ROFIN SINAR TECHNOLOGIES INC - 10-K Annual Report

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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES AND EXCHANGE ACT OF 1934

For the fiscal year ended September 30, 1998

Commission file number: 000-21377

ROFIN-SINAR TECHNOLOGIES, INC.
------------------------------------------------------
(Exact name of Registrant as specified in its charter)

Delaware 38-3306461
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

45701 Mast Street, Plymouth, MI 48170
- -------------------------------------- ----------
(Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code: (734) 455-5400

Securities registered pursuant to Section 12(b) of the Act: NONE

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

Title of each class
-------------------
Common Stock, $.01 par value
Rights Associated with Common Stock, par value $.01 per Share

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]

The aggregate market value of the common stock held by non-affiliates of the
Registrant (based upon the closing price of the stock on the Nasdaq National
Market on December 17, 1998) was approximately $109,467,550.

11,522,900 shares of the Registrant's common stock, par value $.01 per
share, were outstanding as of December 17, 1998.

Documents Incorporated by Reference
-------------------------------------
Certain sections of the Company's Proxy Statement to be filed in connection
with the Company's 1999 Annual Meeting of Stockholders to be held in March
1999 are incorporated by reference herein at Part III, Items 10 - 13.

ROFIN-SINAR TECHNOLOGIES, INC.

TABLE OF CONTENTS

Item Page
- -------- ------------------------------------------------------ ----

PART I 1. Business 3

2. Properties 24

3. Legal Proceedings 24

4. Submission of Matters to a Vote of Security Holders 24

PART II 5. Market Price of the Registrant's Common
Equity and Related Stockholder Matters 25

6. Selected Financial Data 26

7. Management's Discussion and Analysis of
Financial Condition and Results of Operations 27

7A. Quantitative and Qualitative Disclosures about
Market Risk 33

8. Consolidated Financial Statements and
Supplementary Data 33

9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 33

PART III 10. Directors and Executive Officers of the Registrant 34

11. Executive Compensation 34

12. Security Ownership of Certain
Beneficial Owners and Management 34

13. Certain Relationships and Related Transactions 34

PART IV 14. Exhibits, Consolidated Financial Statement
Schedules, and Reports on Form 8-K 35

SIGNATURES 38

PART I

Special Note Regarding Forward-Looking Statements

Certain statements in this Annual Report on Form 10-K constitute forward-
looking statements within the meaning of the Private Securities Litigation
Reform Act of 1995 (the "Reform Act"). Such forward-looking statements
involve known and unknown risks, uncertainties, and other factors which may
cause the actual results, performance, or achievements of the Company to be
materially different from any future results, performance or achievements,
expressed or implied by such forward-looking statements, including those
factors set forth under "Risk Factors", below. In making these forward-
looking statements, the Company claims the protection of the safe-harbor for
forward-looking statements contained in the Reform Act. The Company does
not assume any obligation to update these forward-looking statements to
reflect actual results, changes in assumptions, or changes in other factors
affecting such forward-looking statements.

ITEM 1. BUSINESS

COMPANY OVERVIEW

Rofin-Sinar Technologies Inc. ("Rofin-Sinar" or the "Company") was
incorporated in Delaware on July 19, 1996. On September 30, 1996, the
Company consummated an initial public offering of its common stock ("IPO").
Prior to the IPO, the common stock of Rofin-Sinar, a newly formed holding
company, Rofin-Sinar Inc. ("RSI") and Rofin-Sinar Laser GmbH ("RSL") were
each owned directly or indirectly by Siemens AG ("Siemens"). RSL includes
the consolidated accounts of its 99.97% owned subsidiary, Rofin-Sinar France
S.A.; its 90.65% owned subsidiary Rofin-Sinar Italiana S.r.l.; and its 51%
owned subsidiary Rofin-Marubeni Laser Corporation (a Japanese corporation).
Concurrent with the IPO, the stock of RSI and RSL (together, the "Rofin-
Sinar Group"), including all business operations, assets and liabilities,
were sold to the Company in a reorganization.

Rofin-Sinar designs, develops, engineers, manufactures and markets laser
products for cutting, welding and marking a wide range of industrial
materials. Lasers are a non-contact technology for material processing
which have several advantages that are desirable in industrial applications.
The Company believes it has a worldwide market share (based on sales volume)
of approximately 18% for laser products used for cutting/welding and marking
applications and that it is among the largest suppliers of laser products
used for marking applications in Europe and the Asia/Pacific region (other
than Japan). Over 80% of the Company's sales in fiscal 1998 were made to
existing customers. The Company has sold more than 5,500 laser sources
since 1975 and currently has over 1,500 active customers (including
multinational companies with multiple facilities purchasing from the
Company). During both fiscal 1996 and 1997, approximately 72% of the
Company's revenues came from sales and servicing of laser products for
cutting and welding applications and approximately 28% came from sales and
servicing of laser products for marking applications, compared to fiscal
1998 where 67% of revenue was from cutting/welding applications and 33% from
marking applications.

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Through its global manufacturing, distribution and service network, the
Company provides a comprehensive range of laser solutions to three principal
target markets for material processing lasers: the machine tool, automotive
and semiconductor & electronics industries. The Company sells directly to
industrial end-users, to original equipment manufacturers ("OEMs")
(principally in the machine tool industry) who integrate Rofin-Sinar's laser
sources with other system components, and to distributors. Many of Rofin-
Sinar's customers are among the largest global participants in their
respective industries. During the 1996, 1997, and 1998 fiscal years, 34%,
35%, and 31%, respectively, of the Company's sales were in North America,
and 66%, 65%, and 69% in Europe/Asia.

In August 1997, Rofin-Sinar acquired 80% of the common stock of Dilas
Diodenlaser GmbH ("Dilas"), a German limited liability company based in
Mainz, Germany. Dilas designs and manufactures diode lasers and components
for a wide range of material processing applications and sells them to the
machine tool, automotive and semiconductor & electronic industries, as well
as to the research, measurement and medical instruments industries.

In January 1998, Rofin-Sinar formed a 74% owned company, Rofin-Sinar UK
Ltd., based in Kingston upon Hull, England, and acquired certain business
assets from Palomar Technologies Ltd. UK to design and manufacture low power
CO2 lasers for cutting and marking applications to be sold mainly to the
machine tool and packaging industries.

THE COMPANY'S LASER PRODUCTS

The Company currently offers a comprehensive range of laser products and
related services for three principal material processing applications: (1)
cutting; (2) welding; and (3) marking. Rather than offering standardized
laser systems, the Company works directly with its customers to develop and
customize optimal solutions for their manufacturing requirements. In
developing its laser solutions, the Company offers customers its expertise
in: (i) product development and manufacturing services based on over 20
years of laser technology experience and applications know-how; (ii)
application and process development (i.e., developing new laser-based
applications for manufacturing customers and assisting them in integrating
lasers into their production processes); (iii) system engineering (i.e.,
advising customers on machine design, including tooling, automation and
controls for customers in need of "turn-key" solutions); and (iv) extensive
after-sales support of its laser products (including technical support,
field service, maintenance and training programs, and rapid spare parts
delivery).

The following table sets forth the Company's net sales of laser products
used for cutting and welding applications and of laser products used for
marking applications in fiscal 1996, 1997 and 1998:

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September 30,
-----------------------------------
Product Category * 1996 1997 1998
------------------------------ --------- --------- ---------
(in thousands)
Lasers for cutting and welding $ 83,473 $ 93,452 $ 78,472
Laser marking products 32,430 35,941 39,111
--------- --------- ---------
Total sales, net $ 115,903 $ 129,393 $ 117,583
========= ========= =========

* For each product category, net sales includes sales of services
(including training, maintenance and repair) and spare parts.

The Company from time to time reviews various opportunities to acquire
businesses, technologies or products complementary to the Company's present
business.

The laser sources sold by the Company consist of a laser head (containing
the lasing medium, resonator, source of excitation, resonator mirrors and
cooling mechanism), power supply and microcontroller (for control and
monitoring). For a more detailed discussion of the components of a laser
source, see "Laser Technology". Products are offered in different
configurations and utilize different design principles according to the
desired application. The Company's engineers and other technical experts
work directly with customers in the Company's applications centers to
develop and customize the optimal solution for the customers' manufacturing
requirements.

LASER PRODUCTS FOR CUTTING AND WELDING

The Company's family of CO2 laser products for cutting and welding, and
their principal markets and applications, are discussed below.

LASER SERIES POWER RANGE MODE OF EXCITATION
----------------- -------------- ---------------------
RS DC Slab Series 1.5kW - 3.5kW High Frequency
RS HF Series 4.0kW - 8.0kW High Frequency
RS SM Series 700W - 2.0kW Direct Current
RS SC Series 100W - 200 W High Frequency

Rofin-Sinar introduced its diffusion-cooled RS DC Slab Series laser in mid-
1995 and, to date, has shipped over 340 units. The Company believes that it
is the only laser manufacturer of diffusion-cooled slab-based lasers in the
high power range. In this laser design, a high frequency (HF) excited gas
discharge occurs between two water-cooled electrodes which have a large
surface area that permits maximum heat dissipation. In December 1997,
Rofin-Sinar introduced its second generation of Slab lasers using a diamond
window as the only transmissive optic, which further improved the mode
stability and enabled higher laser power. The core diffusion-cooled
technology is protected by two patents and the Company has exclusive license
rights to this technology on a worldwide basis for power levels above 500

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watts for material processing applications. The Company's current focus
with respect to its Slab Series lasers is on continuing to increase their
power output and continuing to reduce their manufacturing costs in order to
achieve more attractive pricing. Principal markets for the Slab Series
lasers are the machine tool and automotive industries.

The Company's RS HF Series lasers combine proven cross-flow design
principles with modern high frequency (HF) discharge excitation technology.
Since its introduction in 1995, the Company has shipped this product
predominantly to customers in the automotive industry, and their sub-
suppliers, in the United States and Europe, where it has been used in a
significant number of welding applications, including transmissions,
tailored blanks, steel tubing and many other car parts and components. In
fiscal 1997 the Company increased the output power of this product to 8kW.
The automotive industry is the principal market for the HF Series laser.

The Company's SM Series fast-axial flow CO2 laser is used for both cutting
and welding applications. In the fast-axial flow principle, the gas
discharge occurs in a tube in the same direction as the resonator, through
which the laser gas mixture flows at a high speed. Due to the potential to
reduce the manufacturing cost of the Slab lasers, the Company intends, over
the next years, to replace the SM Series product family with the Slab Series
laser. SM Series products are used primarily by the machine tool industry.

The Company's SC Series diffusion-cooled CO2 lasers are developed and
produced by Rofin-Sinar UK Ltd. The SC Series are sealed-off lasers which
are also based on the Slab laser principle used for the DC Series. The
lasers are used for cutting and marking applications. Principal markets are
the machine tool and packaging industries.

The Company's family of Nd:YAG laser products for cutting and welding, and
their principal markets, are discussed below.

LASER SERIES POWER RANGE MODE OF EXCITATION
----------------- -------------- ---------------------
RS P Series 50W - 1kW Flash Lamp
RS CW Series 1kW - 2.5kW Flash Lamp

The Company's RS P Series of pulsed Nd:YAG lasers are designed to meet the
requirements of a wide range of welding and cutting applications. Their
high peak power, flexible fiber optic beam delivery system, and small
focused beam spot size allow these lasers to be successfully applied in many
cutting and welding applications. The RS lasers' pulse shaping capability
(achieved through programming of the power supply) makes them particularly
well suited to the processing of metallurgically difficult materials such as
aluminum and its various alloys. Principal markets for these lasers are the
automotive and precision welding markets.

Rofin-Sinar's RS CW Series of continuous wave Nd:YAG lasers are designed
exclusively for use with flexible fiber optic beam delivery systems, making
them particularly well suited for integration into complex production
systems. The key competitive advantages of the CW Series lasers are their

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pulse shaping capability and multiple power output configurations. These
configurations include continuous wave and pulsed power ramping modes
separately or in combination with each other, which allows the Company to
address a wide range of customer applications. Power ramping is
particularly suited for achieving smooth welds and avoiding cracks during
the welding process. In addition, several features of the CW Series laser
such as the simple resonator design, easily accessed power supply and highly
durable ceramic pumping chambers are designed with a view to long service
intervals and, therefore, low maintenance costs. These lasers are used
principally in the automotive industry.

The Company is actively engaged in the development of diode-pumped solid-
state Nd:YAG lasers through a joint research program with the Fraunhofer
Institute for Laser Technology. The Company's objective is to develop diode-
pumped lasers capable of performing industrial material processing
applications (e.g. car body welding) more rapidly than previously possible
and at reduced operating and maintenance costs. The first prototype, with
an output power of 1,300 watts, was shipped in the third quarter of 1998 to
the Fraunhofer Institute in Aachen, Germany. See "Business-Research and
Development."

As a result of the Company's fiscal 1997 acquisition of Dilas, the Company's
laser product offerings were extended to include a family of diode laser
products for welding, soldering, and surface treatment applications, the
principal markets for which are discussed below.

LASER SERIES POWER RANGE MODE OF EXCITATION
----------------- -------------- ---------------------
Diode Lasers 10W-4000W Direct Current

The Company's diode lasers are designed to meet the requirements of a wide
range of welding, soldering, and surface treatment applications. The
Company's high power laser diodes can be stacked into arrays achieving
output powers in the multiple kilowatt range. In addition to their use in
the automotive, machine tool and semiconductor & electronic markets, these
lasers are also sold into the medical device and research markets.
Additionally, laser diodes are sold as components both internally and
externally.

LASER MARKING PRODUCTS

The Company's family of laser marking products is as follows:

LASER SERIES POWER RANGE MODE OF EXCITATION
----------------- -------------- ---------------------
PowerLine;
CombiLine;
S-Line 25W - 130W Flash Lamp
Diode Markers 3W - 50W Laser Diodes

PowerLine - The Company's standard PowerLine laser marking product consists
of an Nd:YAG laser in the range of 25 to 130W, galvo-head, personal
computer with Pentium processor, and Rofin-Sinar's proprietary Laser Work

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Bench software. The modular design of the PowerLine marker enables
customers to order the most suitable configuration for their production
processes or systems (e.g. OEM customers may order the laser head, power
supply, and laser cooling assembly plates as subassemblies without the
cabinet for easier integration into the handling system specified by the
end-user). The PowerLine marker's Nd:YAG laser incorporates a dual lamp
ceramic cavity design using "long-life" lamps (guaranteed to provide 1,200
hours usage), which results in higher output power (and therefore higher
marking speeds), higher energy efficiency (and therefore reduced operating
costs), high beam quality (and therefore constant and reliable marking
quality), and longer service intervals. The Company's proprietary Laser
Work Bench software provides operators with a user-friendly desktop
publishing environment that allows them to manipulate fonts, import
graphics, preview marking and control all laser parameters and job programs.
Special options and accessories include a double-marking head allowing
marking speeds of up to 1,000 characters per second in certain applications
(most notably marking of integrated circuits), as well as beam-switching and
- -splitting options for marking of products in multiple production lines.

CombiLine - Built on a modular design, the CombiLine consists of a PowerLine
laser marker that can be combined with a variety of parts handling systems
developed by the Company, including: motor driven positioning tables, foil
handling systems for marking labels, conveyor belts and pick-and-place
systems, allowing the CombiLine to be customized as a turn-key system.

S-Line - The S-Line is targeted for the low-end laser marking segment in
North America and Europe currently served by a number of smaller regional
competitors. This product is a lower-cost, more standardized version of the
Company's PowerLine product with the same base software but fewer features
and options. The Company introduced this product in June 1997.

Diode Markers - The Diode Marker products are based on the PowerLine model
but utilize laser diodes, in place of flash-lamps, to pump the Nd:YAG rod.
The laser diodes, with their guarantee to provide 5,000 hours usage, offer
significantly higher up-time for customers. The main application is marking
of plastics in the semiconductor and electronics industries. This product
was introduced in June 1997.

Applications Development

In addition to manufacturing and selling laser sources for cutting and
welding and laser marking products, the Company also develops in its
applications centers laser-based solutions for customers seeking
alternatives to conventional manufacturing techniques. More than 20 years
of laser technology experience and know-how are embodied in the Company's
applications groups, developed as a result of its participation in a broad
range of industrial markets.

Markets and Customers

Rofin-Sinar's laser products and systems are currently sold to three
principal industrial markets: the machine tool, automotive and
semiconductor & electronics industries. The following table sets forth the
distribution of the Company's total sales among the Company's principal
markets:
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Fiscal Years
----------------------
Principal Market 1996 1997 1998 Primary Applications
- ---------------- ------ ------ ------ --------------------------------
Machine Tool 31% 28% 26% Cutting
Automotive 27% 29% 19% Welding and component marking
Semiconductor &
Electronics 15% 14% 19% Marking of integrated circuits
------ ------ ------
72% 71% 64%

The remaining 28%, 29%, and 36%, respectively, of sales in fiscal 1996,
1997, and 1998 were attributable to customers in a wide variety of other
industries (including aerospace, consumer goods, medical device
manufacturers, job shops, universities and institutes). No one customer
accounted for over 10% of total sales in any of such periods.

Sales, Marketing and Distribution

Rofin-Sinar sells its products in approximately 30 countries through OEMs
and to major end-users who have in-house engineering resources capable of
integrating the Company's products into their own production systems. Laser
sources for cutting applications are marketed and sold principally to OEMs
in the machine tool industry who sell laser cutting machines incorporating
the Company's products without any substantial involvement by the Company.
Laser sources for welding applications are marketed and sold both to systems
integrators and to end-users. Laser marking products are marketed and sold
directly to end-users and to OEMs for integration into their handling
systems (mainly for integrated circuit marking applications). In the case
of both welding lasers and laser marking products, since product samples are
required to be run through the OEM's system, the end-user is significantly
involved in the selection of the laser component and will often specify that
it desires a Rofin-Sinar device. In such cases, the Company's application
engineers work directly with the end-user to optimize the application's
performance and demonstrate the advantages of the Company's products.

The Company has 39 direct sales engineers operating in 14 countries, 21
employees are dedicated to marketing CO2 and Nd:YAG lasers for cutting and
welding and 18 are dedicated to marketing laser marking products. In
addition, Rofin-Sinar has 11 independent distributors and agents marketing
the Company's welding and cutting laser products and laser marking products
in Australia, Brazil, Denmark, Israel, the Philippines, the People's
Republic of China, Portugal, Singapore, Spain, Sweden and Finland.

The Company directs its worldwide sales and marketing of cutting and welding
lasers from its offices in Hamburg, Germany and for laser diode components
from Mainz, Germany. Worldwide sales and marketing of laser marking products
is directed from the Company's offices in Gunding-Munich, Germany. U.S.
sales of the Company's cutting and welding laser products are managed out of
its Plymouth, Michigan facility. The sales office in Phoenix, Arizona
supports the expansion of the Company's laser marking business in the North
American market. In Europe, Rofin-Sinar also maintains sales and service
offices in Italy, France, the United Kingdom and Belgium. Sales offices are
maintained in South Korea and Taiwan to cover the Asia/Pacific region (other

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than Japan). Subsequent to the end of fiscal 1998, the Company opened a
sales and service office in Singapore. In Japan, the Company's principal
distributor is its joint venture with Marubeni Corporation and Nippei Toyama
Corporation.

Customer Service and Replacement Parts

During fiscal 1996 and fiscal 1997 approximately 23%, and in fiscal 1998
approximately 27%, of the Company's revenues were generated from sales of
after-sale services, replacement parts and components for its laser
products. The Company believes that a high level of customer support is
necessary to successfully develop and maintain long-term relationships with
its OEM and end-user customers in its laser products and laser marking
systems business. This close relationship is maintained as customers' needs
change and evolve. Recognizing the importance of its existing and growing
installed multinational customer base, the Company has expanded into new
geographic regions by providing local service and support. Rofin-Sinar has
over 115 customer service personnel. The Company's field service and in-
house technical support personnel receive ongoing training with respect to
the Company's laser products, maintenance procedures, laser-operating
techniques and processing technology. Most of the Company's distributors
also provide customer service and support.

Many of Rofin-Sinar's laser products are operated 24 hours a day in high
speed, quality-oriented manufacturing operations. Accordingly, the Company
provides 24-hour, year-round service support to its customers in Germany,
the United States, and the majority of other countries in which it has
operations. The Company plans to continue adopting similar service support
elsewhere. In addition, eight-hour response time is provided to certain key
customers. This support includes field service personnel who reside in
close proximity to the Company's installed base. The Company provides
customers with process diagnostic and verification techniques, as well as
specialized training in the operation and maintenance of its systems. The
Company also offers regularly scheduled and intensive training programs and
customized maintenance contracts for its customers.

Of Rofin-Sinar's customer service personnel, approximately 84 employees
operate in the field in 40 countries. Field service personnel are also
involved in the installation of the Company's systems.

Rofin-Sinar's approach to the sale of replacement parts is closely linked to
the Company's strategic focus on rapid customer response. The Company
provides around-the-clock order entry and provides same or next day delivery
of parts worldwide in order to minimize disruption to customers'
manufacturing operations. Rofin-Sinar generally agrees to provide after
sale parts and service for 10 years if requested by the customer. The
Company's growing base of installed laser sources and laser marking products
is expected to continue to generate a stable source of parts and service
sales.

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COMPETITION

Laser Products for Cutting and Welding

The market for laser products and systems is fragmented, and includes a
large number of competitors, many of which are small or privately owned or
which compete with Rofin-Sinar on a limited geographic, industry-specific or
application-specific basis. The Company also competes in certain target
markets with competitors which are part of large industrial groups and have
access to substantially greater financial and other resources than the
Company. Competition among laser manufacturers includes attracting and
retaining qualified engineering and technical personnel. The overall
competitive position of the Company will depend upon a number of factors,
including product performance and reliability, customer support,
manufacturing quality, the compatibility of its products with existing laser
systems, and the ability to successfully develop products utilizing the
emerging technologies of diode lasers and diode-pumped solid-state lasers.

Rofin-Sinar believes it is among the top three suppliers of laser sources in
the worldwide market for cutting and welding applications. Companies such
as Trumpf, Fanuc and PRC (for high power CO2 lasers), Synrad and Coherent
(for low power CO2 lasers), Haas and Lumonics (for Nd:YAG lasers) and
Optopower and SDL (for diode lasers and laser diodes) compete in certain of
the markets in which Rofin-Sinar operates. However, in the Company's
opinion, none of these companies competes in all of the industries,
applications and geographic markets currently served by Rofin-Sinar. Only
Trumpf/Haas has a product range and worldwide presence similar to those of
the Company. The Company believes that it has a competitive advantage over
such companies due to its exclusive access (for material applications of 500
watts and above) to the patented diffusion cooling technology incorporated
in its CO2 Slab lasers.

Laser Marking Products

Significant competitive factors in the laser marking market include system
performance and flexibility, cost, the size of each manufacturer's installed
base, capability for customer support, and breadth of product line. Because
many of the components required to develop and produce a laser marker are
commercially available, barriers to entry into this market are low, and the
Company expects new competitive product entries into this market. The
Company believes that its product range of laser markers will compete
favorably in this market primarily due to the performance and price
characteristics of such products.

The Company's products compete in the laser marking market with conventional
ink-based and acid-etching technologies, as well as with laser mask-marking.
The Company believes that its principal competitors in the laser marking
market include Baasel, General Scanning, Excel Technology and Lumonics.

Rofin-Sinar also competes with manufacturers of conventional non-laser
products in applications such as welding, drilling, soldering, cutting and
marking. The Company believes that as industries continue to modernize,
seek to reduce production costs and require more precise and flexible
manufacturing, the features of laser-based systems will become more

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desirable than systems incorporating conventional manufacturing techniques
and processes. This increased acceptance of laser applications by
industrial users will be enhanced by product-line expansion to include lower
and higher power C02 lasers, advancements in fiber optic beam delivery
systems, improvements in reliability, and the introduction of diode lasers
and diode-pumped solid-state lasers capable of performing heavy industrial
material processing and marking applications.

MANUFACTURING AND ASSEMBLY

Rofin-Sinar manufactures and tests its high power CO2 and Nd:YAG laser
products for cutting and welding at its Hamburg, Germany and Plymouth,
Michigan facilities. The Company's laser marking products are manufactured
and tested at its facilities in Gunding-Munich, Germany. The diode laser
products are manufactured and tested at the Mainz, Germany facility. Low
power CO2 laser products are manufactured and tested in Kingston upon Hull,
UK. The Company's joint venture in Japan performs assembly and testing of
SM Series CO2 lasers.

Given the competitive nature of the laser business, the Company focuses
substantial efforts on maintaining and enhancing the efficiency and quality
of its manufacturing operations. The Company utilizes just-in-time and
cell-based manufacturing techniques to reduce manufacturing cycle times and
inventory levels, thus enabling it to offer on-time delivery and high
quality products to its customers.

Rofin-Sinar's in-house manufacturing includes only those manufacturing
operations which are critical to achieve quality standards or protect
intellectual property. These manufacturing activities consist primarily of
product development, testing of components and subassemblies (some of which
are supplied from within the Company and others of which are supplied by
third party vendors and then integrated into the Company's finished
products), assembly and final testing of the completed product, as well as
proprietary software design and hardware/software integration. The Company
minimizes the number of suppliers and component types; however, wherever
practicable, it has at least two sources of supply for key items. The
Company has a qualifying program for its vendors and generally seeks to
build long-term relationships with such vendors. The Company purchases
certain major components from single suppliers. The Company has reason to
believe that it could, if necessary, purchase such components from
alternative sources of supply following appropriate qualification of such
new vendors. The Company cannot assure, however, that alternative sources
of supply could be obtained on as favorable terms.

Rofin-Sinar is committed to meeting internationally recognized manufacturing
standards. In 1995, the Company's Hamburg facility received ISO 9001
certification. During fiscal 1997, both the Plymouth and Gunding-Munich
facilities obtained their ISO 9001 certification. During fiscal 1998 the
Company's Plymouth facility passed its QS9000TE external audit, and
anticipates becoming certified in fiscal 1999.

The Company's production is controlled by production planning software. By
reducing the variety of products and options, designing new products on a
modular concept, reducing the number of vendors and the depth of production

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through outsourcing, the Company has been able to reduce its manufacturing
costs and improve its production efficiency.

RESEARCH AND DEVELOPMENT

During fiscal 1996, 1997 and 1998, Rofin-Sinar spent $9.3 million, $9.7
million, and $10.0 million, respectively, on research and development. In
addition, the Company received funding under German government grants
totaling $0.8 million, $0.9 million, and $1.1 million in fiscal 1996, 1997
and 1998, respectively.

Rofin-Sinar's research and development activities are directed at meeting
customers' manufacturing needs and application processes. Core competencies
include CO2 gas lasers, Nd:YAG solid-state lasers and diode lasers,
precision optics, electronic power supplies, fiber optics, beam delivery,
control interfaces, software programming and systems integration. The
Company strives for customer-driven development activities and promotes the
use of alliances with key customers and joint development programs in a wide
range of its target markets.

The Company's research and development activities are carried out in five
centers in Hamburg, Gunding-Munich and Mainz, Germany, Kingston upon Hull,
UK, and Plymouth, Michigan and are centrally coordinated and managed.
Rofin-Sinar maintains close working relationships with the leading
industrial, government and university research laboratories in Germany,
including the Fraunhofer Institute for Laser Technology in Aachen, the
Institute for "Technische Physik" of the German Space and Aerospace Research
Center in Stuttgart, the Fraunhofer Institute for Material Science in
Dresden, the Laser Center in Hanover, and elsewhere around the world,
including the University of Alberta in Canada. Such relationships include
funding of research, joint development programs, personnel exchange programs
and licensing of patents developed at such institutes.

In September 1996, the Company began a research program with the Fraunhofer
Institute for Laser Technology to develop a modular 5 kW diode-pumped Nd:YAG
laser. Under this arrangement, the total project budget to be spent by both
parties is approximately DM 6.5 million. In fiscal 1997 and fiscal 1998,
outlays by the Company for this project totaled DM 3.5 million. Under the
terms of the collaboration, the Company will be granted access to technology
previously developed by the Fraunhofer Institute. The Company anticipates
that the project's development and manufacturing scale-up efforts will occur
over a three-year period. No assurance can be given, however, that the
collaboration with the Fraunhofer Institute will be successful.

INTELLECTUAL PROPERTY

Rofin-Sinar owns intellectual property, which includes patents, proprietary
software, technical know-how and expertise, designs, process techniques and
inventions. While policies and procedures are in place to protect critical
intellectual properties, Rofin-Sinar believes that its success depends to a
larger extent on the innovative skills, know-how, technical competence and
abilities of the Company's personnel. The Company is also an exclusive
licensee on a worldwide basis of two patents, one of which expires in July
2007 (as to which the license is exclusive for five years from

- 13 -

commercialization of products) and one of which expires in January 2005 (as
to which the license is exclusive for the duration of the patent), covering
the diffusion-cooled technology used in its Slab Series CO2 lasers for
industrial material processing applications of 500 watts and above. In the
Company's view, the technology protected by these two patents represents a
significant step forward in industrial laser technology for material
processing and an important source of the Company's future growth and
profitability.

Rofin-Sinar protects its intellectual property in a number of ways
including, in certain circumstances, through patents. The Company has
sought patent protection primarily in Germany and the United States. Some
patents have also been registered in other jurisdictions including Great
Britain, France, Italy and Japan. The Company currently holds 55 separate
patents for inventions relating to lasers, processes and power supplies
which expire from 1999 to 2017. In addition, Rofin-Sinar requires its
employees and certain of its customers, suppliers, distributors, agents and
consultants to enter into confidentiality agreements to further safeguard
the Company's intellectual property.

The Company from time to time receives notices from third parties alleging
infringement of such parties' patent or other intellectual property rights
by the Company's products. While such notices are common in the laser
industry, and the Company has in the past been able to develop non-
infringing technology or license necessary patents or technology on
commercially reasonable terms, there can be no assurance that the Company
would in the future prevail in any litigation seeking damages or expenses
from the Company or to enjoin the Company from selling its products on the
basis of such alleged infringement, or that the Company would be able to
develop any non-infringing technology or license any valid and infringed
patents on commercially reasonable terms. In the event any third party made
a valid claim against the Company or its customers and a license were not
made available to the Company on commercially reasonable terms, the Company
would be adversely affected.

In July 1996, the Company received notice of an opposition filed by a
competitor in the European Patent Office ("EPO") which challenges on a
number of grounds one of the two third-party patents licensed by the Company
covering certain aspects of its diffusion-cooled CO2 Slab laser. The U.S.-
issued counterpart of this patent was previously the subject of a
reexamination proceeding in the U.S. Patent and Trademark Office ("PTO"), at
the conclusion of which the patent was upheld. While the decision of the
PTO is not binding on the EPO, based on the outcome of the U.S.
reexamination proceeding and management's review of the arguments made in
the notice of opposition, the Company believes that such notice of
opposition is without substantial merit. The Company intends to defend the
EPO opposition proceeding vigorously.

In July 1996, the Company received correspondence from a manufacturer of
sealed-off, RF-excited CO2 lasers for military and commercial avionics
applications offering a license of its U.S. patents covering such technology
in exchange for a cross-license of the Company's CO2 Slab laser technology.
Based on its review of the patents held by such manufacturer, the Company
does not believe that its products infringe such patents, and it intends to

- 14 -

defend vigorously any infringement action which such party may commence
against the Company.

In September 1997, the Company filed a complaint against a competitor in the
US District Court of New York concerning infringement of one of the
Company's patents covering the design of optical resonators and beam
delivery systems. This case has not been terminated as of September 30,
1998.

From time to time, the Company files notices of opposition to certain
patents on laser technologies held by others, including academic
institutions and competitors of the Company, which the Company believes
could inhibit its ability to develop products in this area. In particular,
the Company has a pending notice of opposition against a patent held by a
competitor which it believes conflicts with a third-party patent licensed by
the Company covering certain aspects of its diffusion-cooled CO2 Slab laser.
No assurance can be given that the Company will be able to avoid an action
by such competitor or others or not be forced to initiate its own actions to
protect its proprietary position.

ORDER BACKLOG

The Company's order backlog was $35.9 million, $29.1 million and $35.9
million, as of September 30, 1996, 1997, and 1998, respectively. The
Company's order backlog, which contains relatively little service, training
and spare parts, represents approximately three months of laser shipments.
The decline in the Company's order backlog from September 30, 1996 to
September 30, 1997 was primarily attributable to lower order entry in the
fourth quarter of fiscal 1997 due to a relatively flat automotive welding
market in the United States and by the introduction in such period of the
second generation of the Company's Slab Series lasers, which resulted in
delays in orders by European OEM customers. The strengthening of the U.S.
dollar had an additional negative impact of approximately $2 million on
year-to-year order backlog. The increase in the Company's backlog from
September 30, 1997 to September 30, 1998 was primarily attributable to
higher order entry in the fourth quarter of fiscal 1998 due to high demand
for high power CO2 lasers from the automotive industry and strong Slab laser
order entry from the machine tool industry in Europe. The strengthening of
the U.S. dollar had a negative impact of approximately $1.4 million on year-
to-year order backlog.

An order is booked by Rofin-Sinar when a purchase order with an assigned
delivery date has been received. Delivery schedules range from one week to
six months, depending on the size, complexity and availability of the
product or system ordered, although typical delivery dates for laser source
products range 8-12 weeks from the date an order is placed. Orders in
backlog are subject to cancellation (subject to penalties), or rescheduling
by the customer. The Company's backlog on any particular date is not
necessarily indicative of actual sales for any future period.

The Company anticipates shipping the present backlog during fiscal 1999. In
the event that the Company's marketing activities in the United States
related to its laser marking systems result in additional demand for such
systems, the Company will require added manufacturing capacity in the United

- 15 -

States. The Company estimates that the total capital expenditures required
to add such manufacturing capacity in the United States would be
approximately $200,000.

LASER TECHNOLOGY

The term "laser" is an acronym for "Light Amplification by Stimulated
Emission of Radiation". Lasers were first developed in the early 1960s in
the United States. A laser consists of an active lasing medium that gives
off its own light (radiation) when excited, an optical resonator with a
partially reflective output mirror at one end, a fully reflective rear
mirror at the other that permits the light to bounce back and forth between
the mirrors through the lasing medium, and an external energy source used to
excite the lasing medium. A laser works by causing the energy source to
excite (pump) the lasing medium which converts the energy from the source
into an emission consisting of particles of light (photons). These photons
stimulate the release of more photons, as they are reflected between the two
mirrors which form the resonator. The resulting build-up in the number of
photons is emitted in the form of a laser beam through an output port or
"window." By changing the energy and the lasing medium, different
wavelengths and types of laser light can be produced. The laser produces
light from the lasing medium to achieve the desired intensity, uniformity
and wavelength through a series of reflective mirrors. The heat generated
by the excitation of the lasing medium is dissipated through a cooling
mechanism, which varies according to the type of laser technology.

EMPLOYEES

At September 30, 1998, Rofin-Sinar had 552 full time employees, of which 373
were in Germany, 103 were in the United States, 13 in France, 21 in Italy,
20 in UK and 22 in Japan, whereas at September 30, 1997, Rofin-Sinar had 500
full time employees, of which 345 were in Germany, 105 were in the United
States, 13 in France, 16 in Italy and 21 in Japan.

While the Company's employees are not covered by collective bargaining
agreements and the Company has never experienced a work stoppage, slowdown
or strike, the Company's employees at its Hamburg and Gunding-Munich
facilities are represented by a seven-person and five-person works council,
respectively, as well as by a four-person central works council. Matters
relating to compensation, benefits and work rules are negotiated and
resolved between management and the works council for the relevant location.
The Company considers its relations with its employees to be excellent.

GOVERNMENT REGULATION

The majority of the Company's laser products sold in the United States are
classified as Class IV Laser Products under applicable rules and regulations
of the Center for Devices and Radiological Health ("CDRH") of the U.S. Food
and Drug Administration. The same classification system is applied in the
European markets. Safety rules are formulated with Deutsche Industrie Norm
(i.e., German Industrial Standards) or ISO standards which are
internationally harmonized. Such regulations generally require a self-
certification procedure pursuant to which a manufacturer must file with the
CDRH with respect to each product incorporating a laser device, periodic

- 16 -

reporting of sales and purchases and compliance with product labeling
standards. The Company's laser products for cutting and welding and laser
marking products can result in injury to human tissue if directed at an
individual or otherwise misused. The Company believes that its laser
products for cutting and welding and laser marking products are in
substantial compliance with all applicable laws for the manufacture of laser
devices.

RISK FACTORS

Industry Concentration and Cyclicality; Dependence on Sales by Third Parties

The Company's business is significantly dependent on capital expenditures by
manufacturers in the machine tool, automotive and semiconductor &
electronics industries. These industries are cyclical and have historically
experienced periods of oversupply, resulting in significantly reduced demand
for capital equipment, including the products manufactured and marketed by
the Company. For the foreseeable future, the Company's operations will
continue to be dependent on capital expenditures in these industries which,
in turn, are largely dependent on the market demand for their products. The
Company's net sales and results of operations may be materially adversely
affected if downturns or slowdowns in the machine tool, automotive, and
semiconductor & electronics industries occur in the future.

The Company's net sales are dependent in part upon the ability of its OEM
customers to develop and sell systems that incorporate the Company's laser
products. Adverse economic conditions, large inventory positions, limited
marketing resources and other factors affecting these OEM customers could
have a substantial impact upon the Company's financial results. No
assurances can be given that the Company's OEM customers will not experience
financial or other difficulties that could adversely affect their operations
and, in turn, the financial condition or results of operations of the
Company.

Variability and Uncertainty of Quarterly Operating Results; Potential
Volatility of Stock Price

The Company has experienced and expects to continue to experience some
fluctuations in its quarterly results. The Company believes that
fluctuations in quarterly results may cause the market price of its common
stock to fluctuate, perhaps substantially. Factors which may have an
influence on the Company's operating results in a particular quarter include
the timing of the receipt of orders from major customers, product mix,
competitive pricing pressures, the relative proportions of domestic and
international sales, the Company's ability to design, manufacture and
introduce new products on a cost-effective and timely basis, the delay
between incurrence of expenses to further develop marketing and service
capabilities and realization of benefits from such improved capabilities,
and the introduction of new products by the Company and its competitors. In
addition, the Company's backlog at any given time is not necessarily
indicative of actual sales for any succeeding period. The Company's sales
will often reflect orders shipped in the same quarter that they are
received. Moreover, customers may cancel or reschedule shipments, and
production difficulties could delay shipments. Accordingly, the Company's

- 17 -

results of operations are subject to significant variability from quarter to
quarter. See "Business-Order Backlog."

Other factors which the Company believes may cause the market price of its
common stock to fluctuate, perhaps substantially, include announcements of
new products, technologies or customers by the Company or its competitors
and developments with respect to intellectual property and shortfalls in the
Company's operations relative to analysts' expectations. In addition, in
recent years, the stock market in general, and the shares of technology
companies in particular, have experienced wide price fluctuations. These
broad market and industry fluctuations, particularly in the semiconductor &
electronics and automotive industries, may adversely affect the market price
of the Company's common stock.

Currency Risk

Although the Company reports its results in U.S. dollars, approximately two-
thirds of its sales are denominated in other currencies, including primarily
German marks, as well as French francs, Italian lire, British pounds and
Japanese yen. Although a predominant portion of the Company's cost of goods
sold, selling, general and administrative expenses and research development
expenses are incurred in German marks, net sales and costs and related
assets and liabilities are generally denominated in the functional
currencies of the operations, thereby serving to reduce the Company's
exposure to exchange gains and losses. Exchange differences upon
translation from each operation's functional currency to U.S. dollars are
accumulated as a separate component of equity. The currency translation
adjustment component of shareholders' equity changed from a $2.2 million
credit at September 30, 1996 to a $2.8 million debit at September 30, 1997
and from a $2.8 million debit at September 30, 1997 to a $0.8 million debit
at September 30, 1998. These changes arose primarily from the strengthening
of the U.S. dollar against such foreign currencies during the fiscal 1996 -
1998 period, and reflect the fact that a high proportion of the Company's
capital is invested in its German operations, whose functional currency is
the German mark. The fluctuation of the German mark and the other
functional currencies against the U.S. dollar has had the effect of
increasing and decreasing (as applicable) reported net sales as well as cost
of goods sold and gross margin and selling, general and administrative
expenses denominated in such foreign currencies when translated into U.S.
dollars as compared to prior periods. The Company's subsidiaries will from
time to time pay dividends in their respective functional currencies, thus
presenting another area of potential currency exposure in the future.

The Company has implemented a policy to hedge a certain portion of its net
foreign currency exposure on sales transactions utilizing forward exchange
contracts and forward exchange options. The Company has also implemented a
policy to continue to borrow in each operating subsidiary's functional
currency to reduce exposure to exchange gains and losses. There can be no
assurance that changes in currency exchange rates will not have a material
adverse effect on the Company's business, financial condition and results of
operations.

- 18 -

Competition

The laser industry is characterized by significant price and technical
competition. The Company's current and proposed laser products and laser
marking products compete with those of several well-established companies,
some of which are larger and have substantially greater financial,
managerial and technical resources, more extensive distribution and service
networks and larger installed customer bases than the Company. The Company
believes that this competition will be particularly intense in the CO2,
diode laser and Nd:YAG solid-state laser markets, as many companies have
committed significant research and development resources to pursue
opportunities in these markets. There can be no assurance that the Company
will successfully differentiate its current and proposed products from the
products of its competitors or that the marketplace will consider the
Company's products to be superior to competing products. With respect to
the Company's laser marking products, because many of the components
required to develop and produce a laser-based marking system are
commercially available, barriers to entry into this market are relatively
low, and the Company expects new competitive product entry in this market.
To maintain its competitive position in this market, the Company believes
that it will be required to continue a high level of investment in
engineering, research and development, marketing and customer service and
support. There can be no assurance that the Company will have sufficient
resources to continue to make such investments, that the Company will be
able to make the technological advances necessary to maintain its
competitive position, or that its products will receive market acceptance.
See "Business-Competition."

Risks Relating to Sales Growth in CO2, Diode and Nd:YAG Lasers

In recent years, the Company has experienced a decline in sales revenues.
If the Company is to increase the rate of growth of its laser sales in the
near term, such sales will have to come through increases in market share
for the Company's existing products, through the development of new products
or through the Company's acquisition of its competitors or their products.
To date, a substantial portion of the Company's revenue has been derived
from sales of high-powered CO2 laser sources and, more recently, solid-state
flash lamp-pumped laser sources. The Company intends to devote substantial
resources to widening the low power CO2 Slab laser product range, to
increasing the output power of its diffusion-cooled CO2 Slab laser sources
and to developing diode lasers and diode-pumped Nd:YAG solid-state laser
products in accordance with market demand. The Company is currently focused
on developing low power CO2 Slab lasers with broadened output powers to
offer the full range of low power CO2 lasers and on continuing to reduce the
manufacturing costs of its diffusion-cooled CO2 Slab lasers to achieve more
attractive pricing. The Company's diode-pumped lasers are currently being
introduced to the market and are not expected to generate substantial
revenue in fiscal 1999. The Dilas diode lasers are modified for use in
industrial production environments and are currently marketed for welding,
soldering, and surface treatment applications. A large part of the
Company's growth strategy depends upon being able to increase substantially
its market share for laser marking products, particularly in the United
States and Japan.

- 19 -

If the Company is unable to implement its strategy of increasing demand for
its laser marking products, expanding the product range in the CO2 Slab
laser series to include both higher and lower output power levels, and
developing diode lasers and diode-pumped Nd:YAG solid-state lasers at
attractive prices, it may not be able to increase its revenue, as a result
of which its business, operating results and financial condition could be
adversely affected. No assurance can be given that the Company will
successfully expand its marking products market share, widen the low power
CO2 Slab laser Series, increase the output power of its diffusion-cooled CO2
Slab laser sources, successfully market diode lasers for welding and
hardening applications or develop diode-pumped Nd:YAG solid-state laser
products or that any such products will achieve market acceptance or not be
rendered obsolete or uncompetitive by products of other companies. See Item
7, "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and "Business-The Company's Laser Products."

While there are currently no commitments with respect to any future
acquisitions, the Company's business strategy includes the expansion of its
products and services, which may be effected through acquisitions. The
Company from time to time reviews various opportunities to acquire
businesses, technologies or products complementary to the Company's present
business. There can be no assurance that the Company will be able to
integrate any acquired business effectively or that any acquisition will
result in long-term benefits to the Company.

Conflicting Patents and Other Intellectual Property Rights of Third Parties;
Limited Protection of Intellectual Property

The Company from time to time receives notices from third parties alleging
infringement of such parties' patent or other intellectual property rights
by the Company's products. While such notices are common in the laser
industry and the Company has in the past been able to develop non-infringing
technology or license necessary patents or technology on commercially
reasonable terms, there can be no assurance that the Company would in the
future prevail in any litigation seeking damages or expenses from the
Company or to enjoin the Company from selling its products on the basis of
such alleged infringement, or that the Company would be able to develop any
non-infringing technology or license any valid and infringed patents on
commercially reasonable terms. In the event any third party made a valid
claim against the Company or its customers and a license were not made
available to the Company on commercially reasonable terms, the Company would
be adversely affected.

The Company's future success depends in part upon its intellectual property,
including trade secrets, know-how and continuing technological innovation.
There can be no assurance that the steps taken by the Company to protect its
intellectual property will be adequate to prevent misappropriation or that
others will not develop competitive technologies or products. The Company
currently holds 55 United States and foreign patents on its laser sources
which expire from 1999 to 2017. There can be no assurance that other
companies are not investigating or developing other technologies that are
similar to the Company's, that any patents will issue from any application
filed by the Company or that, if patents do issue, the claims allowed will
be sufficiently broad to deter or prohibit others from marketing similar

- 20 -

products. In addition, there can be no assurance that any patents issued to
the Company will not be challenged, invalidated or circumvented, or that the
rights thereunder will provide a competitive advantage to the Company. See
"Business-Intellectual Property."

Risks Associated with International Operations

The Company's products are currently marketed in approximately 30 countries,
with Germany, the rest of Europe, the United States and the Asia/Pacific
region being the Company's principal markets. Sales in the Company's
principal markets are subject to risks inherent in international business
activities, including, in particular, general economic conditions in each
such country, overlap of differing tax structures, management of an
organization spread over various jurisdictions, unexpected changes in
regulatory requirements and compliance with a variety of foreign laws and
regulations. Other general risks associated with international operations
include import and export licensing requirements, trade restrictions and
changes in tariff and freight rates. The business and operations of the
Company's principal subsidiary, RSL, are primarily subject to the changing
economic and political conditions prevailing in Germany. Although
productivity in Germany is generally high, labor costs, corporate taxes and
employee benefit expenses are high and weekly working hours are shorter in
Germany compared to the rest of the European Union, the United States and
Japan.

Asia/Pacific Risk

Countries in the Asia/Pacific region, including Japan, have recently
experienced weaknesses in their currency, banking and equity markets. As
the Asia/Pacific market currently represents approximately 17% of the
Company's revenue, these weaknesses could adversely affect consumer demand
for the Company's product, the U.S. dollar value of the Company's foreign
currency denominated sales, and ultimately the Company's consolidated
results of operations.

Risks Associated with the Conversion by EU Member States to the "Euro"

The "euro" is a new legal currency being introduced by certain European
Union member states. On January 1, 1999, eleven European countries will
establish fixed conversion rates between their existing currencies (legacy
currencies) and the euro. As of that date, the legacy currencies of such
countries will not be directly convertible into each other; instead a legacy
currency must be converted into the euro, which then will be converted into
a target legacy currency. The legacy currencies and the euro will both be
used through June 30, 2002, after which the legacy currencies will be
withdrawn.

With regard to information systems, the Company has completed a review of
its information systems and believes the introduction of the euro in 1999
will have no material impact on its systems. Furthermore, the Company's
review indicates that its information systems can operate in the "euro only"
environment, beginning in July 2002. The Company plans to conduct another
survey concerning the euro's impact on information systems during 2000,
following the actual introduction of the euro.

- 21 -

With regard to the Company markets, the Company has reviewed its customer
list and current selling practices and expects no material impact from the
introduction of the euro on January 1, 1999.

The Company is currently unable to determine the ultimate long term
financial impact of the exclusive use of the euro on the Company's markets
and on the economies of the countries in which it operates. This impact
will depend upon the evolving competitive situations and macro-economic
impact of the introduction of the euro.

Year 2000 Compliance

The Year 2000 (Y2K) issue refers to the result of computer programs being
written using two digits rather than four to define an applicable year. Any
of the Company's products, manufacturing equipment, information technology
hardware or software that have date-sensitive software or embedded chips may
recognize a date using "00" as the year 1900 rather than the year 2000.
This could result in miscalculations causing disruptions of operations,
including, among other things, a temporary inability to operate equipment,
process transactions, send invoices, or engage in other normal business
activities, as well as product failures and system failures.

The Company's plan to address the Y2K issue involves four phases:
assessment, remediation, testing and implementation. In a coordinated
effort among the Company, outside consultants, and product suppliers, the
Company has completed the "assessment" phase of its critical information
technology hardware and software components as well as its embedded
technology equipment related to computer operations and manufacturing (such
as manufacturing equipment, security systems, telephone systems). The
Company has determined that it will be required to modify or replace certain
portions of its hardware, software or other embedded chip devices in order
to ensure that they will properly recognize dates beyond December 31, 1999.
The Company presently believes that by completing these minor upgrades to
its current technology the Y2K issue can be mitigated and that the Company's
systems would not be materially affected.

The Company's information technology (I.T.) hardware and operating systems
were upgraded to Y2K compliant versions during fiscal 1998 at a total cost
of $100,000. Related I.T. exposures are covered under the Company's normal
support contracts with an outside company. The remediation and testing of
certain software programs are expected to be completed by February 1999,
with implementation of the new programming scheduled for March 1999. No
unique costs are expected to be incurred in upgrading the Company's I.T.
systems.

While the assessment of all non-I.T. systems utilizing embedded technology
has already been completed, the remediation, testing and implementation
phases of such systems are scheduled to be completed by June 1999. These
systems include: manufacturing equipment, security systems,
telecommunication systems, and other non-critical systems. To date, the
Company has incurred approximately $10,000 to upgrade these systems.
Additional costs of up to $20,000 are expected to be incurred during fiscal
1999 in order to complete the remediation, testing and implementation of
these systems.

- 22 -

In addition to the I.T. and embedded technology exposures, the Company has
assessed the Y2K compliance of each of its product lines. The conclusion of
this assessment was that none of the Company's current products contain
date-sensitive programming which make them vulnerable to the Y2K problem.

The Company has initiated formal communications with its significant
suppliers and customers in an effort to determine the extent to which the
Company may be vulnerable to their failure to correct their own Y2K issues.
Failure of the Company's significant trading partners to address Y2K issues
could have a material adverse effect on the Company's operations, although
it is not possible at this time to quantify the amount of business that
might be lost or the costs that could be incurred by the Company.

In addition, parts of the global infrastructure, including banking systems,
electrical power, other utilities, communications and governmental
activities, may not be fully functional after 1999. Infrastructure failures
could significantly reduce the Company's ability to manufacture its products
and its ability to serve its customers as effectively as they are now being
served. The Company is currently identifying elements of the infrastructure
that are critical to its operations and obtaining information as to their
anticipated Y2K readiness.

While the Company believes its efforts to address the Y2K issue will be
successful in avoiding any material adverse effect on the Company's
operations or financial condition, it recognizes that failing to resolve Y2K
issues on a timely basis would, in a "worst case scenario", significantly
limit its ability to manufacture and distribute its products and process its
daily business transactions for a period of time, especially if such failure
is coupled with third party or infrastructure failures. Similarly, the
Company could be significantly affected by the failure of one or more
significant trading partners to conduct their respective operations after
1999. Adverse affects on the Company could include, among other things,
business disruption, increased costs, loss of business and other similar
risks, the combined costs of which are impossible to estimate at this time.

The Company has primarily utilized (and will continue to primarily utilize)
internal resources to oversee and complete the various phases of its Y2K
program. Internal costs to date have been minimal (approximately $15,000),
whereas future internal costs are estimated to not exceed $20,000.

The foregoing discussion regarding Y2K project timing, implementation,
effectiveness, and costs are based upon management's current evaluation
using available information. However, there can be no guarantees that
unexpected events will not occur and actual results could be materially
different than anticipated.

- 23 -

ITEM 2. PROPERTIES

The Company's manufacturing facilities include the following:

Owned or Size
Location of Facility Leased (sq. ft.) Primary Activity
- ------------------------ ---------- ----------- -------------------------
Hamburg, Germany Owned * 110,840 CO2 lasers, Nd:YAG lasers
Plymouth, Michigan Leased 58,075 CO2 lasers
Kingston upon Hull,
United Kingdom Leased 48,504 Low power CO2 lasers
Gunding-Munich, Germany Leased 46,634 Nd:YAG lasers, laser
Marking products
Sakai Atsugi-shi, Japan Leased 11,245 CO2 lasers
Mainz, Germany Leased 7,532 Diode lasers & components

* The facility is owned by RSL; the real property on which the facility
is located is leased by RSL under a 99-year lease.

The Company's leases of its facilities in Plymouth, Michigan expire in 1999
(with renewal options until 2001). The Company intends to continue to
exercise its renewal options. The Kingston upon Hull, United Kingdom
facility lease expires in 2007, with the option to purchase the facility in
June 2002. The Gunding-Munich, Germany facility lease expires in 2005, with
an optional yearly notice of termination. The leases on its Japanese
facilities in Atsugi-shi expire in 1999 (renewable for two years) and in
2001 (renewable for three years). The Mainz, Germany facility lease expires
in 1999.

The Company maintains sales, administration and research and development
facilities at each of the Hamburg, Gunding-Munich, Mainz, Kingston upon Hull
and Plymouth locations. The Company also maintains sales and service
offices worldwide, all of which are leased.

The Company believes that its existing facilities are adequate to meet its
needs for the next 12 months and that suitable additional or alternative
space would be available, if necessary, in the future on commercially
reasonable terms. The Company expects to make additional capital
expenditures to support its diode laser and diode-pumped solid-state laser
development activities in Germany.

ITEM 3. LEGAL PROCEEDINGS

There are no pending material legal proceedings to which the Company is a
party.

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

There were no matters submitted to a vote of the security holders during the
fourth quarter of fiscal 1998.

- 24 -

PART II

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

The Company's common stock is traded on the Nasdaq National Market under the
symbol RSTI. The table below sets forth the high and low sales prices of
the Company's common stock for each quarter ended during the last two years
as reported by the National Association of Securities Dealers, Inc.:

Common Trade Prices
-----------------------
Quarter ended High Low
--------------------- --------- ---------
December 31, 1996 $14 3/8 $10 3/4
March 31, 1997 $16 3/4 $10 1/2
June 30, 1997 $19 5/8 $13 7/8
September 30, 1997 $19 3/8 $15 3/8
December 31, 1997 $17 1/4 $10 3/4
March 31, 1998 $23 1/2 $11 7/8
June 30, 1998 $25 5/8 $15 3/4
September 30, 1998 $18 1/2 $ 9 1/4

At December 17, 1998, the Company had approximately twelve holders of record
of its common stock and 11,522,900 shares outstanding. The Company has not
paid dividends on its common stock and does not anticipate paying dividends
in the foreseeable future.

Use of IPO Proceeds

The Company completed its initial public offering of 11,500,000 shares of
its common stock on September 30, 1996 for gross proceeds of $109.2 million
pursuant to its registration statement on Form S-1 (No. 333-09539) declared
effective on September 25, 1996. The lead managers for the offering were
Deutsche Morgan Grenfell/C.J. Lawrence, Inc., Alex Brown & Sons Incorporated
and Lehman Brothers Inc. Net proceeds of the offering (after deduction of
$6.6 million in underwriting discounts and commissions and $0.3 million in
other offering expenses) were $102.3 million. Of such amount approximately
$77.1 million was used to purchase all outstanding shares of RSL and RSI
from the former Parent and to repay certain indebtedness owed to the former
Parent. Of the remainder, $25.0 million was invested in certificates of
deposit, with the balance applied to working capital. In fiscal 1997 the
Company used approximately $5.2 million to consummate the acquisition of
Dilas, and $1.8 million to acquire other business assets. In fiscal 1998
the Company used approximately $3.5 million to acquire business assets,
which included the acquisition of certain business assets of Palomar
Technologies Ltd. In addition, the Company used $1.8 million to fund
working capital needs. Accordingly, approximately $12.7 million of the net
offering proceeds remain to be applied.

- 25 -

ITEM 6. SELECTED FINANCIAL DATA

The following table sets forth selected consolidated financial data for the
five fiscal years ended September 30, 1998. The information set forth below
should be read in conjunction with the consolidated financial statements and
notes thereto filed as part of this annual report.

Year ended September 30,
--------------------------------------------
1994 1995 1996 1997 1998
-------- -------- -------- -------- --------
(in thousands, except share amounts)
STATEMENT OF INCOME DATA:
Net sales $ 69,217 $ 92,466 $115,903 $129,393 $117,583
Cost of goods sold 46,993 57,162 72,096 82,982 74,476
Gross profit 22,224 35,304 43,807 46,411 43,107
SG&A expenses 17,059 20,673 21,246 22,101 22,656
R&D expenses 6,834 6,719 9,335 9,727 9,960
Special charge - - - 1,350 -
Income (loss) from operations ( 1,669) 7,912 13,226 13,233 10,491
Net interest expense (income) 1,308 1,272 1,010 ( 854) ( 759)
Income (loss) before income taxes( 3,116) 6,265 12,244 14,712 11,799
Net tax expense (benefit) ( 1,422) 3,052 4,956 5,758 5,118
Net income (loss) ( 1,694) 3,213 7,288 8,954 6,681
Net income per
common share-Basic ( 0.20) 0.37 0.84 0.78 0.58
Net income per
common share-Diluted ( 0.20) 0.37 0.84 0.77 0.58
Shares used in computing net
income per share - Basic 8,632 8,632 8,632 11,505 11,517
Shares used in computing net
income per share - Diluted 8,632 8,632 8,639 11,606 11,615

OPERATING DATA (as percentage of sales):
Gross profit 32.1% 38.2% 37.8% 35.9% 36.7%
SG&A expenses 24.6% 22.4% 18.3% 17.1% 19.3%
R&D expenses 9.9% 7.3% 8.1% 7.5% 8.5%
Income (loss) from operations ( 2.4%) 8.6% 11.4% 10.2% 8.9%
Income (loss) before income taxes ( 4.5%) 6.8% 10.6% 11.4% 10.0%

BALANCE SHEET DATA:
Working capital $ 4,927 $ 14,530 $ 56,138 $ 55,007 $ 67,119
Total assets 76,667 90,995 133,147 132,189 143,742
Line of credit and loans 22,380 21,805 24,780 18,569 22,703
Stockholders' equity 30,583 39,673 78,000 81,925 90,765

OTHER DATA:
Depreciation and amortization 2,527 2,364 2,449 2,142 2,512
Backlog 17,000 26,500 35,900 29,100 35,900
Sales per employee 184 227 256 259 213

- 26 -

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

OVERVIEW

Rofin-Sinar is a leader in the design, development, engineering,
manufacturing and marketing of laser-based products used for cutting,
welding and marking a wide range of industrial materials. During fiscal
1998, approximately 67% of the Company's revenues were from sales and
servicing of laser products for cutting and welding applications and
approximately 33% were from sales and servicing of laser products for
marking applications.

Formation of Rofin-Sinar UK, Ltd.

In January 1998, Rofin-Sinar formed a 74% owned company, Rofin-Sinar UK
Ltd., based in Kingston upon Hull, England, and acquired certain business
assets of Palomar Technologies Ltd. (Palomar), Kingston upon Hull, UK, a
wholly owned subsidiary of Palomar Medical Technologies, Inc., USA.

Rofin-Sinar UK designs and manufactures low power CO2 lasers, based on the
slab laser technology, for cutting and marking applications and sells them
mainly to the machine tool and packaging industries.

The Company's business strategy continues to include the expansion of its
products and services, which may be effected through acquisitions. The
Company, from time to time, reviews various opportunities to acquire
businesses, technologies or products complementary to the Company's present
business.

Currency Exchange Rates

Although the Company reports its Consolidated Financial Statements in U.S.
dollars, approximately two-thirds of its sales are denominated in other
currencies, primarily German marks, as well as French francs, Italian lire,
British pounds and Japanese yen. Net sales and costs and related assets and
liabilities are generally denominated in the functional currencies of the
operations, thereby serving to reduce the Company's exposure to exchange
gains and losses.

Exchange differences upon translation from each operation's functional
currency to United States dollars are accumulated as a separate component of
equity. Due to the strengthening of the U.S. dollar against such foreign
currencies during fiscal 1997 and 1998, the currency translation adjustment
component of shareholders' equity changed from a $2.2 million credit at
September 30, 1996 to a $0.8 million debit at September 30, 1998.

The fluctuation of the German mark and the other relevant functional
currencies against the U.S. dollar has had the effect of increasing or
decreasing (as applicable) reported net sales, as well as cost of goods sold
and gross margin and selling, general and administrative expenses,
denominated in such foreign currencies when translated into U.S. dollars as
compared to prior periods.

- 27 -

The following table illustrates the effect of the changes in exchange rates
on the Company's fiscal 1996, 1997, and 1998 net sales, gross profit and
income from operations.

----------------- ----------------- -----------------
Fiscal 1996 Fiscal 1997 Fiscal 1998
----------------- ----------------- -----------------
In 1995 In 1996 In 1997
Exchange Exchange Exchange
Actual Rates Actual Rates Actual Rates
-------- -------- -------- -------- -------- --------
(in millions)
Net Sales $ 115.9 $ 117.2 $ 129.4 $ 140.0 $ 117.6 $ 123.3
Gross Profit 43.8 44.3 46.4 50.6 43.1 45.3
Income from operations 13.2 13.4 13.2 14.4 10.5 11.2

Between fiscal 1995 and 1996, the German mark weakened against the U.S.
dollar by approximately 1.7%. The impact of this weakening of the German
mark was to decrease net sales, gross profit and income from operations by
$1.3, $0.5 and $0.2 million, respectively. Between fiscal 1996 and 1997,
the German mark weakened against the U.S. dollar by approximately 13.2%.
The impact of this weakening was to decrease net sales, gross profit and
income from operations by $10.6, $4.2, and $1.2 million, respectively.
Between fiscal 1997 and 1998, the German mark weakened against the U.S.
dollar by approximately 6.7%. The impact of this weakening was to decrease
net sales, gross profit and income from operations by $5.7, $2.2, and $0.7
million, respectively.

Taxes

The Company's subsidiaries pay taxes in many jurisdictions and the
provisions for income taxes in the Company's Consolidated Financial
Statements are based on separate local tax computations. On a consolidated
basis, this practice may result in the Company incurring income tax expense
even though it may not have consolidated pre-tax income or in paying taxes
in excess of pre-tax income if some, but not all, of its subsidiaries are
not profitable (see Note 9 of the Notes to the Consolidated Financial
Statements). In particular, because of the Company's substantial operations
in Germany, the Company historically has had a higher effective tax rate
than many of its competitors who do not have substantial operations in
Germany.

The Company currently generates taxable income, principally in Germany and
the United States. German corporate tax law applies the imputation system
with regard to the taxation of the income of a corporation (such as RSL and
Dilas). In general, retained corporate income is subject to a municipal
trade tax (which for Hamburg and Gunding on a combined basis is 16.5%, and
for Mainz is 18.0%), which is deductible for federal corporate income tax
purposes, a federal corporate income tax of 45% and, effective January 1,
1995 and January 1, 1998, a surcharge of 7.5% and 5.5 %, respectively, on
the federal corporate income tax amount.

Profits which are distributed by a German corporate taxpayer (such as RSL
and Dilas) in the form of a dividend are subject to a reduced federal

- 28 -

corporate income tax rate of 30%, plus the 7.5% or 5.5% surcharge on the
federal corporate income tax amount calculated at the reduced rate.
Dividends may be paid by RSL and Dilas to the Company and may be subject to
a withholding tax pursuant to the income tax treaty currently in effect
between the United States and the country from which the dividend is paid.

The Company is currently looking into various foreign tax minimization
strategies which could result in reducing or eliminating its foreign
withholding taxes. Tax expense and deferred taxes in fiscal 1998 have been
recorded at rates assuming all earnings of RSL and Dilas will be dividended
to Rofin-Sinar Technologies, Inc.

RESULTS OF OPERATIONS

For the periods indicated, the following table sets forth the percentage of
net sales represented by the respective line items in the Company's
consolidated statements of operations.
Fiscal Year Ended September 30,
--------------------------------
1996 1997 1998
-------- -------- --------
Net sales 100% 100% 100%
Cost of goods sold 62% 64% 63%
Gross profit 38% 36% 37%
Selling, general and administrative expenses 19% 17% 19%
Research and development expenses 8% 8% 9%
Special charge 0% 1% 0%
Income from operations 11% 10% 9%
Income before income taxes 11% 11% 10%
Net income 6% 7% 6%

FISCAL 1998 COMPARED TO FISCAL 1997

Net Sales - Net sales of $117.6 million for fiscal 1998 decreased by $11.8
million, or 9%, from the prior year. The decrease resulted from net sales
decreases of $15.0 million in cutting and welding laser products, due to the
transition from the C02 fast-axial flow laser technology to the new
diffusion-cooled C02 Slab laser technology whereby OEMs delayed orders to
redesign their handling systems. The current year decrease in sales is also
a reflection of a higher level of sales to the automotive industry booked in
fiscal 1997 versus 1998. Net sales of marking and microwelding products
increased by $3.2 million due to strong demand for the Company's integrated-
circuit markers in the semiconductor industry.

Geographically, net sales decreased $8.8 million, or 19%, in the United
States and $3.0 million, or 4% in Europe/Asia. The effect of currency
translation was to reduce net sales by $5.7 million, or 5%, of fiscal 1998
net sales.

Cost of Goods Sold - Cost of goods sold of $74.5 million in fiscal 1998
decreased by $8.5 million, or 10%, over the prior year, and primarily
reflect the decrease in net sales.

- 29 -

Gross Profit - Gross profit of $43.1 million in fiscal 1998 decreased by
$3.3 million, or 7%, over the prior year. As a percentage of net sales,
gross profit increased from 36% in fiscal 1997 to 37% in fiscal 1998. The
increase in margin percentage was primarily caused by a favorable mix
towards higher margin products and the current year results not being
negatively affected by losses related to lasers repossessed as part of legal
action taken against delinquent customers, as was the case in 1997. The
effect of currency translation was to reduce gross profit by $2.2 million,
or 5%, of fiscal 1998 gross profit.

Selling, General and Administrative Expenses - Selling, general and
administrative expenses of $22.7 million for fiscal 1998 increased $0.6
million over the prior year. As a percentage of net sales, SG&A expenses
increased from 17% in 1997 to 19% in 1998 due to the fixed nature of certain
costs as compared to lower sales levels in fiscal 1998 as well as to the
first full year SG&A costs incurred by the Dilas entity. However, SG&A
benefited from the translation of foreign currency denominated expenses into
the strong US dollar.

Research and Development Expenses - Research and development expenses of
$10.0 million increased $0.2 million, or 2%, over fiscal 1997. R&D expenses
are incurred primarily in German marks and are net of $1.1 million in
government grants. As a percentage of sales research and development
expenses increased from 8% in fiscal 1997 to 9% in fiscal 1998 due to the
additional expenses incurred by the Dilas and Rofin-Sinar UK subsidiaries,
which was partially offset by the beneficial effect of the translation of
foreign currency denominated expenses into the strong US dollar.

Income from Operations - The Company's income from operations of $10.5
million for fiscal 1998 decreased by $2.7 million, or 21%, from fiscal 1997.
The effect of currency translation was to reduce income from operations by
$0.7 million, or 6%, of fiscal 1998 income from operations.

Income Before Income Taxes - The Company's income before income taxes of
$11.8 million for fiscal 1998, decreased $2.9 million, or 20%, from the
prior year. The decrease was due primarily to lower income from operations
of $2.7 million and higher net interest expense and other income of $0.2
million. As a percentage of net sales, income before income taxes decreased
in fiscal 1998 compared to fiscal 1997 by 1% to 10% of net sales.

Income Tax Expense - Income tax expense was $5.1 million in fiscal 1998 and
$5.8 million in fiscal 1997. The effective tax rates in fiscal 1998 and
1997 were 43% and 39%, respectively. The effective tax rates were higher
than the U.S. statutory rate of 35% principally as a result of earnings
taxed at higher foreign statutory rates. The increase in the effective tax
rate in fiscal 1998 compared to fiscal 1997 of 4% was due to the higher
proportion of foreign income, which is taxed at higher statutory rates
including increased tax rates in France.

Net Income - As a result of the foregoing factors, the Company's net income
of $6.7 million ($0.58 per diluted share) in fiscal 1998 decreased by $2.3
million from the prior year's net income of $9.0 million ($0.77 per diluted
share). The effect of currency translation was to reduce net income by $0.4
million, or 6%, of fiscal 1998 net income.

- 30 -

FISCAL 1997 COMPARED TO FISCAL 1996

Net Sales - Net sales of $129.4 million for fiscal 1997 increased by $13.5
million, or 12%, over the prior year. The improvement resulted from net
sales increases of $10.0 million, or 11%, in cutting and welding laser
products, and $3.5 million, or 11%, in marking and microwelding products.
The increase in cutting and welding was due to strength in the OEM cutting
market, sales of the Slab Series laser for welding applications, and a major
welding program for a supplier to the automotive market. The increase in
marking and microwelding was due primarily to the introduction of a laser
system designed specifically for the dental instruments market and the
demand for the Company's integrated-circuit markers in the semiconductor
industry. Geographically, net sales increased $8.5 million, or 11%, in
Europe/Asia and $5.0 million, or 13%, in the United States. The effect of
currency translation was to reduce net sales by $10.6 million, or 8%, of
fiscal 1997 net sales. At 1996 exchange rates, the Company would have
achieved growth in net sales of 21%.

Cost of Goods Sold - Cost of goods sold of $83.0 million in fiscal 1997
increased by $10.9 million, or 15%, over the prior year, and primarily
reflect the increase in net sales.

Gross Profit - Gross profit of $46.4 million in fiscal 1997 increased by
$2.6 million, or 6%, over the prior year. As a percentage of net sales,
gross profit decreased from 38% in fiscal 1996 to 36% in fiscal 1997. The
decrease in margin percentage was primarily caused by the mix of products
sold in fiscal 1997 being weighted more heavily towards models with lower
margins. Gross profit was also negatively affected by losses related to
lasers repossessed as part of legal action taken against delinquent
customers. The effect of currency translation was to reduce gross profit by
$4.2 million, or 9%, of fiscal 1997 gross profit.

Selling, General and Administrative Expenses - Selling, general and
administrative expenses of $22.1 million for fiscal 1997 increased only $0.9
million over the prior year. As a percentage of net sales, selling,
general, and administrative expenses decreased from 19% in 1996 to 17% in
1997 as the Company continues its strategy of achieving economies of scale
by focusing its sales growth in the core business segments.

Research and Development Expenses - Research and development expenses of
$9.7 million increased $0.4 million, or 4%, over fiscal 1996. Research and
development expenses are incurred primarily in German marks and are net of
government grants. As a percentage of sales research and development
expenses remained unchanged at 8%. Current year research and development
spending includes a $1.7 million outlay towards the Company's diode-pumped
solid-state laser program.

Special Charge - The special charge of $1.4 million relates to the payment
to a customer in fiscal 1997 in settlement of a dispute arising out of the
use of one of the Company's existing products in a newly developed customer
application. The Company's lasers were determined to be incompatible with
the customer's intended use. As part of the settlement the Company accepted
the return of product for full refund which had the effect of reducing
revenue by $0.5 million and gross profit by $0.3 million.

- 31 -

Income from Operations - The Company's income from operations of $13.2
million for fiscal 1997 remained unchanged from fiscal 1996. The effect of
currency translation was to reduce income from operations by $1.2 million,
or 9% of fiscal 1997 income from operations. The reduction in income from
operations from 11%, in fiscal 1996, to 10%, in fiscal 1997, was due
primarily to the $1.4 million special charge. Net sales per employee
increased from $256,000 in fiscal 1996 to $285,000 in fiscal 1997 based on
1996 exchange rates, representing a productivity increase of 11%.

Income Before Income Taxes - The Company's income before income taxes of
$14.7 million for fiscal 1997, increased $2.5 million, or 20%, over the
prior year. The increase was due primarily to interest income resulting
from the $32.6 million net IPO proceeds (after the purchase of RSL and RSI
from the former parent) and from cash generated by operating activities in
fiscal 1997.

Income Tax Expense - Income tax expense was $5.8 million in fiscal 1997
compared to $5.0 million in fiscal 1996. The effective tax rates for fiscal
1997 and 1996 were 39% and 40%, respectively. The effective tax rates were
higher than the U.S. statutory rate of 35% principally as a result of
earnings taxed at higher foreign statutory rates. The slight decrease in
the effective tax rate was due to certain foreign income which was not taxed
due to the use of tax loss carryforwards.

Net Income - As a result of the foregoing factors, the Company's net income
of $9.0 million ($0.77 per diluted share) in fiscal 1997 increased by $1.7
million over the prior year's net income of $7.3 million ($0.84 per diluted
share). The effect of currency translation was to reduce net income by $0.6
million, or 7%, of fiscal 1997 net income.

LIQUIDITY AND CAPITAL RESOURCES

The Company completed its initial public offering of 11,500,000 shares of
its Common Stock on September 30, 1996 for net proceeds of $102.7 million
(before deduction of other offering expenses borne proportionately by the
Company's former parent and the Company). Of such amount, approximately
$82.0 million of the gross proceeds ($77.1 million of the net proceeds) were
used to purchase all outstanding shares of RSL and RSI from the former
parent and its affiliates and to repay certain indebtedness owed to Siemens
and its affiliates.

The Company's primary sources of liquidity are cash and cash equivalents of
$34.9 million at September 30, 1998. Additional sources of liquidity
include the Company's $25 million line of credit with Deutsche Bank and DM
12 million line of credit with Commerzbank., of which $13.4 million is
unused and available as of September 30, 1998. Management believes that
cash flow from operations, cash and cash equivalents and the existing
available lines of credit to be sufficient to fund operations for fiscal
1999.

Cash and cash equivalents decreased by $5.9 million during fiscal 1998. Net
cash used in operating activities of $5.8 million was due primarily to net
income offset by increases in receivables and inventories and decreases in

- 32 -

taxes payable due to timing. Cash used in Investing activities of $3.1
million included $3.5 million used to acquire property and equipment offset
by miscellaneous other items. Financing activities provided a net of $3.2
million in cash including borrowings from banks of $4.0 million offset by
repayment to related parties of $0.9 million and miscellaneous other items.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The following discussion about the Company's market risk disclosures
involves forward looking statements. Actual results could differ materially
from those projected in the forward looking statements. The Company is
exposed to market risk related to changes in interest rates and foreign
currency exchange rates. The Company does not use derivative financial
instruments for speculative or trading purposes.

Interest Rate Sensitivity

As of September 30, 1998, the Company maintained a cash equivalents
portfolio of $28.4 million, consisting mainly of taxable interest bearing
securities and demand deposits all with maturities of less than three
months. If short term interest rates were to increase or decrease by 10%
interest income would increase or decrease by $0.2 million, accordingly.

At September 30, 1998, the Company had $19.1 million of annually adjusted
interest rate debt and $3.6 million of fixed rate debt expiring in the year
2000. A 10% change in the average cost of the Company's debt would result
in an increase or decrease in pre-tax interest expense of less than $0.1
million.

Foreign Currency Exchange Risk

The Company enters into foreign currency forward contracts and forward
exchange options generally of less than six months duration to hedge its
foreign currency risk on sales transactions. At September 30, 1998, the
Company had 53.1 million yen of contracts to buy 700,000 German marks, which
would result in gains or losses which would not be material, were the
Japanese yen / German mark currency exchange to increase or decrease by 10
percent. Such gains and losses would be offset by gains and losses on the
related receivables.

ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

See Item 14(a) for an index to the consolidated financial statements. No
supplementary financial information is required to be presented pursuant to
Item 302(a) of Regulation S-K.

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

None

- 33 -

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item is included in the "Election of
Directors", "Directors and Executive Officers" and "Section 16(a)
Beneficial Ownership Reporting Compliance" sections of the Company's Proxy
Statement to be filed in connection with the Company's 1999 Annual Meeting
of Stockholders to be held in March 1999, and is incorporated by reference
herein.

ITEM 11. EXECUTIVE COMPENSATION

The information required by this Item is included in the "Executive
Compensation and Related Information" section of the Company's Proxy
Statement to be filed in connection with the Company's 1999 Annual Meeting
of Stockholders to be held in March 1999, and is incorporated by reference
herein.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information required by this Item is included in the "Security Ownership
of Certain Beneficial Owners" and "Management" sections of the Company's
Proxy Statement to be filed in connection with the Company's 1999 Annual
Meeting of Stockholders to be held in March 1999, and is incorporated By
reference herein.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by this Item is included in the "Compensation
Committee", "Interlocks and Insider Participation" and "Certain
Transactions" sections of the Company's Proxy Statement to be filed in
connection with the Company's 1999 Annual Meeting of Stockholders to be held
in March 1999, and is incorporated by reference herein.

- 34 -

PART IV

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

a. 1. Consolidated Financial Statements

The following financial statements are filed as part of
this annual report.

Independent Auditors' Report F-1

Consolidated Balance Sheets as of September 30, 1997 and 1998 F-2

Consolidated Statements of Operations for the years ended
September 30, 1996, 1997, and 1998 F-3

Consolidated Statements of Stockholders' Equity and
Comprehensive Income for the years ended
September 30, 1996, 1997, and 1998 F-4

Consolidated Statements of Cash Flows for the years ended
September 30, 1996, 1997, and 1998 F-5

Notes to Consolidated Financial Statements F-6

2. Financial Statement Schedules

Independent Auditors' Report F-22

Schedule II - Valuation and Qualifying Accounts F-23

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

The exhibits listed in the accompanying index to exhibits is filed
or incorporated by reference as part of this annual report.

b. Reports on Form 8-K

The Registrant filed a report on Form 8-K on July 8, 1998, announcing
that DILAS Diodenlaser GmbH recently booked an order amounting to over
one million dollars from a major US customer.

The Registrant filed a report on Form 8-K on August 25, 1998,
announcing its earnings for the third quarter of fiscal 1998.

c. Exhibits

The exhibits listed in the accompanying index to exhibits are filed or
incorporated by reference as part of this annual report.

- 35 -

EXHIBIT
NUMBER DESCRIPTION
- ------- -------------------------------------------------------------------
3.1 Certificate of Incorporation of the Company and Form of Certificate
of Amendment thereto (*)

3.2 By-Laws of the Company (**)

4.1 Form of Rights Agreement (*)

10.1 Form of Sale and Transfer Agreement between Siemens
Aktiengesellschaft and Rofin-Sinar Technologies Inc. (*)

10.2 Form of Sale and Transfer Agreement by and among Siemens Power
Corporation and Rofin-Sinar Technologies Inc. (*)

10.3 Form of Tax Allocation and Indemnification Agreement among Rofin-
Sinar Technologies Inc., Rofin-Sinar Inc., Siemens Corporation and
Siemens Power Corporation (*)

10.4 Joint Venture Agreement, dated as of May 27, 1992, by and among
Rofin-Sinar Laser GmbH, Marubeni Corporation and Nippei Toyama
Corporation (*)

10.5 Cooperation Agreement, dated as of May 27, 1992, among Nippei
Toyama Corp., Rofin-Sinar Laser GmbH and Marubeni Corporation (*)

10.6 Cooperation Agreement, dated as of May 27, 1992, among Rofin-Sinar
Laser GmbH, Marubeni Corporation and Nippei Toyama Corporation (*)

10.7 Inheritable Building Right (Erbbaurecht), dated as of March 1,
1990, between Rofin-Sinar Laser GmbH and Lohss GmbH (in German,
English summary provided) (*)

10.8 Lease Agreement, dated August 10, 1990, between Josef and Maria
Kranz and Rofin-Sinar Laser GmbH (in German, English summary
provided) (*)

10.9 Lease Agreement, dated June 14, 1989, between DR Group and Rofin-
Sinar Incorporated (Mast Street property) (*)

10.10 Lease Agreement, dated March 25, 1993 between DR Group and Rofin-
Sinar Incorporated (Plymouth Oaks Drive property) (*)

10.11 Rofin-Sinar Laser GmbH Pension Plan (in German, English summary
provided) (*)

10.12 Form of 1996 Equity Incentive Plan (*)

10.13 Form of 1996 Non-Employee Directors' Stock Plan (*)

10.14 Deutsche Bank AG Commitment Letter dated August 22, 1996 (*)

- 36 -

10.15 Form of Employment Agreement, dated as of September 2, 1996, among
Peter Wirth, Rofin-Sinar Laser GmbH and Rofin-Sinar Technologies
Inc. (in German, English summary provided) (*)

10.16 Form of Employment Agreement, dated as of September 2, 1996, among
Hinrich Martinen, Rofin-Sinar Laser GmbH and Rofin-Sinar
Technologies Inc. (in German, English summary provided) (*)

10.17 Form of Employment Agreement, dated as of September 2, 1996, among
Gunther Braun, Rofin-Sinar Laser GmbH and Rofin-Sinar Technologies
Inc. (in German, English summary provided) (*)

11.1 Statement of earnings per share

21.1 List of Subsidiaries of the Registrant

27.1 Financial Data Schedule for fiscal year ended September 30, 1998

- ----------------------------------------------------------------------------
(*) Incorporated by reference to the exhibits filed with the Company's
Registration Statement on Form S-1 (File No. 333-09539) which was
declared effective on September 25, 1996.

(**) Incorporated by reference to the exhibit filed with the Company's
Quarterly Report for the period ended March 31, 1998.

- 37 -

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.

Date: December 23, 1998 ROFIN-SINAR TECHNOLOGIES INC.

By: /s/ Peter Wirth
-------------------------------
Peter Wirth

Chairman of the Board,
Chief Executive Officer, and
President

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

SIGNATURE TITLE DATE
- --------------------- ----------------------------- -----------------

/s/ Peter Wirth Chairman of the Board of December 23, 1998
- --------------------- Directors, Chief Executive
Peter Wirth Officer and President

/s/ Hinrich Martinen Executive Vice President, December 23, 1998
- --------------------- Research and Development/
Hinrich Martinen Operations, Chief Technical
Officer and Director

/s/ Gunther Braun Executive Vice President, December 23, 1998
- --------------------- Finance and Administration,
Gunther Braun Chief Financial Officer,
Principal Accounting Officer
and Director

/s/ William Hoover Director December 23, 1998
- ---------------------
William Hoover

/s/ Ralph Reins Director December 23, 1998
- ---------------------
Ralph Reins

/s/ Gary Willis Director December 23, 1998
- ---------------------
Gary Willis

INDEPENDENT AUDITORS' REPORT

The Board of Directors and Stockholders
Rofin-Sinar Technologies Inc. and Subsidiaries

We have audited the accompanying consolidated balance sheets of Rofin-Sinar
Technologies Inc. and Subsidiaries as of September 30, 1997 and 1998, and
the related consolidated statements of operations, stockholders' equity and
comprehensive income, and cash flows for each of the years in the three-year
period ended September 30, 1998. These consolidated financial statements
are the responsibility of the Company's management. Our responsibility is
to express an opinion on these financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Rofin-
Sinar Technologies Inc. and Subsidiaries as of September 30, 1997 and 1998,
and the results of their operations and their cash flows for each of the
years in the three-year period ended September 30, 1998, in conformity with
generally accepted accounting principles.

KPMG Peat Marwick LLP
Detroit, Michigan

October 30, 1998

F-1

ROFIN-SINAR TECHNOLOGIES INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)

September 30,
----------------------
1997 1998
--------- ---------
ASSETS
Current Assets:
Cash and cash equivalents $ 40,743 $ 34,874

Accounts receivable, trade 28,058 34,722
Less allowance for doubtful accounts ( 910) ( 1,093)
--------- ---------
Trade accounts receivable, net 27,148 33,629

Accounts receivable, related party 721 379
Other accounts receivable 726 1,600
Inventories (note 2) 28,731 38,372
Prepaid expenses 390 280
Deferred income tax assets - current (note 9) 3,508 2,680
--------- ---------
Total current assets 101,967 111,814

Property and equipment, at cost (note 3) 37,166 41,689
Less accumulated depreciation ( 15,048) ( 17,691)
--------- ---------
Property and equipment, net 22,118 23,998

Deferred income tax assets - noncurrent (note 9) 2,769 2,833
Goodwill (note 1) 5,054 4,713
Other assets 281 384
--------- ---------
Total assets $ 132,189 $ 143,742
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Line of credit (note 5) $ 18,569 $ 19,123
Accounts payable, related party 894 -
Accounts payable, trade 5,837 6,257
Income taxes payable (note 9) 5,826 3,154
Accrued liabilities (note 4) 15,834 16,161
--------- ---------
Total current liabilities 46,960 44,695

Long-term debt (note 6) - 3,580
Pension obligations (note 8) 3,044 3,673
Deferred income tax liability - noncurrent (note 9) 191 415
Minority interests 69 430
Other long-term liabilities - 184
--------- ---------
Total liabilities 50,264 52,977

Commitments and contingencies (note 7)
Stockholders' equity:
Preferred stock, 5,000,000 shares authorized,
none issued or outstanding - -
Common stock, $0.01 par value, 50,000,000 shares
authorized, 11,522,900 (11,510,500 at
September 30, 1997) shares issued
and outstanding 115 115
Additional paid-in capital 75,666 75,861
Retained earnings 8,954 15,635
Accumulated other comprehensive income ( 2,810) ( 846)
--------- ---------
Total stockholders' equity 81,925 90,765
--------- ---------
Total liabilities and stockholders' equity $ 132,189 $ 143,742
========= =========

See accompanying notes to consolidated financial statements

F-2

ROFIN-SINAR TECHNOLOGIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands, except per share amounts)

Years ended September 30,
-------------------------------
1996 1997 1998
--------- --------- ---------
Net sales $ 115,903 $ 129,393 $ 117,583
Cost of goods sold 72,096 82,982 74,476
--------- --------- ---------
Gross profit 43,807 46,411 43,107
--------- --------- ---------

Selling, general, and administrative expenses 20,762 20,856 22,508
Provision for doubtful accounts 484 1,245 148
Research and development expenses 9,335 9,727 9,960
Special charge (note 10) - 1,350 -
--------- --------- ---------
Income from operations 13,226 13,233 10,491

Other expense (income):
Interest expense, net (notes 5 and 6) 1,010 ( 854) ( 759)
Minority interest 10 13 111
Miscellaneous ( 38) ( 638) ( 660)
--------- --------- ---------
Total other expense, net 982 ( 1,479) ( 1,308)
--------- --------- ---------
Income before income taxes 12,244 14,712 11,799

Income tax expense (note 9) 4,956 5,758 5,118
--------- --------- ---------
Net income $ 7,288 $ 8,954 $ 6,681
========= ========= =========

Net income per share (note 11):
Basic $ 0.84 $ 0.78 $ 0.58

Diluted $ 0.84 $ 0.77 $ 0.58
========= ========= =========

Weighted average shares used in computing
Net income per share (note 11):
Basic 8,631,578 11,504,500 11,516,631

Diluted 8,639,498 11,605,706 11,614,692
========= ========== ==========

See accompanying notes to consolidated financial statements

F-3

ROFIN-SINAR TECHNOLOGIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME
Years ended September 30, 1996, 1997, and 1998
(dollars in thousands)

Accumulated
Common Additional Former Other Total
Stock Paid-in Retained Parent's Comprehensive Stockholders'
Par Value Capital Earnings Capital Income Equity
------------ ------------ ------------ ------------ ------------ ------------

BALANCES at September 30, 1995 - - - 34,224 5,449 39,673

Comprehensive income:
Foreign currency translation adjustment - - - - ( 3,264) ( 3,264)
Net income - - - 7,288 - 7,288
------------
Total comprehensive income 4,024

Capital contributions from former Parent - - - 1,938 - 1,938
Public sale of common stock, net of expense 115 75,700 - ( 43,450) - 32,365
------------ ------------ ------------ ------------ ------------ ------------
BALANCES at September 30, 1996 115 75,700 - - 2,185 78,000

Comprehensive income:
Foreign currency translation adjustment - - - - ( 4,995) ( 4,995)
Net income - - 8,954 - - 8,954
------------
Total comprehensive income 3,959

Adjustment of public offering expenses - ( 77) - - - ( 77)
Common stock issued - 43 - - - 43
------------ ------------ ------------ ------------ ------------ ------------
BALANCES at September 30, 1997 115 75,666 8,954 - ( 2,810) 81,925

Comprehensive income:
Foreign currency translation adjustment - - - - 1,964 1,964
Net income - - 6,681 - - 6,681
------------
Total comprehensive income 8,645

Common stock issued - 195 - - - 195
------------ ------------ ------------ ------------ ------------ ------------
BALANCES at September 30, 1998 $ 115 $ 75,861 $ 15,635 $ - $ ( 846) $ 90,765
============ ============ ============ ============ ============ ============

See accompanying notes to consolidated financial statements
F-4

ROFIN-SINAR TECHNOLOGIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS

(dollars in thousands)

Years ended September 30,
--------------------------
1996 1997 1998
-------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 7,288 $ 8,954 $ 6,681
Adjustments to reconcile net income
to net cash provided (used) by
operating activities:
Depreciation and amortization 2,449 2,142 2,512
Issuance of restricted stock - 43 63
Provision for doubtful accounts 484 1,245 148
Loss on disposal of property and equipment 7 5 2
Deferred income taxes 1,118 ( 375) 831
Increase in minority interest 10 43 400
Change in operating assets and liabilities:
Trade accounts receivable ( 7,355) ( 270) ( 5,846)
Other accounts receivable ( 373) 782 ( 1,040)
Inventories ( 6,976) 2,776 ( 8,339)
Prepaid expenses and other 8 ( 166) 242
Accounts payable, trade ( 249) 321 1,352
Income taxes payable 3,636 2,752 ( 2,902)
Accrued liabilities and pension obligation 6,049 ( 44) 53
-------- -------- --------
Net cash provided (used) by operating activities 6,096 18,208 ( 5,843)
-------- -------- --------

CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment ( 1,955) ( 1,798) ( 3,525)
Proceeds from the sale of property and equipment 91 44 37
Investment in subsidiaries - ( 5,092) -
Goodwill - - 376
-------- -------- --------
Net cash used by investing activities ( 1,864) ( 6,846) ( 3,112)
-------- -------- --------

CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in former parent's capital 1,938 - -
Repayment of former parent loans ( 7,473) (16,586) -
Public sale of common stock, net of expenses 102,445 - -
Purchase of RSI and RSL stock (70,080) - -
Borrowings from bank 6,318 12,209 4,003
Repayments to bank ( 3,129) - -
Repayments to related party - - ( 942)
Other - ( 77) 132
-------- -------- --------
Net cash provided (used) by financing activities 30,019 ( 4,454) 3,193
-------- -------- --------
Effect of foreign currency translation on cash ( 72) ( 1,034) ( 107)
-------- -------- --------

Net increase (decrease)in cash and cash equivalents 34,178 5,874 ( 5,869)
Cash and cash equivalents at beginning of year 691 34,869 40,743
-------- -------- --------
Cash and cash equivalents at end of year $ 34,869 $ 40,743 $ 34,874
======== ======== ========

Cash paid during the year for interest $ 134 $ 624 $ 777
======== ======== ========
Cash paid during the year for income taxes $ - $ 3,316 $ 6,921
======== ======== ========

See accompanying notes to consolidated financial statements

F-5

ROFIN-SINAR TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996, 1997, and 1998
(dollars in thousands)

1. SUMMARY OF ACCOUNTING POLICIES
(a) Description of the Company and Business

The accompanying financial statements present the historical financial
information of Rofin-Sinar Technologies Inc. ("Rofin-Sinar" or "the Company")
its wholly owned consolidated subsidiaries; Rofin-Sinar, Inc. (a United
States company) ("RSI"), and Rofin-Sinar Laser GmbH (a Federal Republic of
Germany limited liability company)("RSL"), the accounts of its 80% owned
subsidiary, Dilas Diodenlaser GmbH ("Dilas"), and the accounts of its 74%
owned subsidiary, Rofin-Sinar UK, Ltd. ("RS, UK"). RSI and RSL were formerly
the industrial laser businesses of Siemens AG ("Siemens" or "former Parent").
RSL includes the consolidated accounts of its 99.97% owned subsidiary, Rofin-
Sinar France S.A.; its 90.65% owned subsidiary, Rofin-Sinar Italiana S.r.L.;
and its 51% owned subsidiary, Rofin-Marubeni Laser Corporation (a Japanese
entity). All significant intercompany balances and transactions have been
eliminated in consolidation.

On September 30, 1996, Rofin-Sinar consummated an initial public offering of
its common stock (IPO). Prior to the IPO the common stock of Rofin-Sinar, a
newly formed holding company, RSI and RSL were each owned directly or
indirectly by Siemens AG. Concurrent with the IPO the stock of RSI and RSL
(together, Rofin-Sinar Group), including all business operations, assets and
liabilities, were sold to the Company (reorganization). Approximately
$82,000 of the gross proceeds ($77,080 of the net proceeds) from the public
offering were used to purchase such stock of Rofin-Sinar Group from Siemens
AG and its subsidiaries and to repay certain indebtedness to Siemens. The
reorganization constituted a combination of entities under common control
and, for financial statements purposes, was accounted for by combining the
historical accounts of Rofin-Sinar Group and Rofin-Sinar, in a manner similar
to pooling-of-interest accounting.

On August 1, 1997, the Company acquired 80% of the common stock of Dilas
Diodenlaser GmbH, a German corporation, based in Mainz, Germany, for $5,200.
Dilas designs, manufactures and markets diode lasers and components. The
transaction was accounted for on a purchase accounting basis. The excess of
purchase price over the fair value of the net assets acquired was $5,100 and
has been recorded as goodwill, which is being amortized on a straight-line
basis over 15 years. Accumulated amortization as of September 30, 1998
totaled $398. The Company periodically assesses the recoverability of the
unamortized balance of the intangible asset based on expected future
profitability and undiscounted future cash flows of Dilas and their
contribution to the overall operation of the Company. The operating results
of Dilas have been included in the consolidated statement of operations from
the date of acquisition.

F-6

The combined financial statements for the fiscal year ended September 30,
1996 are derived from the historical financial statements of the Rofin-Sinar
Group. Management believes the accompanying historical statements of
operations for this fiscal period include a reasonable allocation of all
expenses the Company would have incurred as an independent company.

The primary business of Rofin-Sinar is to develop, manufacture, and market
industrial lasers and supplies used for material processing applications.
The majority of the Company's customers are in the machine tool, automotive,
semiconductor & electronics industries and are located in the United States,
Europe, and Asia. For the year ended September 30, 1998, Rofin-Sinar
generated approximately 73% of its revenues from the sale and installation of
new lasers and approximately 27% from aftermarket support for the Company's
existing laser products.

(b) Cash Equivalents

Cash equivalents consist of liquid instruments with an original maturity of
three months or less as well as taxable and tax-exempt variable rate demand
obligations which are redeemable upon a five day minimum notice. Interest
income was $0, $1,601, and $1,579 for the years ended September 30, 1996,
1997, and 1998, respectively, and was offset by interest expense in the
accompanying consolidated statements of operations.

(c) Inventories

Inventories are stated at the lower of cost or market, after provisions for
excess and obsolete inventory salable at prices below cost. Costs are
determined using the first in, first out and weighted average cost methods.

(d) Property and Equipment

Property and equipment are recorded at cost and depreciated over their useful
lives, except for leasehold improvements, which are amortized over the lesser
of their useful lives or the term of the lease. The methods of depreciation
are straight line for financial reporting purposes and accelerated for income
tax purposes. Depreciable lives for financial reporting purposes are as
follows:
Useful
Lives
-----------
Buildings 40 Years
Machinery and equipment 3-10 Years
Furniture and fixtures 3-10 Years
Computers and software 3-4 Years
Leasehold improvements 5-15 Years

(e) Revenue Recognition

Revenues are recognized when a laser product is shipped or services are
performed.

F-7

(f) Income Taxes

Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect on
deferred taxes of a change in tax rates is recognized in income in the period
that includes the enactment date.

The Company's results through September 30, 1996 were included in the
consolidated federal income tax return of Siemens Corporation in the U.S.
For periods from and after September 30, 1996, the Company bears sole
responsibility for filing tax returns in the respective jurisdictions.

(g) Accounting for Warranties

The Company issues a standard warranty of one year for parts and labor on
lasers that are sold. However, extended warranties are negotiated on a
contract-by-contract basis. The Company provides for estimated warranty
costs as products are shipped.

(h) Foreign Currency Translation

In accordance with Statement of Financial Accounting Standards No. 52,
Foreign Currency Translation, the assets and liabilities of the Company's
operations outside the United States are translated into U.S. dollars at
exchange rates in effect on the balance sheet date, and revenues and expenses
are translated using a weighted average exchange rate during the period.
Gains or losses resulting from translating foreign currency financial
statements are recorded as a separate component of shareholders' equity.
Gains or losses resulting from foreign currency transactions are included in
net income.

(i) Comprehensive Income

In 1997, the Financial Accounting Standards Board issued SFAS No. 130 (FAS
130), "Reporting Comprehensive Income". FAS 130 establishes standards for
reporting and presenting comprehensive income and its components in a full
set of financial statements. During fiscal 1998 the Company adopted FAS 130
and is now required to report the sum of net income and accumulated foreign
currency translation adjustment as "comprehensive income" in the consolidated
statements of stockholders' equity and comprehensive income. FAS 130 only
requires additional disclosures in the consolidated financial statements, and
does not affect the Company's financial position or results of operations.
Prior year financial statements have been reclassified to conform to the
requirements of FAS 130.

F-8

(j) Research and Development Expenses

Research and development costs are expensed when incurred and are net of
German government grants of $822, $876, and $1,145 received for the years
ended September 30, 1996, 1997, and 1998, respectively. The Company has no
future obligations under such grants.

(k) Financial Instruments

Financial instruments of the Company, consisting principally of cash,
accounts receivable, accounts payable, and bank loans, are recorded at
amounts which approximate estimated fair value. The estimated fair value
amounts are determined by the Company using available market information and
available valuation methodologies.

(l) Use of Estimates

Management of the Company makes a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent liabilities to prepare these financial statements in conformity
with generally accepted accounting principles. Actual results could differ
from these estimates.

(m) Reclassifications

Certain reclassifications of prior year amounts have been made for consistent
presentation.

2. INVENTORIES

Inventories are summarized as follows:
September 30,
------------------------
1997 1998
---------- ----------
Finished goods $ 2,732 $ 3,809
Work in progress 7,944 10,039
Raw materials and supplies 6,903 10,605
Demo inventory 4,335 5,395
Service parts 6,817 8,524
---------- ----------
Total inventories, net $ 28,731 $ 38,372
========== ==========

F-9

3. PROPERTY AND EQUIPMENT Property and equipment include the following:

September 30,
------------------------
1997 1998
---------- ----------
Buildings $ 20,878 $ 22,009
Technical machinery and equipment 5,801 7,014
Furniture and fixtures 5,867 6,414
Computers and software 3,123 3,781
Leasehold improvements 1,497 2,471
---------- ----------
Total property and equipment, at cost $ 37,166 $ 41,689
========== ==========

4. ACCRUED LIABILITIES

Accrued liabilities are comprised of the following:
September 30,
------------------------
1997 1998
---------- ----------
Employee compensation $ 4,960 $ 5,211
Warranty reserves 5,724 5,245
Other taxes payable 820 721
Customer deposits 2,016 1,690
Other 2,314 3,294
---------- ----------
Total accrued liabilities $ 15,834 $ 16,161
========== ==========

5. LINE OF CREDIT

In October 1996 the Company obtained an annually renewable credit line of
$25,000 with Deutsche Bank AG to support its working capital needs. As of
September 30, 1997 $12,209 was borrowed against this loan facility by RSL and
Rofin-Sinar Italiana S.r.L. at a fixed interest rate of 3.9%, whereas at
September 30, 1998 $14,570 was borrowed against this loan facility by RSL,
Dilas, Rofin-Marubeni, Rofin-Sinar Italiana S.r.L. and RS UK at an average
fixed interest rate of 3.7%.

In addition, the Company has several foreign lines of credit which allow it
to borrow in the applicable local currency. At September 30, 1997 direct
borrowings under these agreements totaled $489, while at September 30, 1998,
they totaled $4,553; and $3,744 remain unused. Fixed interest rates under
these agreements can vary from 1.3% to 7.4%, depending upon the country and
amount of usage.

F-10

6. LONG-TERM DEBT

As of September 30, 1998, Dilas had long-term borrowings totaling $597 under
the credit line with Deutsche Bank AG at a fixed interest rate of 5.1%(see
Note 5, above). Furthermore, RSL entered into a loan agreement with a German
bank for a $2,983 long-term credit facility, at a fixed interest rate of
4.8%, which was completely used at September 30, 1998. Both agreements
expire in 2000.

7. LEASE COMMITMENTS

The Company leases operating facilities and equipment under operating leases
which expire at various dates through 2007. The lease agreements require
payment of real estate taxes, insurance, and maintenance expenses by the
Company.

Minimum lease payments for future fiscal years under noncancelable operating
leases as of September 30, 1998 are:

Fiscal Year Ending September 30, Total
-------------------------------- ---------
1999 $ 1,834
2000 1,099
2001 676
2002 519
2003 and thereafter 1,443

Rent expense charged to operations for the years ended September 30, 1996,
1997, and 1998, approximates $1,568, $1,609, and $1,656, respectively.

8. EMPLOYEE BENEFIT PLANS

Substantially all of the Company's U.S. and German employees participate in
defined benefit pension plans. The Company's U.S. plan began in fiscal 1995
and is funded. As is the normal practice with German companies, the German
plan is unfunded.

The following table sets forth the funded status of the plans at the balance
sheet dates:
September 30,
------------------------
1997 1998
---------- ----------
Actuarial present value of benefit obligation:
Vested employees $ 2,944 $ 3,727
Nonvested employees 567 648
---------- ----------
Accumulated benefit obligation 3,511 4,375

Effects of assumed future compensation increase 1,181 1,602
---------- ----------
Projected benefit obligation 4,692 5,977

F-11

Plan assets ( 1,607) ( 1,899)
---------- ----------
Projected benefit obligation in excess
of plan assets 3,085 4,078

Unrecognized net gain 488 61
Unrecognized prior service cost ( 529) ( 466)
---------- ----------
Accrued pension cost $ 3,044 $ 3,673
========== ==========

Pension costs consist of the following components:
Years ended September 30,
----------------------------
1996 1997 1998
-------- -------- --------
Service cost $ 431 $ 418 $ 466
Interest on projected benefit obligations 275 294 351
Actual Return on Assets - - ( 34)
Amortization of unrecognized prior service cost 64 52 63
Amortization of unrecognized gain ( 11) ( 84) ( 111)
-------- -------- --------
Net pension cost $ 759 $ 680 $ 735
======== ======== ========

Pensions generally provide benefits based on years of service. A discount
rate for the U.S. of 7.5% (7.0% for foreign plan) as of September 30, 1998,
and 8% (7.0% for foreign plan) as of September 30, 1997 and 1996, is assumed.
Increases in future compensation levels for the U.S. plan are projected at 6%
(2% for foreign plan). Prior service costs and actuarial gains and losses
are generally amortized over the average remaining service period of active
employees.

RSI has a 401(k) plan for the benefit of all eligible U.S. employees, as
defined by the plan. Participating employees may contribute up to 16% of
their qualified annual compensation. The Company matches 50% of the first 6%
of the employees' compensation contributed as a salary deferral. Company
contributions for the years ended September 30, 1996, 1997, and 1998 are
$119, $146, and $148, respectively.

F-12

9. INCOME TAXES

Income before income taxes is attributable to the following geographic
regions:
Years ended September 30,
----------------------------
1996 1997 1998
-------- -------- --------
United States $ 3,680 $ 3,178 $ 864
Germany 8,186 10,525 10,256
France 169 183 570
Italy 109 180 296
Japan 100 646 125
United Kingdom - - ( 312)
-------- -------- --------
Total income before income taxes $ 12,244 $ 14,712 $ 11,799
======== ======== ========

The provision for income tax expense is comprised of the following amounts:

Years ended September 30,
----------------------------
1996 1997 1998
-------- -------- --------
Current:
United States $ - $ 1,981 ( $ 101)
Foreign 3,838 4,152 4,481
-------- -------- --------
Total current 3,838 6,133 4,380
-------- -------- --------
Deferred:
United States 1,316 ( 395) 348
Foreign ( 198) 20 390
-------- -------- --------
Total deferred 1,118 ( 375) 738
-------- -------- --------
Total income tax expense $ 4,956 $ 5,758 $ 5,118
======== ======== ========

Statutory tax rates in the U.S., U.K., Italy, France, and Japan approximate
34%, 20%, 41% (52% for fiscal 1996 and 53% for fiscal 1997), 42% (37% for
fiscal 1996 and 1997), and 51% (52% for fiscal 1996), respectively. German
corporate tax law applies the imputation system with regard to the taxation
of the income of a corporation (such as RSL and Dilas). In general, retained
corporate income is subject to a municipal trade tax (which for Hamburg and
Gunding on a combined basis is 16.5%, and for Mainz is 18.0%), which is
deductible for federal corporate income tax purposes, a federal corporate
income tax of 45% and, effective January 1, 1995 and January 1, 1998, a
surcharge of 7.5% and 5.5%, respectively, on the federal corporate income tax
amount.

F-13

Profits which are distributed by a German corporate taxpayer in the form of a
dividend are subject to a reduced federal corporate income tax rate of 30%
plus the 7.5% or 5.5% surcharge on the federal corporate income tax amount
calculated at the reduced rate. Dividends may be paid by RSL and Dilas to
the Company and may be subject to a withholding tax pursuant to the income
tax treaty currently in effect between the United States and the country from
which the dividend is paid.

The Company is currently looking into various foreign tax minimization
strategies which could result in reducing or eliminating its foreign
withholding taxes. Tax expense and deferred taxes in fiscal 1998 have been
recorded at rates assuming all earnings of RSL and Dilas will be dividended
to Rofin-Sinar Technologies, Inc.

The difference between actual income tax expense and the amount computed by
applying the U.S. federal income tax rate of 34% is as follows:

Years ended September 30,
----------------------------
1996 1997 1998
-------- -------- --------
Computed "expected" tax expense $ 4,163 $ 5,002 $ 4,012
Difference between U.S. and foreign
statutory rates 741 1,019 1,083
Foreign operating loss for which no
benefit is recognized - ( 286) -
Use of unrecognized operating loss - ( 374) -
Tax exempt interest - - ( 248)
Reduction of N.O.L. Valuation Allowance - - ( 525)
Adjustment of prior-year tax estimates - - 434
German dividend withholding tax - 262 -
Other 52 135 362
-------- -------- --------
Actual tax expense $ 4,956 $ 5,758 $ 5,118
======== ======== ========

The tax effects of temporary differences that give rise to the net deferred
tax assets are as follows:
September 30,
------------------------
1997 1998
---------- ----------
Deferred tax assets:
Foreign:
German reorganization benefits $ 1,969 $ 1,569
Net operating loss carryforwards 1,227 744
Pension accrual 252 281
Inventory 480 511
Other, net 244 13
---------- ----------
Total Foreign 4,172 3,118

F-14

United States:
Net operating loss carryforwards 3,380 2,912
Depreciation 180 271
Warranty accrual 959 722
Inventory 1,024 1,089
Other 387 650
---------- ----------
Total United States 5,930 5,644

Gross deferred tax assets 10,102 8,762
Less: Valuation allowance ( 950) ( 289)
---------- ----------
Net deferred tax assets 9,152 8,473
---------- ----------

Deferred tax liabilities:
Foreign:
Depreciation ( 2,309) ( 2,415)
Inventory ( 310) ( 448)
Bad debt allowance ( 134) ( 105)
Accrued liabilities ( 179) ( 279)
---------- ----------
Total Foreign ( 2,932) ( 3,247)

United States:
Pension accrual ( 134) ( 128)
---------- ----------
Deferred tax liabilities ( 3,066) ( 3,375)
---------- ----------
Net deferred income tax assets $ 6,086 $ 5,098
========== ==========

In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or all of the
deferred tax assets will not be realized. The ultimate realization of
deferred tax assets is dependent upon the generation of future taxable income
during the periods in which those temporary differences become deductible.
Management considers the scheduled reversal of deferred tax liabilities,
projected future taxable income, and tax planning strategies in making this
assessment. Based upon the level of historical taxable income and
projections for future taxable income over the periods in which the deferred
tax assets are deductible, management believes it is more likely than not
that the Company will realize the benefits of these deductible differences,
net of the existing valuation allowances at September 30, 1998.

At September 30, 1998, the Company has U.S. federal net operating loss
carryforwards available of $8,565, which expire in 2008, and Japanese net
operating loss carryforwards of $1,273, which expire in 2000. The annual
utilization by the Company of its U.S. net operating loss carryforwards will
be subject to limitation under Section 382 of the Internal Revenue Code of
1986, as amended, as a result of the occurrence of a change of ownership
within the meaning of Section 382 in connection with the Company's initial
public offering in September 1996.

F-15

10. SPECIAL CHARGE
The special charge of $1,350 relates to the payment to a customer in fiscal
1997 in settlement of a dispute arising out of the use of one of the
Company's existing products in a newly developed customer application. The
Company's lasers were determined to be incompatible with the customer's
intended use. As part of the settlement the Company accepted the return of
product for full refund which had the effect of reducing revenue by $507 and
gross profit by $322.

11. NET INCOME PER COMMON SHARE

On March 31, 1997, the Financial Accounting Standards Board issued SFAS No.
128 (FAS 128) , "Earnings Per Share". FAS 128 establishes standards for
computing and presenting earnings per share (EPS) and applies to entities
with publicly held common stock or potential common stock. During fiscal
1998 the Company adopted FAS 128 and is now required to report both basic and
diluted earnings per share. Basic EPS is computed by dividing net income by
the weighted average number of common shares outstanding during the period.
Diluted EPS reflects the potential dilution from common stock equivalents
(stock options). The Company has restated earnings per share for the
comparative prior periods, as required by FAS 128. Shares prior to the IPO
represent a pro-rata portion of the number of shares issued pursuant to the
offering, the proceeds from which were used to purchase the shares of RSI and
RSL and to repay the remaining indebtedness owed to Siemens. The calculation
of the weighted average number of common shares outstanding for each period
is as follows:
Years ended September 30,
--------------------------------------
1996 1997 1998
------------ ------------ ------------
Weighted average number of
shares for BASIC net income
per common share 8,631,578 11,504,500 11,516,631

Potential additional shares
due to outstanding dilutive
stock options 7,920 101,206 98,061
------------ ------------ ------------
Weighted average number of
shares for DILUTED net
income per common share 8,639,498 11,605,706 11,614,692
============ ============ ============

Excluded from the calculation of diluted EPS for the year ended September 30,
1998 were 193,000 outstanding stock options. These could potentially dilute
future EPS calculations but were not included in the current period because
their effect was antidilutive.

F-16

12. RELATED PARTY TRANSACTIONS
The Company had sales to its joint venture partners in Japan amounting to
$1,969, $3,776, and $2,153 in fiscal years 1996, 1997, and 1998, respectively.

The Company's purchases from and sales to related parties have generally been
on terms comparable to those available in connection with purchases from or
sales to unaffiliated parties.

13. GEOGRAPHIC INFORMATION

Assets, revenues, and income before taxes, by geographic region, at September
30, 1996, 1997, and 1998, and for the years then ended, are summarized below:

ASSETS September 30,
------------------------
1997 1998
---------- ----------
United States $ 55,794 $ 60,267
Germany 71,059 77,312
Other 11,666 17,180
Intercompany eliminations ( 6,330) ( 11,017)
---------- ----------
Total Assets $ 132,189 $ 143,742
========== ==========

REVENUES TOTAL BUSINESS
Years ended September 30,
----------------------------------
1996 1997 1998
---------- ---------- ----------
United States $ 45,227 $ 49,675 $ 39,594
Germany 88,433 96,167 91,842
Other 16,350 21,494 20,434
Intercompany
Eliminations ( 34,107) ( 37,943) ( 34,287)
---------- ---------- ----------
$ 115,903 $ 129,393 $ 117,583
========== ========== ==========

INTERCOMPANY REVENUES
Years ended September 30,
----------------------------------
1996 1997 1998
---------- ---------- ----------
United States $ 5,347 $ 4,737 $ 3,412
Germany 28,083 32,544 30,000
Other 677 662 875
Intercompany
Eliminations ( 34,107) ( 37,943) ( 34,287)
---------- ---------- ----------
$ - $ - $ -
========== ========== ==========

F-17

EXTERNAL REVENUES
Years ended September 30,
----------------------------------
1996 1997 1998
---------- ---------- ----------
United States $ 39,880 $ 44,938 $ 36,181
Germany 60,350 63,623 61,842
Other 15,673 20,832 19,560
---------- ---------- ----------
$ 115,903 $ 129,393 $ 117,583
========== ========== ==========

INCOME BEFORE INCOME TAXES
Years ended September 30,
----------------------------------
1996 1997 1998
---------- ---------- ----------
United States $ 3,680 $ 3,178 $ 864
Germany 8,186 10,525 10,256
Other 378 1,009 679
---------- ---------- ----------
$ 12,244 $ 14,712 $ 11,799
========== ========== ==========

14. SELECTED QUARTERLY FINANCIAL DATA (Unaudited)

The following represents the Company's quarterly results (millions of
dollars, except per share amounts):
Quarters Ended
------------------------------------------
Dec.31, March 31, June 30, Sept. 30,
1997 1998 1998 1998
--------- --------- --------- ---------
Net sales $ 28.2 $ 30.0 $ 28.9 $ 30.5
Gross profit 11.0 11.0 10.0 11.1
Net income 2.0 1.9 1.3 1.5
Net income per share - Basic 0.18 0.17 0.11 0.13
Net income per share - Diluted 0.18 0.17 0.11 0.13

Quarters Ended
------------------------------------------
Dec.31, March 31, June 30, Sept. 30,
1996 1997 1997 1997
--------- --------- --------- ---------
Net sales $ 34.0 $ 33.5 $ 31.2 $ 30.7
Gross profit 12.1 12.2 12.0 10.1
Net income 2.7 2.5 1.5 2.3
Net income per share - Basic 0.23 0.22 0.13 0.20
Net income per share - Diluted 0.23 0.21 0.13 0.20

F-18

15. STOCK INCENTIVE PLANS

Directors' Plan

The Company has reserved 100,000 shares of common stock for the Directors'
Plan, which covers non-employee members of the Board of Directors. Under
this plan each member of the Board of Directors who is not an employee of the
Company and who is elected or continues as a member of the Board of Directors
is entitled to receive an initial grant of 1,500 shares of common stock and
thereafter an annual grant of 1,500 shares of common stock. The Directors'
Plan provides that non-employee directors aged 65 or older, upon their
appointment or election to the Board of Directors, will receive, in lieu of
such initial and annual grants of shares of common stock, 7,500 shares of
restricted stock which shall vest in five equal installments on the date of
grant and each of the following four anniversaries thereof. Prior to
vesting, no shares of restricted stock may be sold, transferred, assigned,
pledged, encumbered or otherwise disposed of, subject to certain exceptions.
The Directors' Plan will continue in effect until the earlier of ten years
from the date of the first grant or the termination of the Directors' Plan by
the Board of Directors. A total of 13,500 shares are issued and outstanding
under the plan at September 30, 1998, of which 4,500 vest in future periods.

Equity Incentive Plan

The Company maintains an Equity Incentive Plan, whereby incentive and
nonqualified stock options, restricted stock and performance shares may be
granted to officers and other key employees to purchase a specified number of
shares of common stock at a price not less than the fair market value on the
date of grant. There were no incentive stock options, restricted stock or
performance shares granted in fiscal 1996, 1997, or 1998. On September 26,
1996 and 1997, nonqualified stock options were granted to officers and other
key employees. Options will expire not later than ten years after the date
on which they are granted, and become exercisable at such times and in such
installments as determined by the Compensation Committee of the Board of
Directors. The balance of outstanding stock options as of September 30,
1996, 1997, and 1998, and all options activity for the periods then ended are
as follows:
Price per Share
--------------------------
Number Price Weighted
Of Shares Range Average
--------- --------------- ----------
Granted September 26, 1996 282,000 $ 9 1/2 $ 9 1/2
Exercised -
Forfeited -
--------- --------------- ----------
Outstanding at September 30, 1996 282,000 $ 9 1/2 $ 9 1/2
--------- --------------- ----------
Granted 193,000 $ 16 7/8 $ 16 7/8
Exercised -
Forfeited -
--------- --------------- ----------
Outstanding at September 30, 1997 475,000 $9 1/2 - 16 7/8 $ 12 1/2
--------- --------------- ----------

F-19

Granted -
Exercised ( 13,900)
Forfeited ( 9,600)
--------- --------------- ----------
Outstanding at September 30, 1998 451,500 $9 1/2 - 16 7/8 $ 12 1/2
--------- --------------- ----------

Outstanding Options Exercisable Options
-------------------------------- -------------------
Remaining Weighted Weighted
Life Average Average
Shares (years) Price Shares Price
------- ---------- ----------- ------ -----------
258,500 3 $ 9 1/2 96,500 $ 9 1/2
193,000 4 $ 16 7/8 38,600 $16 7/8

The Company follows APB Opinion 25, Accounting for Stock Issued to Employees,
to account for stock options. No compensation cost is recognized because the
option exercise price is equal to the market price of the underlying stock on
the date of grant. Had compensation cost for these plans, as prescribed by
SFAS Statement 123, been determined based on the Black-Scholes value at the
grant dates for awards, pro forma net income and earnings per share would
have been:
Year ended September 30,
----------------------------------
1996 1997 1998
---------- ---------- ----------
Pro forma net income $ 7,288 $ 8,781 $ 6,292
Pro forma earnings per share - BASIC $ 0.84 $ 0.76 $ 0.55
Pro forma earnings per share - DILUTED $ 0.84 $ 0.76 $ 0.54
---------- ---------- ----------

The pro forma disclosures above include the amortization of the fair value of
all options vested during 1998 and are not necessarily representative of
actual results which will be reported in future years. The weighted average
Black-Scholes value of options granted under the stock option plan during
1996 and 1997 was $5.10 and $9.25, respectively. Value was estimated using
an expected life of five years, no dividends, volatility of 56% and 53%, and
risk-free interest rates of 6.6 % and 6.0% in fiscal 1996 and 1997.

16. RECENTLY ISSUED ACCOUNTING STANDARDS

In 1997 Financial Accounting Standards No. 131 (FAS 131), "Disclosures about
Segments of an Enterprise and Related Information", was issued and is
effective for fiscal years commencing after December 15, 1997. The Company
will comply with the requirements of FAS 131 in fiscal year 1999.

In 1998 Financial Accounting Standards No. 132 (FAS 132), "Employer's
Disclosures about Pensions and Other Postretirement Benefits", was issued and
is effective for fiscal years commencing after December 15, 1997. The
Company will comply with the requirements of FAS 132 in fiscal year 1999.

F-20

In 1998 Financial Accounting Standards No. 133 (FAS 133), "Accounting for
Derivative Instruments and Hedging Activities", was issued and is effective
for fiscal years commencing after June 15, 1999. The Company will comply
with the requirements of FAS 133 in fiscal year 2000. It is not anticipated
that the implementation of this standard will have a material impact on the
financial statements.

F-21

Independent Auditors' Report

The Board of Directors and Stockholders
Rofin-Sinar Technologies Inc. and Subsidiaries:

On October 30, 1998, we reported on the consolidated balance sheets of Rofin-
Sinar Technologies Inc. and Subsidiaries as of September 30, 1997 and 1998,
and the related consolidated statements of operations, stockholders' equity
and comprehensive income, and cash flows for each of the years in the three-
year period ended September 30, 1998, which are included in the annual report
on Form 10-K. In connection with our audits of the aforementioned
consolidated financial statements, we also audited the related financial
statement schedule in the annual report on Form 10-K. This financial
statement schedule, Valuation and Qualifying Accounts, is the responsibility
of the Company's management. Our responsibility is to express an opinion on
this financial statement schedule based on our audit.

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.

KPMG PEAT MARWICK LLP
Detroit, Michigan

October 30, 1998

F-22

ROFIN-SINAR TECHNOLOGIES INC. AND SUBSIDIARIES
Valuation and Qualifying Accounts - Allowance for Doubtful Accounts
Years ended September 30, 1996, 1997, and 1998
(dollars in thousands)

Balance at Charged to Balance at
Beginning Costs and Deductions End of
Of Period Expenses Period
----------- ----------- ----------- -----------

September 30, 1996 1,252 484 ( 773) 963

September 30, 1997 963 1,245 ( 1,298) 910

September 30, 1998 910 148 35 1,093

F-23

INDEX TO EXHIBITS

Exhibit No. Exhibit
- ----------- --------------------------------------------------------

11.1 Earnings Per Share Table
21.1 List of Subsidiaries of Rofin-Sinar Technologies Inc.
27.1 Financial Data Schedule