All revenue is generated by our two business units, CooperVision ("CVI") and CooperSurgical ("CSI"):

CVI
CVI's worldwide core business, which we define as all revenue other than sales to other contact lens suppliers ("OEM" sales), grew 16% in fiscal 2000:

The 11% growth in International (revenue generated by overseas subsidiaries and to overseas distributors) includes the negative effect on reported revenue of weakness in the pound sterling and the euro, which lost 12% and 20%, respectively, in value against the U.S. dollar in fiscal 2000. In constant currency terms, our core business and our International revenue each grew by 18%.

In the United States, the largest contact lens market in the world, CVI revenue grew 18% to $97.8 million, improving its share of the market to 8.5%. U.S. sales of toric lenses to correct astigmatism continued to drive CVI's sales gains, growing 19% in 2000, or about six times faster than the total contact lens market.

The disposable-planned replacement ("DPR") toric market grew about 27% for the nine months ended September 30, 2000 and continues to be the fastest growing category in the U.S. contact lens market. Sales of CVI's DPR torics grew 32% in the U.S., led by Frequency 55 Toric and Encore Toric. CVI believes that it holds a 34% share of this market segment.

Internationally, revenue grew 18% in constant currency. In 2000, we acquired former distributors in Sweden and Spain and now have a direct presence in five overseas countries. Our operations in Canada, where we hold an overall number two market share, and Italy generated particularly strong results.

In 2000, CVI introduced three new specialty lenses:

CVI's core product sales grew 18% in the U.S. and 11% internationally. CVI believes that through fiscal 1999, it gained one market share point in the U.S.

In the United States, sales of toric lenses grew 26%, and DPR torics sales grew 41% as Preference Toric, CVI's premium toric brand, and Frequency 55 Toric both showed strong results. CVI believes that it led the U.S. DPR toric sector with about 34% of the revenue generated, up from 29% in 1998.

U.S. sales of all DPR lenses — torics and spheres together — grew about 9% through the first nine calendar months, according to an industry market research audit. Sales of CVI's DPR lenses in the U.S. were 38% ahead for the fiscal year. DPR lenses represented 66% of CVI's U.S. revenue and 75% of its worldwide revenue.

Internationally, our Canadian and Italian businesses gener-ated strong sales, and new product introductions continued in Europe, including toric and other specialty lenses.


CSI

CSI's revenue grew 5% in fiscal 1999. CSI's sales of gynecology ("GYN") products grew 6%, led by its FemExam, infrared coagulator, Marlow and Cerveillance Scope product lines. The growth in these product lines was partially offset by lower sales of more mature product lines. GYN product sales accounted for over 90% of CSI's sales in fiscal 1999. In July, CSI announced that it had agreed with 3M Pharmaceuticals (NYSE: MMM) and Matria Healthcare Inc. (NASDAQ: MATR) to co-market its FemExam pH and Amines TestCard in the United States and that the American Medical Association had awarded the FemExam Card an additional third party reimbursement code. The FemExam Card is an accurate, convenient point of care diagnostic test used to help determine if a vaginal infection is bacterial or fungal. In August, CSI and BioStar, Inc., a Thermo Electron Corporation (NYSE: TMO) subsidiary, agreed to co-market three additional in-office tests for vaginitis. All four tests are being developed under CSI's licensing agreement with Litmus Concepts, Inc. In the United States, vaginitis accounts for about 13 million physician office visits and about 10 million clinic visits, annually.


COST OF SALES/GROSS PROFIT

Our consolidated gross profit margin has consistently improved over the three-year period:

The gross margin improvement at CVI results from:

Consolidated SGA increased by 22% in 2000 and 10% in 1999.

SGA at CVI increased by 17% in 2000 and 19% in 1999. The increases in both periods resulted primarily from selling, promotion and distribution costs to launch new products. Also in 2000, we incurred one-time costs for a new distribution system. As a percentage of revenue, SGA at CVI was 35% in 2000, 34% in 1999 and 32% in 1998.

SGA increased at CSI in 2000 by 58% over 1999 reflecting the additional costs associated with acquisitions that contributed all but 4% of CSI's 55% revenue growth. CSI's 1999 SGA decreased vs. 1998, when it incurred a high level of costs to launch new products.

Headquarters SGA dropped to 3.4% of consolidated revenue from 3.8% in 1999 and 4.8% in 1998, when we resolved certain legal issues. We anticipate that Headquarters SGA will continue to grow at a rate below sales growth.


RESEARCH AND DEVELOPMENT EXPENSE
Research and development expense was 1% of revenue in each year of the three-year period: $2.7 million in 2000, $2 million in 1999 and $1.9 million in 1998.

We expect the current level of research and development spending to remain stable as a percentage of sales, as we continue to focus on acquiring products that can be marketed immediately or in the short-term, rather than on longer-term, higher-risk research and development projects.


AMORTIZATION OF INTANGIBLES

Amortization of intangibles was $4.2 million in 2000, $3.8 million in 1999 and $3.6 million in 1998. The increase in each year reflects the effect of acquisition activity during the three-year period.


OPERATING INCOME

Operating income improved by $17.2 million between 1998 and 2000:

In 2000, we recorded a charge to income of $653,000 to settle a dispute with a German distributor that included the write-off of a related investment in a joint venture.

In 1998, we recorded a charge to income of $1.3 million to settle a dispute with GT Laboratories and for other smaller matters.


OTHER INCOME, NET

¹The foreign exchange gain of $591,000 includes a one-time gain of $850,000 reflecting weakness in sterling occurring before we implemented our hedging program, partially offset by losses over the period.

Interest income increased in 2000 and 1999 because of higher investment balances primarily from cash received from our sale of Hospital Group of America ("HGA"), our former psychiatric services business, and positive cash flow from operations, net of debt repayments.

In 2000, we repaid the Midland Bank loan and cancelled an interest rate swap, realizing a gain of $240,000.


INTEREST EXPENSE

Interest expense was $4.7 million in 2000 and $6.3 million in each of fiscal 1999 and 1998. The decrease in 2000 reflects debt repayments funded by operating cash flow and cash received from the sale of HGA (see Capital Resources and Liquidity).


PROVISION FOR (BENEFIT OF) INCOME TAXES

In fiscal 1998, we recorded a large tax benefit for the remaining anticipated value of our $184 million net operating loss carry-forwards ("NOLs"). As a result, in fiscal years 1999 and 2000, we report our provision for income taxes as if we were a tax-payer with no NOLs.

We implemented a global tax plan in 1999 to minimize both the taxes reported in our income statement and the actual taxes we will have to pay once we fully use the benefits of our NOLs. Our full year 1999 effective tax rate ("ETR") on income from continuing operations was 32.7%, which includes the impact of the global tax plan and a reversal of $1.1 million of tax reserves no longer required. Our full-year 2000 ETR was 30.2%, which includes the impact of the global tax plan and a reversal of $1.4 million of tax reserves no longer required.

We expect that our global tax plan will result in our ETR being reduced to approximately 30% over the next several years. This plan could also extend the cash flow benefits of our NOLs through 2003, assuming no major acquisitions or large stock issuance. We expect that actual payments for taxes will be about 10% of pretax income during this period.


INCOME FROM DISCONTINUED OPERATIONS

Income from discontinued operations is income derived from HGA, which we declared a discontinued operation in October 1998. The reported income of $129,000 and $4.3 million for the fiscal years ended 1999 and 1998, respectively, is net of income tax expense of $66,000 and $130,000.


LOSS FROM DISPOSAL OF DISCONTINUED OPERATIONS

In 1998, we wrote down HGA's net assets by $22.3 million to the then estimated fair market value in anticipation of the sale of the business. In 1999, we revised our estimated loss by $3 million to $19.3 million.


CAPITAL RESOURCES & LIQUIDITY
YEAR 2000 HIGHLIGHTS:

OPERATING CASH FLOWS

Our major source of liquidity continues to be cash flow from operating activities. Operating cash flow for fiscal 2000 was $41 million, a growth of 48% from the $27.7 million generated in fiscal 1999. In fiscal 2000, first quarter operating cash flow was significantly ahead of 1999's first quarter, providing cash of $5.3 million as opposed to the $3.4 million of cash used reported in the first quarter of 1999. The first quarter continues to be our weakest cash flow quarter, reflecting payments to settle disputes, bonus payments and, to a greater extent in 1999, inventory builds in anticipation of new product launches. We now anticipate generating positive operating cash flow each quarter.

QUARTERLY OPERATING CASH FLOW:

The full year increase of $13.3 million was driven by strong operating results (operating income of $46.9 million, up 21%) and a reduced investment in inventory. Of the total increase in inventory of $4.8 million, approximately $3.9 million represented inventories of companies acquired this year. Major uses of cash for operating activities in fiscal 2000, in addition to those required in the ordinary course of our business, included approximately $6 million related to various settlements, $1.4 million to fund entitlements under Cooper's bonus plans and approximately $4.1 million in interest payments.


INVESTING CASH FLOWS

From an inflow of $20.2 million in 1999, which was driven by net cash of $25.3 million received from the sale of HGA, our investing cash flows swung to an outflow of $40.6 million in 2000. The outflow in 2000 was driven by capital expenditures of $14.7 million and expenditures of about $24 million to fund acquisitions.


FINANCING CASH FLOWS

Our financing activities resulted in the use of $7.2 million cash this year and $34.6 million in 1999. This year we spent about $18 million to refinance a portion of the debt raised in 1998 to fund an acquisition. We funded most of the $18 million drawing on our KeyBank line of credit, which carries a lower effective interest rate. Because the debt we paid off was backed by a letter of credit from KeyBank, and was, therefore, deducted from the total facility amount, we lost no availability under our line of credit. We also repaid approximately $12.7 million of debt this year. In 1999 we repaid a large portion of debt when we disposed of HGA and spent $7.3 million to purchase shares of our common stock on the open market.


RISK MANAGEMENT (See Note 7)

We are exposed to risks caused by changes in foreign currency exchange rates, principally debt denominated in pounds sterling and from overseas operations denominated in foreign currencies. We have hedged most of the debt by entering into contracts to buy sterling forward. We are also exposed to risk associated with changes in interest rates, as the interest rate on certain of our debt varies with the London Interbank Offered Rate.


OUTLOOK

We believe that cash and cash equivalents on hand of $14.6 million plus cash from operating activities will fund future operations, capital expenditures, cash dividends and smaller acquisitions. We may need additional funds for larger acquisitions and other strategic alliances. At October 31, 2000, we had $35.7 million available under the KeyBank line of credit and, based on conversations with KeyBank, anticipate that additional financing would be available as required.


INFLATION AND CHANGING PRICES

Inflation has not had any appreciable effect on our operations in the last three years.


NEW ACCOUNTING PRONOUNCEMENTS
(See Note 1)


FORWARD-LOOKING STATEMENTS

Some of the information included in this annual report contains "forward-looking statements" as defined by the Private Securities Litigation Reform Act of 1995. Forward-looking statements include all statements regarding anticipated growth in our revenue, anticipated market conditions and results of operations. To identify forward-looking statements look for words like "believes," "expects," "may," "will," "should," "seeks," "intends," "plans," "estimates" or "anticipates" and similar words or phrases. Discussions of strategy, plans or intentions often contain forward-looking statements. These, and all forward-looking statements, necessarily depend on assumptions, data or methods that may be incorrect or imprecise.

Events, among others, that could cause actual results and future actions to differ materially from those described by or contemplated in forward-looking statements include major changes in business conditions, a major disruption in the operations of our manufacturing facilities, new competitors or technologies, the impact of an undetected virus on our computer systems, acquisition integration delays or costs, foreign currency exchange exposure, investments in research and development and other start-up projects, dilution to earnings per share from acquisitions or issuing stock, regulatory issues, significant environmental cleanup costs above those already accrued, litigation costs, cost of business divestitures, the requirement to provide for a significant liability or to write off a significant asset, changes in accounting principles or estimates, and other factors described in our Securities and Exchange Commission filings, including the "Business" section in our Annual Report on Form 10-K for the year ended October 31, 2000. We caution investors not to rely on forward-looking statements. They reflect our analysis only on their stated dates or the date of this report. We disclaim any intent or obligation to update these forward-looking statements.