------------------------------------------------------
                                                                                     
YEAR ENDED SEPTEMBER 30, 2000:
Accounts receivable allowances                 $ 4,592           $ 6,147          $ (3,976)       $ 6,763
Warranty                                        13,269            14,610           (10,341)        17,538
===================================================================================================================
YEAR ENDED OCTOBER 2, 1999:
Accounts receivable allowances                 $ 4,817           $ 3,207          $ (3,432)       $ 4,592
Warranty                                        10,938            15,566           (13,235)        13,269
===================================================================================================================
YEAR ENDED SEPTEMBER 26, 1998:
Accounts receivable allowances                 $ 3,499           $ 6,945          $ (5,627)       $ 4,817
Warranty                                         7,498            10,681            (7,241)        10,938
===================================================================================================================


     (1)  Reductions from the reserves are for the purpose for which the
          reserves were created.

                                       69











                       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 September 30, 2000

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

                                 COHERENT, INC.
                                    EXHIBITS
                     ---------------------------------------






                                       70




                                INDEX TO EXHIBITS




  Sequentially
    Exhibit
    Number                    Exhibit
    ------                    -------
              
    10.37         1998 Director Option Plan

    21.1          Subsidiaries

    23.1          Independent Auditors' Consent

    27.1          Financial Data Schedules


All other exhibits required to be filed as part of this report have been
incorporated by reference. See item 14(c) for a complete index of such exhibits.




                                       71

EX-10.37

                                                                   EXHIBIT 10.37


                            1998 DIRECTOR OPTION PLAN


         1.       PURPOSES OF THE PLAN. The purposes of this 1998 Director
Option Plan are to attract and retain the best available personnel for service
as Outside Directors (as defined herein) of the Company, to provide additional
incentive to the Outside Directors of the Company to serve as Directors and to
encourage their continued service on the Board.

                  All options granted hereunder shall be nonstatutory stock
options.

         2.       DEFINITIONS. As used herein, the following definitions shall
apply:

                  (a)      "BOARD" means the Board of Directors of the Company.

                  (b)      "CODE" means the Internal Revenue Code of 1986, as
amended.

                  (c)      "COMMON STOCK" means the common stock of the Company.

                  (d)      "COMPANY" means Coherent, Inc.

                  (e)      "DIRECTOR" means a member of the Board.

                  (f)      "DISABILITY" means total and permanent disability as
defined in Section 22(e)(3) of the Code.

                  (g)      "EMPLOYEE" means any person, including officers and
Directors, employed by the Company or any Parent or Subsidiary of the Company.
The payment of a Director's fee by the Company shall not be sufficient in and of
itself to constitute "employment" by the Company.

                  (h)      "EXCHANGE ACT" means the Securities Exchange Act of
1934, as amended.

                  (i)      "FAIR MARKET VALUE" means, as of any date, the value
of Common Stock determined as follows:

                           (i)      If the Common Stock is listed on any
established stock exchange or a national market system, including without
limitation the Nasdaq National Market or The Nasdaq SmallCap Market of The
Nasdaq Stock Market, its Fair Market Value shall be the closing sales price for
such stock (or the closing bid, if no sales were reported) as quoted on such
exchange or system for the last market trading day prior to the time of
determination as reported in THE WALL STREET JOURNAL or such other source as the
Administrator deems reliable;

                           (ii)     If the Common Stock is regularly quoted by a
recognized securities dealer but selling prices are not reported, the Fair
Market Value of a Share of Common Stock shall be the mean between the high bid
and low asked prices for the Common Stock for the last market trading day prior
to the time of determination, as reported in THE WALL STREET JOURNAL or such
other source as the Board deems reliable; or

                           (iii)    In the absence of an established market for
the Common Stock, the Fair Market Value thereof shall be determined in good
faith by the Board.

                  (j)      "INSIDE DIRECTOR" means a Director who is an
Employee.

                  (k)      "OPTION" means a stock option granted pursuant to the
Plan.

                  (l)      "OPTIONED STOCK" means the Common Stock subject to an
Option.


                  (m)      "OPTIONEE" means a Director who holds an Option.

                                      -1-


                  (n)      "OUTSIDE DIRECTOR" means a Director who is not an
Employee.

                  (o)      "PARENT" means a "parent corporation," whether now or
hereafter existing, as defined in Section 424(e) of the Code.

                  (p)      "PLAN" means this 1998 Director Option Plan.

                  (q)      "SHARE" means a share of the Common Stock, as
adjusted in accordance with Section 10 of the Plan.

                  (r)      "SUBSIDIARY" means a "subsidiary corporation,"
whether now or hereafter existing, as defined in Section 424(f) of the Internal
Revenue Code of 1986.

         3.       STOCK SUBJECT TO THE PLAN. Subject to the provisions of
Section 10 of the Plan, the maximum aggregate number of Shares that may be
optioned and sold under the Plan is 100,000 Shares (the "POOL") (the Shares may
be authorized, but unissued, or reacquired Common Stock), plus an annual
increase to be added on each anniversary date of the adoption of the Plan equal
to (i) the number of Shares needed to restore the maximum aggregate number of
Shares that may be optioned and sold under the Plan to 100,000 or (ii) a lesser
amount determined by the Board of Directors.

                  If an Option expires or becomes unexercisable without having
been exercised in full, the unpurchased Shares which were subject thereto shall
become available for future grant or sale under the Plan (unless the Plan has
terminated). Shares that have actually been issued under the Plan shall not be
returned to the Plan and shall not become available for future distribution
under the Plan.

         4.       ADMINISTRATION AND GRANTS OF OPTIONS UNDER THE PLAN.

                  (a)      PROCEDURE FOR GRANTS. All grants of Options to
Outside Directors under this Plan shall be automatic and nondiscretionary and
shall be made strictly in accordance with the following provisions:

                           (i)      No person shall have any discretion to
select which Outside Directors shall be granted Options or to determine the
number of Shares to be covered by Options.

                           (ii)     Each Outside Director shall be automatically
granted an Option to purchase 20,000 Shares (the "FIRST OPTION") on the date on
which such person first becomes an Outside Director, whether through election by
the stockholders of the Company or appointment by the Board to fill a vacancy;
PROVIDED, HOWEVER, that an Inside Director who ceases to be an Inside Director
but who remains a Director shall not receive a First Option.

                           (iii)    Each Outside Director shall be automatically
granted an Option to purchase 5,000 Shares (a "SUBSEQUENT OPTION") immediately
following each annual meeting of stockholders at which such Outside Director is
re-elected (beginning with the 2000 annual meeting of stockholders) provided he
or she is then an Outside Director and if as of such date, he or she shall have
served on the Board for at least the preceding three (3) months.

                           (iv)     Notwithstanding the provisions of
subsections (ii) and (iii) hereof, any exercise of an Option granted before the
Company has obtained stockholder approval of the Plan in accordance with Section
16 hereof shall be conditioned upon obtaining such stockholder approval of the
Plan in accordance with Section 16 hereof.

                           (v)      The terms of an Option granted hereunder
shall be as follows:

                                    (A)     the term of the Option shall be six
(6) years.

                                    (B)     the Option shall be exercisable only
while the Outside Director remains a Director of the Company, except as set
forth in Sections 8 and 10 hereof.

                                    (C)     the exercise price per Share shall
be 100% of the Fair Market Value per Share on the date of grant of the First
Option.

                                      -2-


                                    (D)     subject to Section 10 hereof, the
First Option shall become exercisable cumulatively to the extent of twenty-five
percent (25%) of the Shares subject to such option on each of the first four
anniversaries of the date of grant, provided that the Optionee continues to
serve as a Director on such dates.

                                    (E)     subject to Section 10 hereof, each
Subsequent Option shall become exercisable with respect to 100% of the Shares
subject to such option on the fourth anniversary of the date of grant, provided
that the Optionee continues to serve as a Director on such date.

                           (vi)     In the event that any Option granted under
the Plan would cause the number of Shares subject to outstanding Options plus
the number of Shares previously purchased under Options to exceed the Pool, then
the remaining Shares available for Option grant shall be granted under Options
to the Outside Directors on a pro rata basis. No further grants shall be made
until such time, if any, as additional Shares become available for grant under
the Plan through action of the Board or the stockholders to increase the number
of Shares that may be issued under the Plan or through cancellation or
expiration of Options previously granted hereunder.

                  (b)      SUSPENSION OR TERMINATION OF OPTION. If the Chief
Executive Officer or his designee reasonably believes that an Optionee has
committed an act of misconduct, the Chief Executive Officer may suspend the
Optionee's right to exercise any option pending a determination by the Board of
Directors (excluding the Outside Director accused of such misconduct). If the
Board of Directors (excluding the Outside Director accused of such misconduct)
determines an Optionee has committed an act of embezzlement, fraud, dishonesty,
nonpayment of an obligation owed to the Company, breach of fiduciary duty or
deliberate disregard of the Company rules resulting in loss, damage or injury to
the Company, or if an Optionee makes an unauthorized disclosure of any Company
trade secret or confidential information, engages in any conduct constituting
unfair competition, induces any Company customer to breach a contract with the
Company or induces any principal for whom the Company acts as agent to terminate
such agency relationship, neither the Optionee nor his estate shall be entitled
to exercise any option whatsoever. In making such determination, the Board of
Directors (excluding the Outside Director accused of such misconduct) shall act
fairly and shall give the Optionee an opportunity to appear and present evidence
on Optionee's behalf at a hearing before the Board or a committee of the Board.

         5.       ELIGIBILITY. Options may be granted only to Outside
Directors. All Options shall be automatically granted in accordance with the
terms set forth in Section 4 hereof.

                  The Plan shall not confer upon any Optionee any right with
respect to continuation of service as a Director or nomination to serve as a
Director, nor shall it interfere in any way with any rights which the Director
or the Company may have to terminate the Director's relationship with the
Company at any time.

         6.       TERM OF PLAN. The Plan shall become effective upon the earlier
to occur of its adoption by the Board or its approval by the stockholders of the
Company as described in Section 16 of the Plan. It shall continue in effect for
a term of ten (10) years unless sooner terminated under Section 11 of the Plan.

         7.       FORM OF CONSIDERATION. The consideration to be paid for the
Shares to be issued upon exercise of an Option, including the method of payment,
shall consist of (i) cash, (ii) check, (iii) other shares which (x) in the case
of Shares acquired upon exercise of an option, have been owned by the Optionee
for more than six (6) months on the date of surrender, and (y) have a Fair
Market Value on the date of surrender equal to the aggregate exercise price of
the Shares as to which said Option shall be exercised, (iv) consideration
received by the Company under a cashless exercise program (if any) implemented
by the Company in connection with the Plan, or (v) any combination of the
foregoing methods of payment.

         8.       EXERCISE OF OPTION.

                  (a)      PROCEDURE FOR EXERCISE; RIGHTS AS A STOCKHOLDER. Any
Option granted hereunder shall be exercisable at such times as are set forth in
Section 4 hereof; PROVIDED, HOWEVER, that no Options shall be exercisable until
stockholder approval of the Plan in accordance with Section 16 hereof has been
obtained.

                  An Option may not be exercised for a fraction of a Share.

                                      -3-


                  An Option shall be deemed to be exercised when written notice
of such exercise has been given to the Company in accordance with the terms of
the Option by the person entitled to exercise the Option and full payment for
the Shares with respect to which the Option is exercised has been received by
the Company. Full payment may consist of any consideration and method of payment
allowable under Section 7 of the Plan. Until the issuance (as evidenced by the
appropriate entry on the books of the Company or of a duly authorized transfer
agent of the Company) of the stock certificate evidencing such Shares, no right
to vote or receive dividends or any other rights as a stockholder shall exist
with respect to the Optioned Stock, notwithstanding the exercise of the Option.
A share certificate for the number of Shares so acquired shall be issued to the
Optionee as soon as practicable after exercise of the Option. No adjustment
shall be made for a dividend or other right for which the record date is prior
to the date the stock certificate is issued, except as provided in Section 10 of
the Plan.

                  Exercise of an Option in any manner shall result in a decrease
in the number of Shares which thereafter may be available, both for purposes of
the Plan and for sale under the Option, by the number of Shares as to which the
Option is exercised.

                  (b)      TERMINATION OF CONTINUOUS STATUS AS A DIRECTOR.
Subject to Section 10 hereof, in the event an Optionee's status as a Director
terminates (other than upon the Optionee's death or Disability), the Optionee
may exercise his or her Option, but only within 210 days following the date of
such termination, and only to the extent that the Optionee was entitled to
exercise it on the date of such termination (but in no event later than the
expiration of its six (6) year term). To the extent that the Optionee was not
entitled to exercise an Option on the date of such termination, and to the
extent that the Optionee does not exercise such Option (to the extent otherwise
so entitled) within the time specified herein, the Option shall terminate.

                  (c)      DISABILITY OF OPTIONEE. In the event Optionee's
status as a Director terminates as a result of Disability, the Optionee may
exercise his or her Option, but only within twelve (12) months following the
date of such termination, and only to the extent that the Optionee would have
been entitled to exercise the Option had the Optionee not been disabled and
remained an Outside Director for six (6) months after such termination (but in
no event later than the expiration of its six (6) year term). To the extent that
the Optionee would not have been entitled to exercise an Option had the Optionee
not been disabled and remained an Outside Director for six (6) months after such
termination, or if he or she does not exercise such Option (to the extent
otherwise so entitled) within the time specified herein, the Option shall
terminate.

                  (d)      DEATH OF OPTIONEE. In the event of an Optionee's
death, the Optionee's estate or a person who acquired the right to exercise the
Option by bequest or inheritance may exercise the Option, but only within twelve
(12) months following the date of death, and only to the extent that the
Optionee would have been entitled to exercise the Option had the Optionee
continued living and remained an Outside Director for six (6) months after the
date of death (but in no event later than the expiration of its six (6) year
term). To the extent that the Optionee would not have been entitled to exercise
an Option had the Optionee continued living and remained an Outside Director for
six (6) months after the date of death, and to the extent that the Optionee's
estate or a person who acquired the right to exercise such Option does not
exercise such Option (to the extent otherwise so entitled) within the time
specified herein, the Option shall terminate.

         9.       NON-TRANSFERABILITY OF OPTIONS. The Option may not be sold,
pledged, assigned, hypothecated, transferred, or disposed of in any manner other
than by will or by the laws of descent or distribution and may be exercised,
during the lifetime of the Optionee, only by the Optionee.

         10.      ADJUSTMENTS UPON CHANGES IN CAPITALIZATION, DISSOLUTION,
MERGER OR ASSET SALE.

                  (a)      CHANGES IN CAPITALIZATION. Subject to any required
action by the stockholders of the Company, the number of Shares covered by each
outstanding Option, the number of Shares which have been authorized for issuance
under the Plan but as to which no Options have yet been granted or which have
been returned to the Plan upon cancellation or expiration of an Option, as well
as the price per Share covered by each such outstanding Option, and the number
of Shares issuable pursuant to the automatic grant provisions of Section 4
hereof shall be proportionately adjusted for any increase or decrease in the
number of issued Shares resulting from a stock split, reverse stock split, stock
dividend, combination or reclassification of the Common Stock, or any other
increase or decrease in the number of issued Shares effected without receipt of
consideration by the Company; PROVIDED, HOWEVER, that conversion of any
convertible securities of the Company shall not be deemed to have been "effected

                                      -4-


without receipt of consideration." Except as expressly provided herein, no
issuance by the Company of shares of stock of any class, or securities
convertible into shares of stock of any class, shall affect, and no adjustment
by reason thereof shall be made with respect to, the number or price of Shares
subject to an Option.

                  (b)      DISSOLUTION OR LIQUIDATION. In the event of the
proposed dissolution or liquidation of the Company, to the extent that an Option
has not been previously exercised, it shall terminate immediately prior to the
consummation of such proposed action.

                  (c)      MERGER OR ASSET SALE. In the event of a proposed
merger of the Company with or into another corporation where following such
merger the stockholders of the Company prior to such merger own less than 50% of
the voting securities of the surviving corporation (a "change of control"), or
the sale of all or substantially all of the assets of the Company, each
outstanding Option shall be assumed or an equivalent option shall be substituted
by such successor corporation or a parent or subsidiary of such successor
corporation. If an Option is assumed or substituted for, the Option or
equivalent option shall continue to be exercisable as provided in Section 4
hereof for so long as the Optionee serves as a Director or a director of the
successor corporation. Following such assumption or substitution, if the
Optionee's status as a Director or director of the successor corporation, as
applicable, is terminated other than upon a voluntary resignation by the
Optionee, the Option or option shall become fully exercisable, including as to
Shares for which it would not otherwise be exercisable. Thereafter, the Option
or option shall remain exercisable in accordance with Section 8 above. In the
event that such successor corporation refuses to assume the Option or to
substitute an equivalent option, the Board shall, in lieu of such assumption or
substitution, provide for the Optionee to have the right to exercise the Option
as to all of the Optioned Stock, including Shares as to which the Option would
not otherwise be exercisable. If an Option becomes fully exercisable in lieu of
assumption or substitution in the event of a merger or sale of assets, the Board
shall notify the Optionee that the Option shall be fully exercisable for a
period of twenty (20) days from the date of such notice, and the Option will
terminate upon the expiration of such period.

         For the purposes of this Section 10(c), an Option shall be considered
assumed if, following the merger or sale of assets, the Option confers the right
to purchase or receive, for each Share of Optioned Stock subject to the Option
immediately prior to the merger or sale of assets, the consideration (whether
stock, cash, or other securities or property) received in the merger or sale of
assets by holders of Common Stock for each Share held on the effective date of
the transaction (and if holders were offered a choice of consideration, the type
of consideration chosen by the holders of a majority of the outstanding Shares).
If such consideration received in the merger or sale of assets is not solely
common stock of the successor corporation or its Parent, the Board may, with the
consent of the successor corporation, provide for the consideration to be
received upon the exercise of the Option, for each Share of Optioned Stock
subject to the Option, to be solely common stock of the successor corporation or
its Parent equal in fair market value to the per share consideration received by
holders of Common Stock in the merger or sale of assets.

         11.      AMENDMENT AND TERMINATION OF THE PLAN.

                  (a)      AMENDMENT AND TERMINATION. The Board may at any time
amend, alter, suspend, or discontinue the Plan, but no amendment, alteration,
suspension, or discontinuation shall be made that would impair the rights of any
Optionee under any grant theretofore made, without his or her consent. In
addition, to the extent necessary and desirable to comply with any applicable
law, regulation or stock exchange rule, the Company shall obtain stockholder
approval of any Plan amendment in such a manner and to such a degree as
required.

                  (b)      EFFECT OF AMENDMENT OR TERMINATION. Any such
amendment or termination of the Plan shall not affect Options already granted
and such Options shall remain in full force and effect as if this Plan had not
been amended or terminated.

         12.      TIME OF GRANTING OPTIONS. The date of grant of an Option
shall, for all purposes, be the date determined in accordance with Section 4
hereof.

         13.      CONDITIONS UPON ISSUANCE OF SHARES. Shares shall not be issued
pursuant to the exercise of an Option unless the exercise of such Option and the
issuance and delivery of such Shares pursuant thereto shall comply with all
relevant provisions of law, including, without limitation, the Securities Act of
1933, as amended, the Exchange Act, the rules and regulations promulgated
thereunder, state securities laws, and the requirements of any stock exchange
upon which the Shares may then be listed, and shall be further subject to the
approval of counsel for the Company with respect to such compliance.

                                      -5-


                  As a condition to the exercise of an Option, the Company may
require the person exercising such Option to represent and warrant at the time
of any such exercise that the Shares are being purchased only for investment and
without any present intention to sell or distribute such Shares, if, in the
opinion of counsel for the Company, such a representation is required by any of
the aforementioned relevant provisions of law.

                  Inability of the Company to obtain authority from any
regulatory body having jurisdiction, which authority is deemed by the Company's
counsel to be necessary to the lawful issuance and sale of any Shares hereunder,
shall relieve the Company of any liability in respect of the failure to issue or
sell such Shares as to which such requisite authority shall not have been
obtained.

         14.      RESERVATION OF SHARES. The Company, during the term of this
Plan, will at all times reserve and keep available such number of Shares as
shall be sufficient to satisfy the requirements of the Plan.

         15.      OPTION AGREEMENT. Options shall be evidenced by written option
agreements in such form as the Board shall approve.

         16.      STOCKHOLDER APPROVAL. The Plan shall be subject to approval by
the stockholders of the Company within twelve (12) months after the date the
Plan is adopted. Such stockholder approval shall be obtained in the degree and
manner required under applicable state and federal law and any stock exchange
rules.


                                      -6-

EX-21.1

                                                                    EXHIBIT 21.1


                                  SUBSIDIARIES


         The following table sets forth information as to Coherent's
subsidiaries, all of which are included in the consolidated financial
statements. Coherent owns 100% of the outstanding voting securities of such
corporations except as noted below.



                                                                         Jurisdiction of
                  Name                                                    Incorporation
- ----------------------------------------------------------------------------------------------------------
                                                                   
     Coherent FSC, Inc.                                                Virgin Islands
     Coherent GmbH                                                     Germany
     Coherent (U.K.) Ltd.                                              United Kingdom
     Coherent Japan, Inc.                                              Japan
     Lambda Physik GmbH (1)                                            Germany
     Lambda Physik U.S. (1)                                            Massachusetts
     Lambda Physik Japan, K.K. (2)                                     Japan
     Coherent S.A.                                                     France
     Coherent Optics Europe, Ltd.                                      United Kingdom
     Coherent Lubeck GmbH                                              Germany
     Coherent Export Co., Inc.                                         United States
     Coherent Holding Co., GmbH                                        Germany
     Coherent-Ealing Europe, Ltd.                                      United Kingdom
     Coherent (U.K.) Holdings, Ltd.                                    United Kingdom
     Coherent Benelux                                                  The Netherlands
     Coherent Tutcore, Ltd. (3)                                        Finland
     Coherent HK Limited                                               Hong Kong
     Coherent Italia                                                   Italy
     Coherent Scotland                                                 Scotland
     Star Medical Technologies, Inc.                                   United States


(1)  Coherent owns 60.4% of the outstanding voting securities of these
     subsidiaries.
(2)  Coherent owns 58.9% of the outstanding voting securities of this
     subsidiary.
(3)  Coherent owns 80.0% of the outstanding voting securities of this
     subsidiary.

EX-23.1

                                                                    EXHIBIT 23.1




                         INDEPENDENT AUDITORS' CONSENT


         We consent to the incorporation by reference in Registration
Statement Nos. 333-46118, 333-80265, 333-03035, 33-66536, 33-35609, 33-31442,
33-21878 and 2-96838 of Coherent, Inc. on Forms S-8 of our report dated
October 30, 2000 appearing in this Annual Report on Form 10-K of Coherent,
Inc. for the year ended September 30, 2000.

/s/ DELOITTE & TOUCHE LLP

San Jose, California
December 13, 2000

EX-27.1

 


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